Georgia Supreme Court Expands Coverage for Faulty Construction

Georgia’s high court has handed contractors and their clients a victory by expanding the scope of a contractor’s general liability policy so that it includes damage due to a contractor’s faulty construction.

The ruling grants homeowners greater rights to recoup damages under a contractor’s general liability policy, which, among other things, will protect homeowners in cases where their contractor has declared bankruptcy or does not have the financial resources to cover the claim on their own.

Also for the first time, contractors facing faulty construction claims can file a claim against their general liability insurer to pay legal fees to defend the claim and pay any amount awarded by a court or as the result of a settlement.

The Georgia Supreme Court ruled in a case [Taylor Morrison Services, Inc. v. HD-Gerling American Insurance Co. S13Q0462 Georgia 2013] that had its genesis in a class action suit where more than 400 homeowners sued the multistate contractor.

The homeowners alleged that the contractor, Taylor Morrison, improperly constructed the homes’ foundations by not using an industry standard four inches of gravel per foundation base and using concrete with too high a water-to-cement ratio.

The homeowners alleged that the foundations proved too weak to support the housing structures, leading to physical damage in the form of water intrusion, cracks in floors and broken up driveways. The homeowners also alleged that Taylor Morrison withheld information about the faulty construction of the foundations.

Morrison’s insurer, HD-Gerling, initially sought to defend the contractor against the lawsuit.

However, HD-Gerling in 2009, sued Taylor Morrison in the U.S. District Court for the Northern District of Georgia on the grounds that the claims were not covered under the contractor’s general liability policy.

The policy stated that HD-Gerling is only legally obligated to pay bodily injury and property damage caused by an “occurrence” in a covered territory. Further, an occurrence only exists when the damage is caused to any work performed by any contractor other than the contractor covered by the general liability policy.

HD-Gerling alleged that the claims against Taylor Morrison did not represent an occurrence since, in addition to building the foundation, the contractor built the entire home.

Based on that argument, HD-Gerling prevailed before the district court, winning a summary judgment against Taylor Morrison and freeing the insurer of any liability. Taylor Morrison then filed an appeal with the U.S. District Court of Appeals for the Eleventh Circuit.

In such cases where a federal court case hinges on a state law, it is not uncommon for the federal court at its discretion to request the state’s highest court to rule on any such outstanding issues. The federal circuit court of appeals requested the Georgia Supreme Court to rule on two specific points. The first was whether the damage to the Taylor Morrison homes constituted an occurrence and second, if it was therefore covered under the general liability policy.

Under the terms of the policy, HD-Gerling set out the conditions that would trigger a general liability claim. The policy explicitly defines that an occurrence happens when it results in property damage or the loss of the use of a property that is not physically damage. The policy also specifically defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same harmful conditions.”

Georgia Supreme Court Judge Keith Blackwell, writing for the majority, noted that while HD-Gerling set out those conditions, it failed to define an accident. Under such circumstances, Blackwell noted, the court turns to the “usual and common usage” of the term in question.

Blackwell found that a plain reading of the of “accident” in reference works such as Black’s Law Dictionary is an “event or change occurring without intention or volition through carelessness, unawareness, ignorance, or a combination of causes and producing an unfortunate result.”

Therefore, Blackwell concluded, an accident is not “usually and commonly to convey information about the nature or extent of injuries, much less the identity of the person whose interests are injured.”

As a result, Blackwell wrote that an “occurrence, as the term is used in contractor’s general liability policy, does not require damage to the property or work or someone other than the insured.”

The Georgia Supreme Court ruling means that HD-Gerling can no longer dispute Taylor Morrison’s claims on the basis that the damage to the homes did not constitute an occurrence under the contractor’s general liability policy.

The high court’s ruling does not mean that insurers are automatically liable for such claims. A standard contractor’s general liability policy can include up to five builders risk exclusions covering various damages that could be incurred on a job site.

The Georgia Supreme Court also pivoted off its ruling on occurrence to note that in cases where a contractor purposely used fraudulently construction techniques it would not be covered under a general liability policy since it would not be accidental.

On the issue of where there is a breach of warranty, it could be considered an occurrence if the breach is not done purposely and, therefore, is accidental and is covered under a general liability policy.

Topics Georgia Homeowners Contractors Construction