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A Full 180 -- The West Virginia Supreme Court of Appeals' New Position on Liability Insurance and Defective Workmanship
August 13, 2013
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Since 1965, the West Virginia Supreme Court of Appeals has consistently held that defective workmanship that caused bodily injury or property damage did not constitute an “occurrence” under a policy of commercial general liability insurance, and therefore the insurer was not obligated to pay for the damage or tender a defense. See McGann v. Hobbs Lumber Co., 150 W. Va. 364, 145 S.E.2d 476 (1965). The Court maintained this position because “faulty workmanship claims are essentially contractual in nature” and thus are “outside the risks assumed by a traditional commercial general liability policy.” Syl. pt. 3, Webster County Solid Waste Authority v. Brackenrich and Associates, Inc., 217 W. Va. 304, 617 S.E.2d 851 (2005).
In June of 2013, however, the West Virginia Supreme Court of Appeals reversed course in the landmark case of Cherrington v. Erie Ins. Property & Cas. Co., 2013 WL 3156003 (W. Va. June 18, 2013). In Cherrington, the Court held that “[d]efective workmanship causing bodily injury or property damage is an ‘occurrence’ under a policy of commercial general liability insurance.” As stated, Cherrington is a landmark decision which will have a significant impact on construction law, warranting discussion.
I. The Cherrington Decision
Cherrington arose out of a “cost plus” contract between Lisbeth Cherrington and The Pinnacle Group, Inc. (“Pinnacle”) for the construction of a home in Greenbrier County, West Virginia. Once construction was completed, Ms. Cherrington observed various defects in the house, including “an uneven concrete floor on the ground level of the house; water infiltration through the roof and chimney joint; a sagging support beam; and numerous cracks in the drywall walls and partitions throughout the house.” Id. at *3.
Ms. Cherrington eventually sued Pinnacle and subcontractor Old White Interiors, LLC in 2006.1 Ms. Cherrington alleged that “Pinnacle was negligent in the construction of [the] home in the following matters: (a) Altering the design; (b) Negligently pouring and finishing the concrete floor; (c) Finishing and painting of the house; and (d) Placing and securing the foundation.” Id. Pinnacle subsequently filed a claim against its commercial general liability (“CGL”) insurance policy with Erie Insurance (“Erie”). Erie refused coverage, so Pinnacle filed a third-party complaint against Erie seeking a declaration of the coverage provided by its policy.
In the lower court, Erie filed a motion for summary judgment, and the circuit court of Greenbrier County granted Erie’s motion, finding that “Ms. Cherrington had failed to state a claim for damages that would be covered by any of the policies of insurance issued to Pinnacle.” Id. at *4. The circuit court based its opinion, in part, on its finding that “Ms. Cherrington had not established that an ‘occurrence’ or ‘accident’ had caused the damages she allegedly sustained because faulty workmanship, in and of itself, or absent a separate event, is not sufficient to give rise to an occurrence.” Id. Pinnacle appealed this final order to the West Virginia Supreme Court of Appeals.
In reversing the circuit court’s decision, the Supreme Court of Appeals noted that “the circuit court relied upon this Court’s prior decision[s] holding that CGL insurance does not provide coverage for defective workmanship.” Cherrington, 2013 WL 3156003 at *6. However, stating that while it “appreciate[s] this Court’s duty to follow our prior precedents,” the Court found that “consistent with the decisions rendered by a majority of our sister jurisdictions,” defective workmanship constitutes an “occurrence” under CGL insurance policies. Id. at *7–8.
The Court observed that, under Erie’s CGL policy, an “occurrence” is defined as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions” but that the term “accident” was not defined. The court defined the term “accident,” to mean “circumstances giving rise to the claimed damages or injuries must not have been ‘deliberate, intentional, expected, desired, or foreseen’ by the insured.” Id. at *9 (citing Syl. pt. 1, Columbia Casualty Co. v. Westfield Ins. Co., 217 W. Va. 250, 617 S.E.2d 797 (2005)). The Court noted that it defied common sense to find that Pinnacle “deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation” and therefore “the damages incurred by Ms. Cherrington during the construction and completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it hired the subcontractors alleged to have performed most of the defective work.” Cherrington, 2013 WL 3156003 at *9. The Court also noted failing to recognize defective work of subcontractors as an “occurrence” was absurd because it directly contradicts the CGL policy’s “Exclusion L” which provides coverage for work provided by subcontractors. Id.
The Court concluded its reasoning with a finding that its “prior proscriptions limiting the scope of the coverage afforded by CGL policies to exclude defective workmanship to be so broad in their blanket pronouncement that a policy of CGL insurance may never provide coverage for defective workmanship as to be unworkable in their practical application.” Id. at *10. For example, the Court noted that each of its prior decisions regarding this issue were applied with equal force to “preclude a contractor, such as Pinnacle, from recovering under its CGL policy for damages resulting from the defective work of its subcontractor even though” the policy expressly provided coverage for this very issue. Id.
II. Cherrington’s Impact
The Cherrington decision marks a very significant change in West Virginia jurisprudence as it relates to construction law, and will likely have practical effects. The most likely (and probably most immediate) impact will be in the cost of CGL policies to contractors. Undoubtedly, insurance companies such as Erie were relying on West Virginia law to protect them from the liability that arose from these circumstances. As a result of the Court’s decision, insurance companies will likely seek to shift the costs of covering these new “occurrences” under their policies to the insureds.
Alternatively, contractors and insurance companies may begin seeing two forms of CGL insurance policies, with newer types of policies expressly excluding defective workmanship from the coverage plan in exchange for a lower premium payment. As is the case with most contractual terms, the parties can adjust the contract to fit the law, and Cherrington demands that insurance companies either pay up or modify their policies to ensure that defective workmanship is not covered. The changes in costs will be a significant factor going forward, and contractors would be wise to anticipate such changes and prepare financially. Regardless, insureds that elect to maintain defective workmanship coverage pursuant to the court’s holding in Cherrington may also need to increase their own rates in order to cover the increased costs. Therefore, homeowners and others who would seek to use contractors also need to prepare for the possibility of increased costs. In a similar vein, subcontractors may face financial consequences in the form of bonds on their work or even a requirement by contractors that they provide their own CGL policies.
In line with the ambiguity of the Court’s decision regarding who is impacted is also the scope of the impact. Cherrington is certainly a turning point, but it is not a blanket pronouncement. Therefore, the Court’s future decisions could be influenced by amendments to or differences in policy language.
Finally, a less predictable potential consequence is the impact Cherrington will have on the relationship between contractors and subcontractors. Contractors may be less stringent in evaluating subcontractors, instead focusing on costs and relying on insurance coverage to protect them from subcontractors who will create liability. This potential overall trend of taking greater risks for greater rewards (read: profits) could extend from a sense of security that comes from the Court’s new decision favoring contractors and requiring coverage for defective workmanship under the Erie policy’s language. However, decreasing standards creates the risk of negligent hiring by contractors, which would preclude coverage and operate as part of the contractor’s claim history, thus increasing policy cost. Such conduct could also have a negative long-term impact on contractors’ reputations (which could also encourage contractors to take more work in-house).
Ultimately, Cherrington is a significant departure from West Virginia precedent and sets a tone for a wave of change in the upcoming months and years. The extent of this change is yet to be determined; however, it is likely that the West Virginia Supreme Court of Appeals will speak again on this issue sooner rather than later.