In a 4 to 3 decision, the Supreme Court of Iowa affirmed the court of appeals’ holding in National Surety Corporation v. Westlake Investments, which we addressed in a previous post. The court confirmed “defective workmanship by an insured’s subcontractor may constitute an occurrence under a modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”
General contractors are typically required to carry commercial general liability (CGL) insurance. If a subcontractor’s work is later determined to be defective, based on the decision in Westlake, the CGL insurance policy may cover costs associated with the subcontractor’s defective work. However, if courts continue to apply Westlake’s analysis—one that could expand CGL policy language—contractors should expect to pay higher CGL premiums in the future.
What is an accident?
The decision in Westlake hinged on the term “accident.” Because the CGL policy did not define this term, the court felt compelled to clarify, looking first to policy language, and finally incorporating a definition found in previous court decisions. The trial court had adopted an interpretation of “accident” that included “continuous or repeated exposure” to harmful conditions, while also suggesting that an accident must be “sudden.” These contradicting definitions led to the Iowa Supreme Court’s split decision.
In his dissenting opinion, Justice Waterman latched on to the suddenness component of the trial court’s definition of “accident.” He observed: “There is nothing sudden about the gradual infiltration of rainwater through leaky window frames over several seasons.” Without a sudden event, Justice Waterman explained, there can be no coverage, regardless of whether the work was performed by the policyholder or its subcontractor. His analysis failed to accept any scenario that would recognize an accident that was not sudden, such as the “continuous or repeated exposure” that occurred in Westlake.
However, while the dissent’s definition of accident was too narrow, the majority’s view went too far. The majority relied on a 1999 Iowa Supreme Court case that denied coverage because the policyholder’s work (not its subcontractor’s) was found to be defective. In its opinion, the majority held that defective workmanship alone may be considered a compensable accident if that work was performed by an insured’s subcontractor. Yet the majority’s analysis failed to require any subsequent event following the defective workmanship, witnessed in Westlake as the gradual intrusion of water. As recognized by many courts and commentators, this subsequent event—not the subcontractor’s defective work—is the accident that triggers CGL coverage, regardless of whether it is sudden or caused gradually by continuous or repeated exposure to a harmful condition.
What’s wrong with better coverage?
More coverage is good, right? Not necessarily. Any windfalls enjoyed because the court included subcontractors’ defective work in CGL insurance coverage will be short lived. If courts continue to find coverage for subcontractors’ defective work alone, it is likely that insurance premiums will increase. As Justice Waterman explained, “the premiums for the policy were priced based on risks under well-settled Iowa law holding [that] poor workmanship is not covered.”
While the court reached the right outcome in Westlake (because there was a subsequent event), it took the wrong road to get there, and in doing so created precedent that might be used to guarantee subcontractors’ work, but will be paid for by higher insurance premiums.
Build it right. Keep it real.
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