Arkansas Supreme Court Holds Faulty Workmanship Not an Occurrence
April 14, 2008
Answering a certified question from the U.S. District Court for the Eastern District of Arkansas, the Supreme Court of Arkansas has held that the faulty work by a contractor cannot be considered an accident constituting an "occurrence" under a CGL policy. Essex Ins. Co. v. John Holder, d/b/a J&H Enterprises, et al., 2008 WL 598160 (Ark. Mar. 6, 2008).
Homeowners contracted with the insured to build a house. Subsequently, the homeowners filed a suit against the insured under a variety of contract and tort theories alleging damages due to "delays, employment of incompetent subcontractors, and defective or incomplete construction." The insured demanded coverage under three CGL policies issued by the insurer. The insurer responded by filing a declaratory judgment action in federal court seeking a ruling that it had no duty to defend the insured under any of the policies at issue.
One of the policies defined "occurrence" simply as "an accident." The other policies contained a Combination Contractor Endorsement that modified the definition: "Occurrence means an accident, including the continuous or repeated exposure to substantially the same general harmful conditions; however, the following is not an ‘occurrence' under this policy: a) [a]ctual and/or alleged defective work; and/or b) [a]ctual and/or alleged defective workmanship; and/or c) [a]ctual and/or alleged defective construction; and/or d) [a]ctual and/or negligent construction." The underlying plaintiffs argued that the term "accident" in the first policy was undefined and therefore ambiguous.
The district court certified to the Arkansas Supreme Court the question whether defective construction or workmanship is an "accident," and therefore an "occurrence" within the meaning of CGL policies. After surveying Arkansas precedent and that of other jurisdictions, the Supreme Court disagreed with the homeowners and held that "[f]aulty workmanship is not an accident; instead, it is a foreseeable occurrence, and performance bonds exist in the marketplace to insure the contractor against claims for the cost of repair or replacement of faulty work."
