“May unintentionally faulty subcontractor work that damages an insured’s work product constitute an ‘accident’ under a commercial general liability insurance policy?” With that opening sentence, the Michigan Supreme Court last month became the latest high court to give a “yes” answer, in Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., 505 Mich. 368, 952 N.W.2d 402 (2020).
Skanska, the construction manager of a hospital renovation project, hired a heating and cooling subcontractor whose liability insurance policy named Skanska and the owner as insureds. When the subcontractor installed the expansion joints in the steam boiler and related piping backwards, the heating system got damaged. Skanska made a claim against the policy which, in typical fashion, indemnified the insured for liability on account of property damage “only if: (1) The . . . ‘property damage’ is caused by an ‘occurrence’ . . .” The insurer responded predictably, pointing to the definition of “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and denying that the faulty installation of the expansion joints qualified as an “accident” because it wasn’t fortuitous. The Michigan Supreme Court disagreed, interpreting “accident” as broader than “fortuity.”
The court found support for its conclusion by referring to the policy’s exclusion of coverage for an insured’s own work product, but with an exception for work performed by a subcontractor on the insured’s behalf: “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 rejected the argument that an exception to an exclusion cannot create coverage where none exists, pointing out that it was obliged to read the contract as a whole and give effect to all of its provisions if possible.
This observation about the subcontractor exception to a coverage exclusion as indicative of initial coverage for faulty workmanship is nothing new. U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 880 (Fla. 2007) (“the subcontractor’s exception to the general exclusion for a contractor’s defective work becomes important only if there is coverage under the initial insuring provision.”); Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1, 12 (Tex. 2007) (“By incorporating the subcontractor exception into the ‘your-work’ exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.”); National Surety Corp. v. Westlake Investments, LLC, 880 N.W.2d 724, 740 (Iowa 2016) (“It would be illogical for an insurance policy to contain an exclusion negating coverage its insuring agreement did not actually provide or an exception to an exclusion restoring it.”). But what makes Skanska interesting is that the court took pains to distance itself from an earlier Michigan decision, Hawkeye-Security Ins. Co. v. Vector Construction Co., 185 Mich.App. 369 (1990), which had expressly relied on a New Hampshire case holding that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship.” McAllister v Peerless Ins. Co., 124 N.H. 676, 680 (1984). The court of appeals in Hawkeye “agree[d] with both the reasoning and the conclusion as expressed by the McAllister court,” 185 Mich.App. at 378. But the Michigan Supreme Court in Skanska decided that “because Hawkeye interpreted a 1973 policy that did not cover damage caused by a subcontractor’s faulty workmanship, Hawkeye is not persuasive.”
Will New Hampshire reach the same conclusion? McAllister’s comment that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship,” was repeated as recently as Concord General Mutual Ins. Co. v. Green & Company Building and Development Corp., 160 N.H. 690, 693 (2010). But no subcontractor’s workmanship caused the damages in either McAllister or Concord General. If our Supreme Court hears a case involving similar policy language, and abides by its longstanding rule that “[w]e will not presume language in a policy to be mere surplus,” International Surplus Lines Ins. Co. v. Manufacturers & Merchants Mutual Ins. Co., 140 N.H. 15, 19 (1995), it just might follow Michigan’s lead and hold that faulty workmanship can be a covered occurrence.
Skanska, the construction manager of a hospital renovation project, hired a heating and cooling subcontractor whose liability insurance policy named Skanska and the owner as insureds. When the subcontractor installed the expansion joints in the steam boiler and related piping backwards, the heating system got damaged. Skanska made a claim against the policy which, in typical fashion, indemnified the insured for liability on account of property damage “only if: (1) The . . . ‘property damage’ is caused by an ‘occurrence’ . . .” The insurer responded predictably, pointing to the definition of “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and denying that the faulty installation of the expansion joints qualified as an “accident” because it wasn’t fortuitous. The Michigan Supreme Court disagreed, interpreting “accident” as broader than “fortuity.”
The court found support for its conclusion by referring to the policy’s exclusion of coverage for an insured’s own work product, but with an exception for work performed by a subcontractor on the insured’s behalf: “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 rejected the argument that an exception to an exclusion cannot create coverage where none exists, pointing out that it was obliged to read the contract as a whole and give effect to all of its provisions if possible.
This observation about the subcontractor exception to a coverage exclusion as indicative of initial coverage for faulty workmanship is nothing new. U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 880 (Fla. 2007) (“the subcontractor’s exception to the general exclusion for a contractor’s defective work becomes important only if there is coverage under the initial insuring provision.”); Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1, 12 (Tex. 2007) (“By incorporating the subcontractor exception into the ‘your-work’ exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.”); National Surety Corp. v. Westlake Investments, LLC, 880 N.W.2d 724, 740 (Iowa 2016) (“It would be illogical for an insurance policy to contain an exclusion negating coverage its insuring agreement did not actually provide or an exception to an exclusion restoring it.”). But what makes Skanska interesting is that the court took pains to distance itself from an earlier Michigan decision, Hawkeye-Security Ins. Co. v. Vector Construction Co., 185 Mich.App. 369 (1990), which had expressly relied on a New Hampshire case holding that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship.” McAllister v Peerless Ins. Co., 124 N.H. 676, 680 (1984). The court of appeals in Hawkeye “agree[d] with both the reasoning and the conclusion as expressed by the McAllister court,” 185 Mich.App. at 378. But the Michigan Supreme Court in Skanska decided that “because Hawkeye interpreted a 1973 policy that did not cover damage caused by a subcontractor’s faulty workmanship, Hawkeye is not persuasive.”
Will New Hampshire reach the same conclusion? McAllister’s comment that “[t]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship,” was repeated as recently as Concord General Mutual Ins. Co. v. Green & Company Building and Development Corp., 160 N.H. 690, 693 (2010). But no subcontractor’s workmanship caused the damages in either McAllister or Concord General. If our Supreme Court hears a case involving similar policy language, and abides by its longstanding rule that “[w]e will not presume language in a policy to be mere surplus,” International Surplus Lines Ins. Co. v. Manufacturers & Merchants Mutual Ins. Co., 140 N.H. 15, 19 (1995), it just might follow Michigan’s lead and hold that faulty workmanship can be a covered occurrence.
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