march 8, 2010 Vol. 36, No. 10 $10.

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Finding Fault With Faulty Workmanship Exclusions

Disagreements sparked over meaning of vague provisions
By JEFFREY J. VITA and DAVID G. JORDAN lowing sample provision illustrates a fairly common faulty workmanship exclusion: We will not pay for loss or damage caused by or resulting from any of the following: Faulty, inadequate or defective: ... (2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction . . . of part or all of any property on or off an insured premises. . . . However, any ensuing loss not excluded or excepted in this policy is covered.

uilders risk policies, which insure against losses from property damage during construction, are often issued on an all risk basis. This means that the insurance covers all risks of direct physical loss or damage unless specifically excluded. The term all risk gives the impression that coverage is broadly applied: [A]n all-risk insurance policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an all-risk policy will, as a rule, be allowed for all fortuitous losses . . . unless the policy contains a specific provision expressly excluding the loss . . . Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 299 (Minn. Ct. App. 1997). However, despite this intuitive perception of the breadth of the insurance provided, builders risk policy exclusions can be wide-ranging, thereby limiting the scope of coverage to something far less than expected. Of particular significance is the exclusion for faulty workmanship. Commonly found within builders risk policies, the faulty workmanship exclusion is typically couched between a number of other causes of loss for which the insurer will not pay. While the exact language and grouping of other causes of loss connected with workmanship varies from policy to policy, the fol-

Jeffrey J. Vita

David G. Jordan

sweeping implications of the exclusion when construed in the manner advanced by insurers: It is reasonable to assume that a primary purpose of purchase of an all risks policy by an insured would be to protect against fortuitous loss through fault of the subcontractors through whom the work was done; if subcontractor-fault were entirely excluded as a covered peril, the all risks peril expressly insured would become perilously close to a policy insuring no risk. Policyholders, therefore, have advanced a more narrow reading of the clause which limits its application to flaws in the actual construction, or product, as opposed to mistakes or accidents that occur during the course of construction. The argument thus promotes an interpretation of faulty workmanship as a faulty product as opposed to a faulty process. This dichotomy between product and process is at the heart of the faulty workmanship debate. In light of the potentially dual meaning,

Notably, the term faulty workmanship is not defined by most builders risk policies, thereby sparking disagreement over its scope and application. Not surprisingly, insurers often take a liberal reading of faulty workmanship, claiming that it applies to virtually all acts of negligence and oversights occurring at a construction project. From the policyholders perspective, such interpretation is inconsistent with the purpose of all risk coverage and renders the policy almost valueless, given that the majority of builders risk claims concern some level of human error. The U.S. Court of Appeals for the Fifth Circuit acknowledged in Dow Chemical Co. v. Royal Indem. Co. in 1981 the potentially wide-

Jeffrey J. Vita is a partner at Saxe Doernberger & Vita, P.C. in Hamden where he represents policyholders in insurance coverage disputes. David G. Jordan is an associate at the firm and focuses his practice on a variety of insurance coverage-based litigation on behalf of policyholders.

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MARCH 8, 2010

CONNECTICUT LAW TRIBUNE

Construction

Law

some courts have deemed the term faulty workmanship to be ambiguous and thus have adopted the construction most favorable to the insured. See, e.g., Allstate v. Smith, 929 F.2d. 447 (9th Cir. 1991) (finding that a roofing contractors failure to place a protective tarp over a temporary hole in the roof, leading to rain damage, was a faulty process, thereby not excluded); M.A. Mortenson Co. v. Indem. Ins. Co. of N. Am., 1999 U.S. Dist. LEXIS 22641 (D. Minn. Dec. 23, 1999) (inadequate protective measures leading to storm damage were not found to be faulty workmanship because such measures did not involve a flawed product); City of Barre v. New Hampshire Ins. Co., 396 A.2d 121 (VT. 1978) (faulty workmanship exclusion did not apply to damage to building arches that were not sufficiently tethered, as the arches were not faulty).

In contrast, however, other courts have concluded that faulty workmanship is unambiguous, thus finding that the exclusion applies to both flaws in the construction process and flaws in the finished product. See Wider v. Heritage Maintenance, Inc., 2007 NY Slip Op 27005, 9 (N.Y. Sup. Ct. 2007) (there is no reasonable conflict in finding that workmanship can refer to the quality of both the process by which the work is done and of the finished product:); Schultz v. Erie Ins. Group, 754 N.E.2d 971, 976 (Ind. Ct. App. 2001) (while the term faulty workmanship allows at least two definitions, we see no reason why it must mean either a flawed product or a flawed process. . . . [A]n insurer could just as likely have both perils in mind when it drafts a policys list of exclusions.); L.F. Driscoll v. American Protection Ins. Co. 930 F.Supp. 184 (E.D.Pa. 1996)

(exclusion not limited to faulty product, and thus damage to projects roofs caused by storing and dragging heavy construction materials across such roofs, was considered faulty workmanship). The opinions regarding the meaning and scope of the faulty workmanship clause appear to be evenly split. What can be concluded from this sharp division of authority is that the meaning of the faulty workmanship exclusion is less than clear, and the outcome of a claim will often depend upon the particular jurisdiction in which the insured finds itself. Given the diverse interpretation of the clause, a fair assessment is that the faulty workmanship provision is itself faulty; deserving of a clarification that is consistent with the true meaning of an all risk policy. n