Michigan Updates to Commerical General Liability Coverage
"Accident" is expanded to encompass the insured's work damaged by a subcontractor
Name: Skanska USA Bldg. Inc. v. M.A.P. Mechanical Contractors, Inc. et al.
Court/Judge: Michigan Supreme Court—Opinion Written by Chief Justice McCormack
Decided: June 29, 2020
Michigan Commercial General Liability ("CGL") insurers now run the risk of obligating themselves to cover losses that have traditionally been excluded. Under the Michigan Supreme Court's June 29, 2020 Opinion in Skanska USA Bldg. Inc. v. M.A.P. Mechanical Contractors, Inc. et al. ("Skanska."), CGL policies are now interpreted broadly to provide coverage for amounts the insured is legally obligated to pay as result of damages caused by the insured's defective product or work. Historically, Michigan courts required the insured's defective product or work to damage the property of another for CGL coverage to apply since most do not warrant the fitness of the insured's product or work. Meaning, if the only damage was the insured's own defective product or work, then a coverage denial was appropriate because there was no "occurrence" or "accident" under the policy definition.
Until Skanska, Hawkeye-Security Ins Co v Vector Constr Co in 1990, was controlling with regard to the Michigan Court of Appeals interpretation of "accident" in the "occurrence" defined to be "anything that begins to be, that happens, or that is a result which is not anticipated and . . . takes place without the insured's foresight or expectation and without design or intentional causation on his part." Hawkeye involved unintentionally faulty work by the insured, and the court held that such work did not qualify as an "accident" and would not be a covered "occurrence." The Hawkeye Court also relied on Bundy Tubing Co., v Royal Indemnity Co., 298 F 2d 151 (CA6, 1962) to find that damages limited to the insured's own defective product or work are not a covered "occurrence", because the defective work or product must damage the property of another.
On June 29, 2020, the Michigan Supreme Court issued the Skanska Opinion revisiting the Hawkeye precedent and CGL coverage obligations with respect to faulty work by the insured's subcontractor. Specifically, the Court found that there is no support for the Hawkeye Court's conclusion that damages limited to the insured's own work or product cannot constitute "accident" and "occurrence" under the CGL policy definitions. While the Opinion initially appears limited to circumstances involving a subcontractor's faulty workmanship, the ambiguous language and lack of application parameters effectively allowbroad application to expand coverage obligations and dispute any type of denial based on damage to the insured's own work or product.
In Skanska, the plaintiff general contractor was assigned to a renovation project of a medical center and subcontracted the heating and cooling portion of the project to the defendant subcontractor. At some point during the project, the subcontractor inadvertently installed some of the expansion joints backwards. The plaintiff made repairs and replaced the work of the subcontractor for services totaling $1.4 million. The plaintiff demanded payment from both the subcontractor and its insurer for the repair and replacement costs and with no answer from either filed suit. The trial court, looking to Hawkeye, denied summary disposition to both parties because "defective workmanship, standing alone, is not an occurrence within the meaning of a general liability insurance contract," but held that there may have been an occurrence may have happened if the subcontractor's damage could have exceeded the scope of the contract.
Both the plaintiff and the subcontractor's insurer appealed, and the Court of Appeals granted summary disposition in favor of the insurer based on the Hawkeye Court's definition of "accident" because the only damage was to the insured's own work product. The plaintiff then filed an Application for Leave to the Michigan Supreme Court, and in granting the Application, the Court requested briefing to determine whether the Hawkeye precedent remained viabile for interpreting coverage obligations under Michigan CGL policies.
The Court looked to its own definition of "accident," which is "an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected." Allstate Ins Co v McCarn, 466 Mich 277, 281 (2002). The Court found that a subcontractor's faulty work may fall within the plain meaning of an "accident," and therefore, would constitute an "occurrence" for CGL coverage. The Court rejected the insurer's argument that an accident must be something over which the insured has no control stating that there was more than one way to demonstrate an accident.
Ultimately, the Skanska Court found that an "accident" cannot include damage limited to the insured's own work product. The Court relied on a 1986 ISO stating that the same was issued to expand CGL policies to specifically cover damages caused by faulty workmanship and "damages to or caused by a subcontractor's work after the insured's operations are completed." The Court further found that Hawkeye interpreted a 1973 policy holding that Hawkeye only applies to cases involving pre-1986 policies.
For now, the Skanska Opinion appears limited to coverage denials based upon CGL policy definitions for "occurrence" and "accident" involving faulty workmanship by a subcontractor. However, the Court clearly intends for its Opinion to also expand CGL coverage for damages to the insured's own work or product. As such, the door is now open to new subsets of claims under a CGL policy.
The full and far reaching impacts of this broadly drafted Opinion are currently unknown at this time. The Court indicated that its Opinion does not address the validity of the reasoning in Hawkeye due to differing facts in Skanska . However, it almost certain that policyholders will test the meets and bounds of circumstances for which this Opinion might establish coverage under their CGL policy.
Hawkeye once afforded insurers the ability to distinguish covered losses arising from the damage to the property of others from damage to the insured's own work product. Unfortunately, Skanska effectively removes that defense for policies issued after 1986.
Accordingly, insurers should be paying careful consdier the benefit of issuing Michigan endorsements that removesany subcontractor exception under policy exclusions for the "Damage to Your Work" or by adding a breach of contract exclusion for subcontractor agreements. The Skanska Court did state that such an endorsement could limit coverage liability for damages caused by the insured's subcontractor. On that point, another action worth considering is reviewing your policy deifintion of "property damage" and considering whether that provides an additional basis for a potential denial. The Skanska opinion acknowledged an insurer's denial based on the "property damage" but did not decide this issue leaving interpretation open by the lower courts.
There is no question that the Skanksa progeny of cases will be closely monitored for further guidance on this issue.