A general contractor builds a new home. The GC hires a subcontractor to install certain components. After the home’s completion, those components turn out to be defective. Not only that, but their defects begin to affect other parts of the building. The homeowner sues, and the GC, facing large legal defense costs and potential judgments, submits claims to its insurers. The insurers deny coverage, saying that this was no accident, as the insurance policies use the term. Was this incident indeed an accident for which the GC should have insurance coverage, or was it merely a business risk that comes with hiring subcontractors? In the opinion of a federal appellate court, it was an accident.
The case, Stanley Martin Companies, Inc. v. Ohio Casualty Group, involved the construction of 24 duplex townhouses in a suburb of Washington, D.C. Stanley Martin, a home builder, hired Shoffner Industries to supply the wood trusses for the new homes. In its contract, Shoffner gave Martin a warranty guaranteeing that the trusses were free of mold, and it agreed to reimburse Martin for any liability or other costs that might arise out of defects in the trusses or any negligence. After Martin completed the homes, some of the homeowners began to complain of mold infestations. Investigations of the problem showed that the mold growth started with defective trusses and surrounding materials. The affected homeowners sued Martin, who ended up spending a long time in litigation and paying more than $1.7 million to clean up the mold.
Martin sought coverage under its General Liability and Umbrella insurance policies. The court’s decision does not say what the General Liability insurance company did, but Ohio Casualty, who provided the Umbrella policy, denied the claim. Ohio Casualty’s policy covered an “occurrence,”� which it defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”� The company argued that the mold damage caused by the subcontractor’s defective work did not fall within this definition of “occurrence,”� and therefore the insurance did not apply. Martin sued Ohio Casualty for breach of contract, but the trial court sided with the insurance company. Martin appealed the decision, and the higher court ruled in its favor.
The court relied on a Maryland ruling which held that damage spreading from a subcontractor’s defective work to the general contractor’s non-defective work qualified as an “occurrence.”� Rejecting Ohio Casualty’s argument that the spread of mold was a further deterioration of already defective work, the court cited a legal definition of “accident”� as an event that takes place without one’s foresight or expectation. Martin, the court said, did not expect or intend for the subcontractor to supply moldy trusses, nor did it expect or intend for mold to spread throughout the buildings. The court held that the mold’s spread to non-defective building components was an “occurrence,”� and therefore Ohio Casualty was obligated to provide coverage for the replacement of those components. However, the court said that the need to replace the trusses was not unexpected nor unforeseen, and therefore the policy did not cover that.
This decision might not bind courts in all states, but it provides a useful guideline to them and to insurance companies and contractors. Because of this decision, insurance companies might demand that the general contractors they insure be very selective about the subcontractors they hire, with special attention to their reputations for quality of work. They might also insist that policies include deductibles for property damage claims, to encourage contractors to use loss control practices. Both the insurance companies and the contractors will need to make every effort to prevent these types of claims from occurring.