The U.S. Court of Appeals, Second Circuit, Finds That An Insured’s Defective Work Qualifies As An “Occurrence” Because The Policy Contains A Subcontractor Exception To The “Your Work” Exclusion

Scottsdale Ins. Co. v. R.I. Pools Inc., 11-3529-CV, 2013 WL 1150217 (2d Cir. Mar. 21, 2013)

On March 21, 2013, the U.S. Court of Appeals for the Second Circuit reversed the judgment of U.S. District Court for the District of Connecticut, finding that the district court failed to properly consider the impact of the subcontractor exception to the “your work” exclusion in a CGL policy.  The district court granted summary judgment to an insurer on the basis that the underlying construction defect lawsuits alleged only defects in the work itself and, therefore, did not allege an “occurrence” as defined in the policy.  The Second Circuit reversed, observing that the policy also contained an exception to the “your work” exclusion for work performed by subcontractors.  The court concluded that the existence of the subcontractor exclusion meant that the term “occurrence” must also include defects in the insured’s own work.

R.I. Pools sold and installed concrete swimming pools and was insured under CGL policies issued by Scottsdale.  R.I. Pools employed outside companies to supply and pour the concrete for its pools.  In 2009, R.I. Pools received complaints from nineteen of its customers for whom R.I. Pools had installed pools in 2006.  The customers claimed that the concrete used in the pools was cracking, flaking and deteriorating, and three customers filed suit against R.I. Pools.  Scottsdale filed a declaratory judgment action against R.I. Pools seeking a declaration that Scottsdale had no duty to defend or indemnify R.I. Pools and seeking reimbursement of the defense costs that Scottsdale had already paid.

The district court granted summary judgment in favor of Scottsdale.  The court reasoned that defects in the R.I. Pools’ workmanship could not be considered “accidents” and, therefore, the damage to the pools did not result from an “occurrence” as required by the Scottsdale policies.  R.I. Pools appealed.

On appeal, the court noted that the district court had relied primarily on Jakobson Shipyard, Inc. v. Aetna Cas. & Sur. Co., 961 F.2d 387 (2d Cir. 1992).  In Jakobson, the insured was sued by its buyer after the insured sold two tug boats that the insured had manufactured with allegedly defective steering mechanisms.  In that case, the court had held that a loss resulting from the insured’s faulty workmanship was not the result of an “accident,” and thus did not constitute an “occurrence.”

In R.I. Pools, the court observed that, unlike the policy in Jakobson, the Scottsdale policies also contained an exclusion for “your work,” as well as an exception to that exclusion for damage to “your work” if the work was performed on R.I. Pool’s behalf by a subcontractor.  The court found that the inclusion of the subcontractor exception meant that “in some circumstances the insured’s own work is covered.”  The court further reasoned that because coverage under the policies is confined to “occurrences,” defects in the insured’s own work must fall within the category of “occurrences.”  The Second Circuit concluded that the district court’s ruling that defects in the R.I. Pools’ work were not “occurrences” was in error and that the district court ruling incorrectly read the subcontractor exception out of the policy.

The court, therefore, reversed the judgment in favor of Scottsdale and remanded for further proceedings.  Furthermore, because there was a possibility the Scottsdale had an obligation to defend the underlying lawsuits, the court also reversed the finding that Scottsdale was entitled to reimbursement of defense costs.  

Unfortunately, R.I. Pools creates unnecessary confusion in the determination of when an “occurrence” is alleged by ignoring the policies’ definition of “occurrence” as “an accident.”  The flaw in the Second Circuit’s reasoning is this: simply because an “occurrence” can result in damage to the insured’s work, it does not follow that in any case where there is an allegation of damage to the insured’s work, it must have resulted from an “occurrence.”  In the case of faulty workmanship, the damage to the insured’s own work is not accidental and, therefore, not the result of an “occurrence.”  In other instances, damage to the insured’s work might be caused by an accident and yet not be the result of defects in the insured’s work.  For example, the insured could accidentally drop a diving platform being installed at a pool, resulting in damage to the completed floor of the pool (the insured’s work).  In such an instance, unlike the case of faulty construction, the damage to the insured’s work would have been caused by an accident, and thus an “occurrence.”  The central inquiry overlooked by the court in R.I. Pools was whether the damage was the result of an accident.      

For more information on the issues discussed above, or any other insurance coverage questions, please contact Adam H. Fleischer, AFleischer@BatesCarey.com or John A. Husmann, JHusmann@BatesCarey.com