“What’s not covered!?”: Defining an “occurrence” in a Subcontractor Claim

Written by Matt Daly, Esq.

Edited by Claire C. Carr, Esq.

Ayttorneys and claims examiners handling construction litigation know that every construction case starts with coverage issues. In claims against subcontractors, perhaps the most commonly encountered issue is the interplay between an “occurrence” and the “your work” exclusion. Subcontractors facing a claim are often surprised to learn what may and may not be covered when this exclusion comes into play. A recent opinion from the United States District Court for the Western District of Virginia provides a solid blueprint for analyzing this issue.

Western World Insurance Company v. Air Tech, Inc. U.S.D.C., West. Dist. Va., Case No. 7:17-CV-518 (Roanoke) involved an insurance dispute between Western World and its insured, Air Tech. The dispute arose after Air Tech was sued for breach of contract and negligence arising from a subcontract agreement that Air Tech entered into with Hall’s Construction Corp. Under the subcontract, Air Tech agreed to supply a Solvent Recovery Chiller for a project Hall’s had undertaken. Air Tech supplied the chiller and was alleged to have been involved in the installation as well.

When the chiller failed and required a replacement, Hall’s sued Air Tech for breach of the subcontract and negligence based on: the failure to properly provide the materials and equipment necessary to install the chiller; failure of the manuals provided to accurately describe the equipment and components and required electrical connections; failure of the manuals to accurately describe the work to be performed; and failure to correctly install the chiller.

The Western World policy provided coverage for property damage only if caused by an “occurrence.” The policy defined “occurrence” as “’an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Additionally, the policy specifically excluded “Expected or Intended Injury,” “Contractual Liability,” “Damage to Your Product,” and “Damage to Your Work.”

After Air Tech made a claim for a defense and indemnity pursuant to the policy, Western World filed a declaratory judgment action in the United States District Court for the Western District of Virginia seeking a determination that coverage did not exist for the claim. In response to Western World’s Motion for Summary Judgment, the court issued its opinion ruling that the policy did not provide coverage.

To determine whether Western World owed Air Tech coverage, the Court employed the “Eight Corners Rule,” and only considered the four corners of the underlying complaint and the four corners of the insurance policy. See, e.g., Erie Ins. Exch. V. State Farm Mut. Auto Ins. Co., 60 Va. Cir. 418 (Warren County, 2002). The court specifically denied Air Tech’s request that other evidence be considered.

Using that framework, the court ruled that the underlying complaint did not allege an “occurrence,” but rather, merely alleged “defective work by an insured causing damage to the insured’s product for which no coverage exists.” Reciting settled Virginia law, the court stated that, “under a commercial general liability policy, when an ‘insured poorly performs its contractual obligations damaging only the insured’s work or product, the resulting contractual liability’” is not covered. Citing Hotel Roanoke Conference Ctr. Comm’n v. Cincinnati Ins. Co., 303 F. Supp. 2d 784, 786 (W.D. Va. 2004). More generally stated: damage caused by a subcontractor’s faulty work is not an “occurrence.”

The court specifically discussed the negligence allegations in the amended complaint; allegations of negligence are often included in breach of contract claims against subcontractors on the flawed logic that a negligence claim constitutes an occurrence triggering coverage. The court dismissed this theory, stating that the “allegations of negligence….do not create an ‘occurrence’ as, at bottom, ‘nothing more [is alleged] than the breach of duties undertaken by Air Tech in the Chiller Contract.’” 1 The court went on to site Virginia’s Source of Duty Rule, stating, “here, the source of any duty breached is solely from the contract entered into between Hall’s Construction and Air Tech. See Filak v. George, 594 S.E.2d 610, 613 (2004). Consequently, a negligence claim will not trigger coverage if it amounts to nothing more than allegations of negligent performance of contractual duties. Citing Richmond Metro Auth. V. McDevitt St. Bovis, Inc., 507 S.E.2d, 344, 347 (1998).

Air Tech also argued that coverage applied based on the principle that the damage alleged extended beyond its own work by asserting that the faulty installation due to incorrect instructions or work performed by a different subcontractor caused damage to an otherwise non-defective chiller. The court acknowledged that coverage “may be triggered where the insured’s actions cause damages which extend beyond its work.” Illustrating this principle, the court cited Stanley Martin Cos., Inc. v. Ohio Cas. Grp., 313 Fed. Appx 609, 614 (4 th Cir. 2009), where the court held that the insured’s contractual obligation to replace defective trusses it installed was not an occurrence, but damage which spread beyond the trusses to non-defective parts of the structure was, and thus was covered under the policy.

However, the court in this case found Air Tech’s argument specious, since providing a working chiller was the core purpose of the subcontract. Although this case did not break any new legal ground in Virginia, it covered several bedrock principles of construction and coverage law, including: the “your work” exclusion; the Eight Corners Rules; the Source of Duty Rule. Attorneys and claims handlers working in this space are sure to find themselves on both sides of the coin: seeking coverage for a subcontractor, or arguing that none exists. The analysis in Western World v. Air Tech provides a valuable discussion for navigating these often complicated legal issues.





1- Quoting Western World’s Memorandum in Support of its Motion for Summary Judgment.

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