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Builder Clients ALERT

Update on coverage for claims involving faulty workmanship under commercial general liability policies

On December 30, 2008, the Pennsylvania Supreme Court denied the Petition for Allowance of Appeal from the Order of the Pennsylvania Superior Court in the case of Millers Capital Ins. Co. v. Gambone Bros. Dev. Co., 941 A.2d 706 (Pa. Super. 2007). In Miller, the Pennsylvania Superior Court found no coverage under the insured builder’s commercial general liability (CGL) policy for claims made against it by homeowners who alleged that their homes were built with defective stucco exteriors, windows and other artificial seals, resulting in water damage to the interior of the homes.

The Pennsylvania Superior Court applied the Pennsylvania Supreme Court’s holding in Kvaerner Metals v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006), in which the Court held that a contractor’s alleged faulty workmanship in building a coke oven battery for a steel company was not an “accident” and, therefore, was not an “occurrence” within the meaning of the contractor’s CGL insurance policy. In doing so, the Court explained that faulty workmanship claims lacked the degree of fortuity contemplated by the ordinary definition of accident.

In light of the Court’s decision in Miller, there is no longer any uncertainty with respect to the exclusion of coverage for faulty workmanship claims under CGL policies. Builders and others who previously thought their CGL policies protected them against such claims should be careful in hiring and supervising the work of subcontractors as they may no longer look to their insurance carriers for protection. There is a “subcontractor exception” which may preserve coverage that would otherwise not exist.

More on the subcontractor exception next month…

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