Re-Evaluating “Occurrence” in the Construction Defect Realm

K&L Homes, Inc. v. American Family Mutual Ins. Co., 2013 ND 57 (N.D. 2013) (Index No. 20120060) The highest court in North Dakota re-evaluated a lower courtaEUR(TM)s decision concerning a construction defect matter, deciding in favor of the insured. In this matter, the plaintiff, a homebuilder, sought coverage for a judgment entered against them for over $250,000. The damages related to a defective home that the underlying plaintiff purchased from the plaintiff. The underlying plaintiff sued for breach of contract and breach of implied warranties. The insurer supplied plaintiff with a defense of the matter under a reservation of rights, but ultimately denied coverage for the judgment based on the aEURoeyour workaEUR? exclusion. The insurer relied on a previous decision in the state, ACUITY v. Burd & Smith Constr., 721 N.W.2d 33 (N.D. 2006), for the proposition that it could not be responsible for coverage of the judgment since the entire home was the plaintiffaEUR(TM)s product. Specifically, in ACUITY, aEURoefaulty or defective workmanship, standing alone, is not an accidental occurrence but aEUR~if faulty workmanship causes bodily injury or property damage to something other than the insuredaEUR(TM)s work product, an unintended and unexpected event has occurred and coverage exists.aEUR(TM)aEUR? The K&L court found issue with the approach taken in ACUITY. Specifically, the K&L court stated that it must first address the question of whether the faulty workmanship could constitute an occurrence. In doing so, the court specifically stated that ACUITY aEURoeincorrectly decided the question aEUR? by drawing a distinction between faulty workmanship that damages the insuredaEUR(TM)s work or product and faulty workmanship that damages a third partyaEUR(TM)s work or property.aEUR? The K&L court decided that faulty workmanship could constitute an occurrence. The next question was whether the faulty workmanship resulted in aEURoeproperty damage,aEUR? which the K&L court decided did exist. Lastly, coverage could only be afforded if the subcontract exception applied. The court decided that since the general contractor could become liable for damage to work performed by a subcontractor, or for damage to the general contractoraEUR(TM)s own work arising out of a subcontractoraEUR(TM)s work, the exception did apply. Accordingly, the insurer was required to cover the judgment against the insured.

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