Liability policies are generally “claims made” (with which lawyers are familiar) or “occurrence.” An occurrence policy requires that an “occurrence” or an “accident” occur during the policy period. Courts often resort to the dictionary for the plain meaning of terms in an insurance policy. Occurrence, which is understood to be an “accident” requires, as defined by Webster’s, “[a]n unexpected and undesirable event” which is unintended. “This implies a degree of fortuity….” Kvaerner Metals Div. v. Commercial Union.
In the context of a contractor’s negligent performance, the damage one small error in an industrial complex can cause is virtually limitless. The judicial interpretation of “occurrence” is in reality not a minute exploration of the “accident.” Instead it is a judicial policy determination setting the boundaries between an uncovered “business risk” and covered losses. The coverage afforded by performance bonds should be paid for in the premiums for a bond, and should not be disguised and spread among all construction projects as overhead through the cost of CGL. An oft-cited discussion will be found at Henderson, “Insurance Protection for Products Liability and Completed Operations-What Every Lawyer Should Know,” 50 NEB.L.REV. 415, 419 (1971).
The courts limit CGL coverage through a variety of means. First, and the most obvious, is the Completed Operations or Work Product Exclusion, started as a case law doctrine and now codified in standard policy CGL policies. Completed Operations Exclusion, barring coverage for damage to the actual work product that the contractor was contracted to perform. If you are hired to put up a wall, and it caves in, you can’t get your CGL carrier to pay the claim that your contracting counterparty asserts against you for the cost of repairing the wall.
Kvaerner goes further, holding that a work site defect in contracted for work can never be an accident or occurrence, because it is always foreseeable even if not intentional. This logic makes little sense: speeding or skidding in an automobile is always a foreseeable occurrence, but it is an accident barring extreme recklessness, i.e., drag racing on Rte 295.
The further issue is whether damage to the property or person of a third party is indemnified to the contractor despite the “occurrence” requirement. Pennsylvania says “No” (Kvaerner), New Jersey says “Yes” (Weedo vs.Stone-E-Brick, Inc. , along with California, George, Indiana, Florida, Texas and others. Other approaches are possible; South Carolina, for example, holding that “occurrence” is ambiguous and must be construed against the insurer, ruled that damage to third parties caused by the poor workmanship of a subcontractor (not in contractual privity up the line past its own counterparty) could be an occurrence or accident under appropriate circumstances. Maryland, Kansas and Wisconsin have adopted similar rules. Pennsylvania holds that subcontractor negligence is always foreseeable and never an accident. Miller Capital Ins. Co. v. Gambone Bros. Dev. Co. Under this logic all negligent acts would not be a covered occurrence. The decision is wholly based on a judicially created economic policy.
There are complex choice of law issues to be addressed. Do not simply assume that the insurance law of the state where the incident occurred controls. The construction of a policy is generally governed by the state where the insurance policy was entered into, a whole analysis unto itself. Specialty Surfaces Int’l vs. Cont. CA’s. Co., (3rd Cir. 2010).Schuylkill Stone Corp. vs. State Auto Mut. Ins. Co. faced the issue of whether an owner’s third party claim against its subcontractor for contribution to damages to the owner’s customers are covered. The case held that since the contribution claim against the insured subcontractor sounded in tort rather than contract, and because there was no contractual relationship between the injured customers and the subcontractors, that notwithstanding Kvaerner an insurable occurrence had occurred.
Which brings us to Zurich Am. Monmouth County contracted with Shoemaker to construct a jail, and alleged that contractor Shoemaker negligently supervised its own subcontractor, enabling the sub to engage in willful misconduct and resulting in damage to both structural elements and personal property of the County Jail. Merely re-casting a breach of contract claim as negligence will not transform a foreseeable event into an accident. Documents outside the Complaint itself cannot be used to establish that a covered claim was asserted. The elements of an insurable claim must be found within the four corners of the Complaint itself. The court held that the willful misconduct of a subcontractor is always foreseeable to the general contractor (a doubtful proposition), but more importantly noted that in view of Schuylkill Stone that if the underlying claim against the subcontractor had been brought by the County, which was not in contractual privity with the sub, that a more interesting question would have been raised.