March 6th, 2018

The Court of Appeals holds that loss of use of real property constitutes “property damage” under CGL Policy

By, Mark A. Boyle, Esq.

Many lawsuits involving real property and defective construction claims include claims for damages that do not constitute physical damage to tangible property. Generally, COMMERICAL GENERAL LIABALITY (“CGL”) carriers eschew coverage for such claims.  The recent decision in Mid-Continent Cas. Co. v Adams Homes of Northwest Florida, Inc., No. 17-12660, 2018 WL 834896 (11 Cir. Feb. 13, 2018) clearly makes loss of use claims—even where no physical damage to tangible property occurs—potentially covered claims under CGL policies in Florida.

Adams Homes of Northwest Florida (“ADAMS”) was sued by a series of homeowners in an integrated community in which the residents were allotted common access to amenities including golf courses, restaurants, a marina, and shops. ADAMS built a series of homes within the development. The homeowners in the development eventually sued ADAMS claiming “homes, the streets adjacent to the homes, and the common areas they have access to, are now prone to flooding “which has made “[Homeowners’] ordinary use or occupation of their property physically uncomfortable” and “disturb[ed] the [Homeowners’] free use … of their property.” Homeowners sued ADAMS in state court seeking damages for ADAMS’ alleged negligence in failing to ensure the installation of adequate drainage.

Mid-Continent Casualty Company (“MCC”) insured ADAMS under a series of commercial general liability policies which included the standard INSURANCE SERVICES OFFICE’s (“ISO”) CGL property damage definition. Under those policies, MCC had the “right and duty to defend the insured against any ‘suit’ seeking damages because of ‘bodily injury’ or ‘property damages’ covered thereunder.” The policy defined property damage as follows:

  1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
  2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.


MCC began defending ADAMS under a reservation of rights but also asserted a declaratory relief action in which MCC attempted to disclaim both the duty to defend and the duty to indemnify. The trial court agreed with MCC that the claims of the Plaintiff did not constitute “property damage” as that terms was defined under the CGL policy.

The 11th Circuit disagreed relying both on the plain language of the policy and a Florida intermediate appellate court decision, McCreary v. Florida Residential Prop. and Cas. Joint Underwriting Ass’n, 758 So.2d 692, 693 (4th Dist. Ct. App. 1999).  In McCreary, the court determined that the actions of the defendant ultimately rendered the Rebalko’s property unsafe and unsecure; thereby resulting in loss of use. Id. at 695. In response to MCC’s response argument that the water was “relatively harmless” and not likely to cause “an immediate danger”, the Court noted:

“But the absence of allegations that the storm water run­off is placing Homeowners in immediate danger does not counsel a different result. Physical discomfort in the use of property, like insecurity and unsafety in the use of property, raises the specter of loss of use. Although it is unclear whether the physical discomfort caused by the run-off is severe enough to prevent Homeowners from using their property, the same was true of Rebalko’s allegations in McCreary. Rebalko did not allege he stopped using his property because of the McCrearys’ dogs; rather, Rebalko alleged he felt insecure and unsafe in its use. Like Rebalko, Homeowners are entitled to have any ambiguity about whether the physical discomfort caused by the run-off was severe enough to cause loss of use resolved in their favor. “If the allegations of the complaint leave any doubt as to the duty to defend, the question must be resolved in favor of the insured.” Lime Tree Vill.Cmty., 980 F.2d at 1405.

Thus, the Court held that there was a duty to defend.

In addition to its holding that a potential loss of use claim required a defense under the CGL policy the 11th Circuit held that the fact that the damages in questions were “purely economic” did not bar the claims under the circumstances of this case noting “We have not found any support for applying the principle that general-liability policies do not cover purely economic damages in a case like this one.”

Until the ADAMS v MCC decision, most of the focus in insurance litigation for defective construction involved the question of whether or not the “property damage” definition had been met by a showing of physical injury to tangible property.  See U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007), Auto-Owners Ins. Co. v Pozzi Windows Co., 984 So. 2d 1241 (Fla. 2008). The ADAMS v MCC decision now gives a potential claimant under a CGL policy two avenues for pleading into coverage: 1. physical damage to tangible property; and/or 2. loss of use.  Practitioners who wish to plead their claims into coverage should plead either or both elements as applicable.



August 18th, 2015


In Cypress Point Condominium Ass’n v. Adria Towers, L.L.C., et al. —A. 3d —, 2015 WL 4111890 (N.J. App. Div. July 9, 2005), the court held that defective construction which resulted in unintended and unexpected consequential damages caused by the work of subcontractors constituted both property and an occurrence under a post 1986 CGL Form.  In so holding, the court recognized that the New Jersey court system had historically held such risks were “business risks” and not covered.   More specifically, the Cypress Point Court distinguished two decisions: Weedo v. Stone-E-Brick, Inc.405 A.2d 788 (N.J. 1979) and Firemen’s Ins. Co. of Newark v. Natl. Union Fire Ins. Co., 904 A.2d 754 (N.J. Super. App. Div. 2006). In distinguishing Weedo and Firemen’s Ins. Co., the Cypress Point court noted that both of those opinions, and many others in New Jersey involved interpretation of the 1973 ISO Form.


In evaluating the prior decision of the New Jersey Supreme Court Weedo, the court made two specific notations. First, the court noted that under the 1973 Form, the work of subcontractors was equated to the work of the general contractor for the purpose of determining whether there was property damage and coverage.  However, the court noted the changes to the subject policy in 1986, by including the subcontractor exception, “treated consequential damages from faulty workmanship of subcontractors differently than damages cause by the work of general contractors.”  The court also specifically noted that the Weedo court had not resolved whether consequential damages resulting from subcontractors’ faulty work constituted either “property damage” or “occurrence.” Rather, theWeedo court focused only on issues related to the exclusions in the policy.  The court specifically noted, that the insurer had conceded that “but for the exclusions in the policy, coverage would obtain.”  Second, the Cypress Point Court rejected insurers’ argument that the insured’s requested at holding in the case would transform the policy into a performance bond, noting, “A performance bond guarantees the completion of a construction contractor if a contractor defaults and unlike an insurance policy, it benefits the project owner rather than the contractor.  Assuredly, unlike a liability insurer, it is also entitled to indemnification from the contractor.”


The court went on to note the intentional changes made by the Insurance Services Organization culminating in the 1986 ISO Form and the addition of the so-called subcontractor exception. The court noted that in recent years the majority rule had become that consequential damages caused by construction defects were covered citing Christopher C. French, Construction Defects: Are They “Occurrences”?, 47 Gonz. L. Rev. 1, 8–9 (2011).  Further the Court cited to the Florida Supreme Court decision in  U.S. Fire Ins. Co. v. J.S.U.B., Inc., which decision explicitly referenced circulars issued by the ISO setting forth the intended scope of coverage.  See J.S.U.B., 9379 So. 2d 871, 879 (Fla. 2007) (quoting ISO Circular, Commercial General Liability Program Instructions Pamphlet, No. GL–86–204 (July 15, 1986). Finally, the court distinguished prior decisions purporting to interrupt New Jersey law as holding that defect construction was not an occurrence cited Pennsylvania Nat’l Mut.Cas. Ins. Co. v. Parkshore Dev.Corp., 403 Fed. Appx. 770 (3d Cir. 2010).


The decision in Cypress Point is particularly important because of where it was decided.  The New Jersey Supreme Court’s decision in Weedo, was the seminal cases deciding that defective construction claims were not covered.  While these decisions were eminently correct under the 1973 ISO CGL Form, the broad business risk concepts recognized in Weedo were dependent on the then existing policy language.  The Weedocourt also cited influential articles by  G.H. Tinker,Comprehensive General Liability Insurance Prospective and Overview, 23 Fed’n Ins. Coun. Q. 217, 218-21 (1975), and Dean Henderson, Insurance Protection for Products Liability and Completed Operations What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 418 (1971).  The Combination of the Weedodecision and these articles “informed” and impacted the interpretation of CGL policies for many years beyond their intended scope.  The Weedo decision and these articles all correctly informed how the 1973 ISO CGL Policy Form was intended to be interpreted.  However, when the policy changed, first by broad form property damage endorsements in the late 1970s, and later by incorporation of the broad form property damage concepts into the main line 1986 ISO CGL Form, the court systems across the country were somewhat slow to recognize the intended changes to the CGL.  That New Jersey has finally done so, shows that the “occurrence” revolution is almost complete.  As of the dictation of this posting, virtually all jurisdictions have considered the questions recognize, either by court decision, or statutory change, the defective construction can constitute an occurrence.

July 1st, 2013


By Mark A. Boyle, Esquire

Boyle & Leonard P.A.

Over the last ten years, one of the biggest issues in insurance litigation across the country has been the question of whether construction defects constitute an occurrence.  A spate of recent opinions finding that defective construction can constitute an occurrence continues a trend favoring coverage on behalf of builders under their Commercial General Liability (CGL) policies.  Most businesses, including businesses involved in the construction trades such as general contractors and subcontractors, procure a standard form of insurance known as the CGL policy.  Most CGL policies are issued on a standard form promulgated by the Insurance Services Office (ISO).  Given that this CGL ISO form is in use throughout the country, one might think that the interpretation of this policy would be uniform throughout most jurisdictions.  This is definitely not the case.


The term “occurrence” is defined under the standard form CGL policy as follows:


[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.


Crucially, the term “accident” is not defined.  The gist of the dispute between contracting insureds and their insurance carriers is whether defective construction is sufficiently “accidental” to constitute a covered loss.  Boiled to its essence, insurance carriers argue that defective construction events are merely faulty workmanship, the foreseeable result of which is eventual damage and other problems.  This argument holds that such foreseeability of damage makes construction defect losses non-accidental and therefore uninsurable under the CGL policy.


Thankfully, while this argument has maintained some traction (see Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317 (Pa. 2006)), the vast majority of jurisdictions which have considered the issue over the last ten years have correctly found coverage.  The most recent state Supreme Court to address the issue is the Supreme Court of Appeals of West Virginia.  See Cherrington, et al. v. Erie Ins. Property & Casualty Co., No. 12-0036, — S.E..2d — (W.V. June 18, 2013).   The Supreme Court of West Virginia explicitly held that the defective workmanship resulting in property damage constituted an occurrence and accident under a commercial general liability policy.  The court also noted that its decision in this regard was following the new “majority rule” based on decisions across the country.  Finally, the West Virginia Supreme Court noted that its decision in Cherrington overruled its prior decisions holding defective construction could not be covered under CGL policies.


Another very recent Supreme Court ruling on this issue comes from the Supreme Court of Connecticut.  In Capstone Bldg. Corp. v. American Motorist Ins. Co. 308 Conn. 760, — A.3d — (Conn. June 11, 2013), the insured general contractor, Capstone, was sued for defective construction.  The contractor submitted a claim for defective construction to its CGL insurance carrier, who denied the claim outright.  The Connecticut Supreme court specifically held:


Because negligent work is unintentional from the point of view of the insured, we find that it may constitute the basis for an “accident” or “occurrence” under the plain terms of the commercial general liability policy.


A similar result was reached in K & L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W. 2d 724 (N.D. April 5, 2013).  In K & L Homes, the builder, K & L, was sued by the owners of a newly-constructed house which had been purchased from K & L.  Not long after the purchase of the house from K & L, the owners claimed that they noticed cracks, unevenness and shifting in their home.  K & L submitted these claims to its insurance carrier, who denied them outright.  The North Dakota Supreme Court began its analysis of the issue by noting, “[c]urrently, the majority of state supreme courts who have decided the issue of whether inadvertent faulty workmanship is an accidental ‘occurrence’ potentially covered under the CGL policy have decided that it can be an ‘occurrence’.”  The court concluded that faulty workmanship may constitute an “occurrence” if the faulty work was “unexpected” and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the harm was anticipated, intended, or expected.


Both the K & L and Capstone courts recognized that their decision was consistent with the Florida Supreme Court’s pronouncements on the same issue in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007).  In J.S.U.B., the Florida Supreme Court held:


We conclude that defective work performed by a subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute “property damage” caused by an “occurrence” as those terms are defined in a standard form commercial general liability policy.


The Florida Supreme Court’s ruling in this regard was a significant change.  (The change was, of course, made at the urging of our firm.  Boyle, Gentile, Leonard & Crockett, P.A. represented the contractor in J.S.U.B. at the claims presentation stage, before the trial court, before the intermediate appeals court, all the way through to our victory at the Florida Supreme Court.)  Reduced to its essence, insurance carriers argue that a contractor’s failure to perform its contract is always intentional – – essentially arguing that a contractor’s failure to perform its work in accordance with its contract necessarily makes the resulting problems arising from that work foreseeable.  While this argument may have some initial intuitive appeal, the argument fails upon closer analysis:


Yet, on even a moment’s reflection, we all understand that contracts are broken, many times, for reasons that we would call “accidental.”  The wrong number of boxes was shipped because someone made a mistake in the counting.  The lawsuit was filed in the wrong venue because someone made a mistake when reading the venue statute.  As one court explained, “at bottom, an occurrence is simply an unexpected consequence of an insured’s act, even if due to negligence or faulty work”.


See Ellen S. Pryor, The Economic Loss Rule and Liability Insurance, 48 Ariz. L. Rev 905, 917 (2006) (quoting Anthem Elecs., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1056 (9th Cir. 2002)).


Certainly, if foreseeability of injury were the test for whether or not something was insurable, nothing would be insured, as all forms of liability that give rise to actionable damages are premised on the foreseeability of damages.  If this argument were to be accepted, it would make CGL policies a Seinfeld-esque insurance policy about nothing.


            In future blog entries, I will explore (1) how the “property damage” definition in the CGL policy interacts with the “occurrence” definition in defective construction cases, (2) how changes to the CGL policy, beginning with the broad form property damage endorsement in the 1970s, expanded the availability of coverage for defective construction, and (3) how the CGL product differs from performance bonds.







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