K&L Homes, Inc. v. American Family Mutual Ins. Co., 2013 ND 57 (N.D. 2013) (Index No. 20120060)
The highest court in North Dakota re-evaluated a lower court’s decision concerning a construction defect matter, deciding in favor of the insured. In this matter, the plaintiff, a homebuilder, sought coverage for a judgment entered against them for over $250,000. The damages related to a defective home that the underlying plaintiff purchased from the plaintiff. The underlying plaintiff sued for breach of contract and breach of implied warranties. The insurer supplied plaintiff with a defense of the matter under a reservation of rights, but ultimately denied coverage for the judgment based on the “your work” exclusion.
The insurer relied on a previous decision in the state, ACUITY v. Burd & Smith Constr., 721 N.W.2d 33 (N.D. 2006), for the proposition that it could not be responsible for coverage of the judgment since the entire home was the plaintiff’s product. Specifically, in ACUITY, “faulty or defective workmanship, standing alone, is not an accidental occurrence but ‘if faulty workmanship causes bodily injury or property damage to something other than the insured’s work product, an unintended and unexpected event has occurred and coverage exists.’”
The K&L court found issue with the approach taken in ACUITY. Specifically, the K&L court stated that it must first address the question of whether the faulty workmanship could constitute an occurrence. In doing so, the court specifically stated that ACUITY “incorrectly decided the question … by drawing a distinction between faulty workmanship that damages the insured’s work or product and faulty workmanship that damages a third party’s work or property.” The K&L court decided that faulty workmanship could constitute an occurrence. The next question was whether the faulty workmanship resulted in “property damage,” which the K&L court decided did exist. Lastly, coverage could only be afforded if the subcontract exception applied. The court decided that since the general contractor could become liable for damage to work performed by a subcontractor, or for damage to the general contractor’s own work arising out of a subcontractor’s work, the exception did apply.
Accordingly, the insurer was required to cover the judgment against the insured.