Resolving a decades-long insurance dispute, the Michigan Supreme Court recently clarified that subcontractor mistakes damaging an insured’s work product may trigger commercial general liability insurance policy coverage. Michigan courts have historically denied coverage for damage claims related to a contractor’s own work, permitting recovery only for damage to another’s property. Those rulings significantly limited insurance claims for a contractor’s defective work.
Now, per Skanksa USA Building v M.A.P. Mechanical Contractors, Inc., Docket Nos. 159510, 159511 (June 29, 2020), damage caused by a subcontractor’s unintentionally faulty work may be an “occurrence” under industry standard ISO policies regardless of whose property is damaged. The decision expands insurance protections for project owners, general contractors, and other additional named insureds.
Skanska USA Building served as construction manager for a medical center renovation project. Skanska subcontracted the project’s heating and cooling work to M.A.P. Mechanical Contractors, Inc. (MAP), which obtained a commercial general liability policy (CGL Policy) from Amerisure Insurance Company. The CGL Policy, which was based on industry-standard Insurance Services Office (ISO) language, named Skanska as an additional insured.
Two years after MAP installed a steam boiler and piping, it was determined that MAP connected several expansion joints backward, which caused significant damage to concrete, steel, and the heating system. Skanska repaired the damage at a cost of $1.4 million and submitted a claim to Amerisure who denied coverage. Amerisure asserted that the faulty installation was not an “occurrence” under the CGL Policy because only Skanska’s work product was damaged. Skanska sued both MAP and Amerisure.
Relying on a Michigan Court of Appeals’ 1990 decision, the trial court agreed that an “occurrence” required damage to another’s property, but it refused to grant Amerisure’s request to dismiss the case due to factual uncertainty about whether damages extended beyond Skanska’s scope of work. On appeal, the Court of Appeals reversed, finding that only Skanska’s work was damaged and, thus, there was no “occurrence.” The Michigan Supreme Court reversed that decision.
The CGL Policy required Amerisure to pay sums related to property damage caused by an “occurrence,” which was contractually defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The CGL Policy did not define “accident”; however, an earlier Michigan Supreme Court opinion defined the term as “an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected.” The Court reasoned that faulty subcontractor work satisfied most of those terms: “It happens by chance, is outside the usual course of things, and is neither anticipated nor naturally to be expected.”
A subcontractor error being an “accident,” and thus an “occurrence,” was further bolstered by the CGL Policy exclusions. The CGL Policy precluded coverage for an insured’s own work, often called the “Your Work” exclusion. But it also stated that “this exclusion does not
apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The Court concluded that “if faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.”
The Court then rejected the argument that “accident” cannot include damage to the insured’s own work product because the CGL Policy’s definition of “occurrence” did not make such a distinction. Further, if the CGL Policy was intended to cover only third-party property damage, the “Your Work” exclusion would be meaningless. The Court reasoned there was no need to exclude from coverage something that was never covered.
Skanska’s full implications are yet to be determined. For now, it provides another potential avenue for recovery of damages under an ISO commercial general liability policy. While standard ISO policy language is common, it is not required. Insurance providers may seek to define “accident,” to redefine “occurrence,” or to remove the subcontractor exception to the “Your Work” exclusion to avoid the result in Skanska. If the standard ISO policy language remains, school officials can reasonably anticipate a change in the insurance landscape, including as to cost, coverage scope, and coverage priority.