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AGC Supports Insurance Coverage for Construction Defects

June 25, 2019

AGC of America has joined the AGC of Michigan in filing a friend-of-the-court brief in the Michigan Supreme Court in strong support of insurance coverage for construction defects.  The brief focuses on the standard form of the General Commercial Liability (CGL) policy sold to AGC members across the United States.  The Michigan Court of Appeals recently held that the policy provides no coverage for resulting damage to a project.  The immediate question is whether the Michigan Supreme Court will grant an application for review of that ruling.  If the court grants that application, the court will then entertain the merits of the case.  The association’s brief urges the court to take the case and to overturn the court of appeals.

The case grew out of a contract for the renovation of a medical center.  The contract required the construction manager to install a new steam heating system.  The construction manager subcontracted that work to a mechanical firm.  To everyone’s great regret, the latter installed expansion joints in the steam pipes backwards, causing approximately $1.4 million in damage to the heating system and other property.  The construction manager repaired the damage and then filed a claim under its CGL policy for the cost of doing so. 

It is widely and well understood that the standard form of the CGL policy does exclude coverage for damage resulting from work that an insured self-performs.  In support of its claim, the construction manager therefore emphasized that the damage was the result of unexpected and unintended defects in a subcontractor’s workmanship.

Relying on an old case that had interpreted an earlier form of the CGL policy, the court of appeals held that defective workmanship does not trigger coverage under any circumstances.  In the process, the court avoided any analysis of the policy exclusion of work that an insured self-performs, including an exception that expressly preserves coverage for the type of claim that the construction manager had made here.  In their brief, AGC of America and the AGC of Michigan identified the flaws in the lower court’s reasoning and explained that its decision is a matter of great concern to the construction industry and the public.  It also notes that construction contractors pay substantial premiums for precisely the coverage that the construction manager is seeking.

At one time, the lower court’s decision would have been in line with the majority rule.  Over the last 14 years, and with AGC’s strong support, the courts have trended in the opposite direction.  That support has included briefs that AGC of America joined its chapters in filing in Florida, Georgia, Indiana, Mississippi, New Jersey, South Carolina, Texas and in the U.S. Court of Appeals for the Eighth Circuit (in one case, applying Arkansas law, and in another, applying Minnesota law) and the Eleventh Circuit (in a case applying Alabama Law).  Today, AGC of America is pleased to note that the majority rule favors coverage for unexpected and unintended defects in a subcontractor’s workmanship.  Together, AGC of America and the AGC of Michigan hope to add Michigan to the new majority.

For additional information, contact AGC’s General Counsel, Michael Kennedy, at kennedym@agc.org.

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