IOWA SUPREME COURT HOLDS SUBCONTRACTOR’S SLOPPY WORK COVERED DESPITE PRECEDENT

The Iowa Supreme Court recently held that property damage caused by defective work performed by an insured’s subcontractor may constitute an accident, and therefore an occurrence for which coverage exists under the commercial general liability policy.  The ruling affirmed the Iowa Court of Appeals decision demanding the insurer National Surety Corporation (“NSC”) pay $12,439,500, plus statutory interest, for the underlying settlement of construction defect claims.

In 2002, developers and a general contractor began construction on a multi-unit apartment complex in West Des Moines, Iowa; during construction, the project was sold to Westlake Investments, LLC (“Westlake”).  The developers and general contractor had purchased a primary commercial general liability policy with a $1,000,000 policy limit from Arch Insurance Group (“Arch”) and an excess CGL policy with a $20,000,000 policy limit from NSC.  The terms of the Arch policy defined the scope of coverage under the NSC policy; the NSC policy incorporated by reference the terms, conditions, and exclusions of the Arch policy.

During original construction, water intrusion issues surfaced in several of the buildings.  Westlake proceeded with the purchase because the parties believed the defects to be only aesthetic in nature; however, the defects remained, resulting in extensive water intrusion damages.  In February 2008, Westlake sued the developers and the general contractor seeking to recover lost profits, repair costs and other damages under tort and contract theories.  The developers and general contractor then sued numerous subcontractors and the architect as third-party defendants.

In early 2012, Westlake settled with the developers, general contractor and all but one of the subcontractors for $15,600,000.  Arch tendered its policy limits towards the settlement.  Pursuant to the terms of the settlement agreement, the developers and general contractor assigned their claims on the NSC excess policy to Westlake.

Subsequently, NSC sought a ruling in Iowa state court that the subcontractors’ defective workmanship could not constitute an accidental occurrence under the CGL policy.  The court disagreed, holding that defective work by a subcontractor can be an occurrence as defined by the policy. The case proceeded to trial and the jury found the NSC was liable for the unpaid portion of the settlement.

NSC appealed the decision to the Iowa Supreme Court seeking a determination that a subcontractor’s shoddy workmanship can never be an occurrence under a CGL policy by virtue of the state high court’s precedential 1999 decision in the case of Pursell Construction v. Hawkeye-Security Insurance.  The court distinguished Pursell, finding that case only dealt with costs of repairing the policyholder’s own defective work.  The court found the policy anticipates coverage for some property damage caused by defective workmanship on the part of the insured’s subcontractor.

This case was the first time the Iowa Supreme Court directly addressed this issue; lengthy dissents pronounced the ruling as counter to precedent established in analyzing CGL policies.  The dissent stated that an accident is an “undesigned, sudden and unexpected event,” and there is “nothing sudden about the gradual infiltration of rainwater through leaky window frames over seasons.”  Further, the dissent opined “the majority in effect converts the liability insurance policy into a home warranty.”

This case stands for the seemingly unpredictable nature of judicial interpretation of insurance policies, and the willingness of courts to depart from precedent in certain circumstances.  This case will have a great effect on insurance coverage matters in Iowa and beyond.

The case is National Surety Corp. v. Westlake Investments LLC, case number 14-1274, in the Supreme Court of the State of Iowa. If you would like a copy of the opinion or have any questions, please feel free to contact us.

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Print this pageEmail this to someone