The general rule is that “the commercial general liability policy covers claims for property damage caused by defective work, but not claims for repair of the defective work itself.” Capstone Bldg. Corp. v. American Motorists Ins. Co., 308 Conn. 760, 67 A.3d 961, 982 (2013). Some courts reach this conclusion by holding that shoddy work is not “property damage,” limiting that phrase to "property that is nondefective, and to damage beyond mere faulty workmanship.” Taylor Morrison Services, Inc. v. Hdi-Gerling America Insurance Co., 293 Ga. 456, 746 S.E.2d 587, 591 (Ga. 2013). Others, including New Hampshire, get there by holding that shoddy work is not a covered "occurrence," limiting coverage to "negligent construction that resulted in an occurrence, rather than an occurrence of negligent construction." High Country Associates v. New Hampshire Ins. Co., 139 N.H. 39, 45 (1994).
But what if the poor workmanship in question must be replaced in order to repair or replace other property which is covered? In that scenario, must the insurer pay to fix the shoddy work? The answer is: maybe.
Carithers v. Mid-Continent Cas. Co., 782 F.3d 1240 (11th Cir. 2015), decided that the insurer must pay. The plaintiffs were homeowners who were assigned their general contractor’s CGL policy after a number of construction defects were discovered, including “incorrect construction of a balcony, which allowed water to seep into the ceilings and walls of the garage leading to wood rot, caused property damage to the garage.” Id. at 1244. The court decided that “repairing the balcony was part of the cost of repairing the garage.” Id. at 1251.
A similar decision is Village at Deer Creek Homeowners Association, Inc. v. Mid-Continent Cas. Co., 432 S.W.3d 231 (Mo.App. 2014). In that case, components of a defectively installed exterior cladding system were damaged by water intrusion, and removal of some or all of the exterior cladding system was necessary in order to repair water intrusion damage caused behind the walls. The court decided, id. at 243: “Once defective construction causes damage, the cost to repair the damage is covered ‘property damage.’ That cost to repair damage may include the cost to replace the defective construction if it too has been damaged or must be removed to access other damaged areas.”
In Lennar Corp. v. Markel American Insurance Co., 413 S.W.3d 750 (Tex. 2013), the Texas Supreme Court found coverage for the cost of removing EIFS, conceded to be a defective product, in order to locate covered water damage to other parts of the structure.
Decisions like these suggest a “back door” way to pass the costs of repairing or replacing defective work onto the insurer when other property that was damaged as a result of defective work cannot be addressed without also addressing the defective work itself. Thus far no New Hampshire reported case has considered the question whether covered repair costs for consequential damages must be teased apart from the costs of repairing the defective work itself, or whether both costs can be passed on to the insurer when the defective work must be addressed in order to fix the consequential damages.
Lawyers love unsettled questions; it gives us a chance to be creative. On this one, I'd rather have the carrier's side.