The Florida Supreme Court has recently issued two opinions which shed light on whether standard form commercial general liability (CGL) insurance policy covers a general contractor’s liability for defective work performed by its subcontractor.  

On the same day, the supreme court issued its opinions in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 2007 WL 4440232 (Fla. December 20, 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 2007 WL 4440389 (Fla. December 20, 2007).  Both cases involved interpretation of the “occurrence” and “property damage” provisions of standard form CGL insurance policies with “Products Completed Operations Hazard” coverage.  In both cases, the insurance company had denied coverage claiming the subcontractor’s faulty workmanship was not an “occurrence” and did not cause “property damage.”

In J.S.U.B., after a general contractor completed the construction of several homes, damage to the foundations, drywall, and other interior portions of the homes appeared due to subcontractors’ use of poor soil, improper soil compaction, and improper testing.  The contractor sought coverage under its CGL policies, and the insurance company denied coverage.  The contractor instituted a declaratory judgment action to see whether the insurance policy provided coverage. 

The issue presented to the court was “whether a post-1986 standard form commercial general liability policy with products-completed operations hazard coverage, issued to a general contractor, provides coverage when a claim is made against the contractor for damage to the completed project caused by a subcontractor’s defective work.”  Id. at 6.  The court addressed the issue in two parts, and held: faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an “occurrence” under a post-1986 CGL policy; and the subcontractors’ defective soil preparation caused “property damage” within the meaning of the policy.  The court specifically noted “[i]f there is no damage beyond the faulty workmanship or defective work, then there may be no resulting ‘property damage.’ “  Id. at 14.  The court determined the claims were covered by the insurance policy.

In Auto-Owners, a general contractor constructed a multimillion dollar house in Coconut Grove, Florida.  The house’s windows were defectively installed by a subcontractor, causing water leakage around the windows.  The contractor’s insurance company tried to avoid coverage, arguing the subcontractor”s defective installation was not an “occurrence”, and the resulting damage was not “property damage”, as those terms were defined by the policy.  The court applied the J.S.U.B. analysis regarding whether faulty workmanship constituted an “occurrence” under a post-1986 standard form commercial general liability policy with products-completed operations hazard coverage, issued to a general contractor.  However, unlike J.S.U.B., the court agreed with the insurance company and found the defective installation was not “property damage”, precluding coverage under the insurance policy.

The court clearly distinguished J.S.U.B., on the basis that it involved a claim for costs to repair damage caused by the subcontractor’s defective work, and Auto-Owners involved a claim for costs to repair or replace the defectively installed windows.  The court recognized a difference between a claim for the costs of repairing or removing defective work (such as replacing defectively installed windows in Auto-Owners) which is not a claim for “property damage”, and a claim for the costs of repairing damage caused by the defective work (such as cracks in the walls due to settling from improperly compacted soil in J.S.U.B.) which is a claim for “property damage.”  The court held because the subcontractor’s defective installation of the windows was not “physical injury to tangible property,” there was no “property damage” under the terms of the CGL policies and no coverage for the costs of repair or replacement of the defective work.

These cases provide valuable insight into when an insurance company has a duty to defend and indemnify general contractors under a commercial general liability insurance policy for subcontractors’ faulty work.