United States Fire Insurance Co. v. J.S.U.B., Inc. and Auto-Owners Insurance Co. v. Pozzi Window Co.
2007 Fla. LEXIS 2394 and 2007 Fla. LEXIS 2391 (Dec. 20, 2007)
On December 20, 2007, the Florida Supreme Court decided United States Fire Insurance Company, et al. v. J.S.U.B., Inc., et al., 2007 Fla. LEXIS 2394, and Auto-Owners Insurance Company v. Pozzi Window Company, et al., 2007 Fla. LEXIS 2391 – two cases dealing with whether a standard form CGL policy with products completed operations hazard coverage issued to a general contractor, cover a general contractor’s liability to a third party for repair and/or replacement costs due to defective work by its subcontractor.
In deciding each case, the Court held that although a subcontractor’s defective work can constitute an “occurrence” under a post-1986 standard form commercial general liability policy, the defective work must also constitute “property damage” in order for coverage on a subcontractor’s defective work to be applicable.
In J.S.U.B., after Contractor completed construction of several homes, owners discovered damage to the foundations, drywall, and other interior portions of the homes. The damage to the homes was caused by Subcontractors’ use of poor soil and improper soil compaction and testing. Contractor sought coverage under its CGL policies. Insurer agreed that the policies provided coverage for damage to homeowners’ personal property, such as homeowners’ wallpaper, but asserted that there was no coverage for the costs of repairing the structural damage to the homes, such as the damage to the foundations and drywall.
The Court first addressed whether faulty workmanship can constitute an “occurrence” within a commercial general liability policy. The Court held that “faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an ‘accident’ and, thus, an ‘occurrence’ under a post-1986 CGL policy.” Accordingly, the Court concluded that Subcontractors’ defective soil preparation, which was neither intended nor expected by Contractor, was an “occurrence.”
The Court then addressed whether Subcontractors’ defective soil preparation caused “property damage” within the meaning of the policy. The Court held that faulty workmanship or defective work that has damaged the completed project has caused “physical injury to tangible property” within the plain meaning of the definition in the policy. In reaching this conclusion, the Court rejected Insurer’s arguments that faulty workmanship that injures only the work product itself does not result in “property damage” and that “there can never be ‘property damage’ in cases of faulty construction because the defective work rendered the entire project damaged from its inception.” The Court also noted that “[i]f there is no damage beyond the faulty workmanship or defective work, then there may be no resulting ‘property damage.'” Because structural damage to the completed homes was caused by the defective work, however, the Court concluded that there was “physical injury to tangible property” and thus the claim against Contractor for the structural damage was a claim for “property damage” within the meaning of the policies.
In Auto-Owners, Builder constructed a multimillion dollar house which included windows manufactured by Pozzi Window Company (“Manufacturer”) and installed by Builder’s subcontractor (“Subcontractor”). After moving into the house, Owner complained of water leakage around the windows, caused by defective installation. Owner filed suit against Manufacturer, Builder, and Subcontractor.
Applying its holding in J.S.U.B. to the facts in Auto-Owners, the Court found that no “property damage” had occurred. The Court distinguished Auto-Owners from J.S.U.B., in which the contractor was seeking coverage for structural damage to the completed homes.
Similar to the CGL policies at issue in J.S.U.B., the CGL policies at issue in Auto-Owners provided coverage for an “occurrence” that causes “property damage.” Unlike J.S.U.B., which involved a claim for the costs to repair structural damage to homes caused by the subcontractor’s defective work, the Court noted that Auto-Owners involved a claim for costs to repair or replace defectively installed windows. Analogizing Subcontractor’s defective installation of windows to the installation of a defective tire on a car – a component that could easily be replaced – the Court found that the defective installation was not “physical injury to tangible property.” The Court therefore held that there was no “property damage” under the terms of the CGL policies, and accordingly, no coverage for the costs of repair or replacement of the defective work.