New York Appellate Court Holds that Damage to Property Caused by Faulty Workmanship is Covered by Commercial General Liability Policy as an “Occurrence”.
In I.J. White Corp. v. Columbia Cas. Co., 105 A.D.3d 531, 964 N.Y.S.2d 21 (2013), the New York Supreme Court, Appellate Division, held that an insurer had a duty to defend and indemnify I.J. White, the manufacturer of a freezer system that caused damages to the baked goods of the third party purchaser of the system. Although some courts hold that commercial general liability (“CGL”) policies do not insure against faulty workmanship (reasoning that there is not “accident,” which is what CGL policies are intended to cover), the court found that the damage to the baked goods constituted an “occurrence” under the CGL policy because coverage is provided for harm caused to other property as a result of faulty workmanship, rather than simply damage to the product itself.
This case is instructive on an important distinction made by courts when determining whether an insurance policy provides coverage over claims arising from poor workmanship. Many courts recognize that CGL policies do not provide coverage for faulty workmanship or the mere failure to properly perform a contract. However, when the improper work causes damage to property other than the work product itself, courts often find an “occurrence” that requires the insurer to provide defense and indemnification.
In Pennsylvania, the Supreme Court decision of Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 333, 908 A.2d 888, 898 (2006) is the primary authority on this issue. In Kvaerner, the Court held that claims for faulty workmanship do not constitute an “occurrence” under a CGL policy when the only damage caused is to the work product itself. The Court reasoned that to provide coverage to the insured for faulty workmanship would impermissibly convert a CGL policy into a performance bond. Thus, if a contractor prefers to have insurance coverage for faulty workmanship, it must pay an additional premium for a policy rider, often referred to in Pennsylvania as a “Kvaerner Rider,” to insure against faulty workmanship damages.