Sheehan Construction Co. v. Continental Casualty Co.

SULLIVAN, Justice,

dissenting.

I respectfully dissent from the denial of Continental Casualty Company’s Petition for Rehearing because I continue to believe that damage caused by faulty workmanship is not covered under a CGL policy-

The United States Court of Appeals for the Sixth Circuit, in a diversity case, addressed this precise issue of Indiana law earlier this year in Cincinnati Insurance Co. v. Beazer Homes Investments, LLC, 594 F.3d 441 (6th Cir.2010), vacated, 399 Fed.Appx. 49 (6th Cir.2010). In that case, a general contractor sought coverage under CGL policies for damage to the insured property that resulted from faulty workmanship of its subcontractors. The Sixth Circuit identified the distinction made in prior Indiana case law between two types of risk and correctly observed that business risk (or the risk of faulty workmanship causing damage to the insured property) has traditionally not been covered under CGL policies, while tort risk (or the risk of accidental injury to persons or property other than the insured property) has been covered. Id. at 451 (finding no need to certify the question because “[t]he Indiana Supreme Court has clearly made a distinction between the two types of risks facing a builder”). Further, the court correctly acknowledged that policy exclusions do not determine coverage. Id. at 450. Accordingly, because it is neither “property damage” nor an “occurrence,” the Sixth Circuit concluded that faulty workmanship causing damage to the insured property is simply not covered by CGL policies under Indiana law. Id. at 448-53; see also Trinity Homes LLC v. Ohio Cas. Ins. Co., No. 1:04-cv-1920-SEB-DML, 2009 WL 3163108, at *6-8 (S.D.Ind. Sept. 25, 2009).

I believe the Sixth Circuit more accurately analyzed Indiana law on this subject than did this Court’s opinion.

We have defined an accident as “‘an unexpected happening without an intention or design.’ ” Tri-Etch, Inc. v. Cincinnati Ins. Co., 909 N.E.2d 997, 1002 (Ind.2009) (quoting Auto-Owners Ins. Co. v. Harvey, 842 N.E.2d 1279,1283 (Ind.2006)). Focusing on the latter part of our definition, the Court’s opinion holds that damage caused by unintentional faulty workmanship is unforeseeable and therefore an accident. Sheehan Constr. Co., Inc. v. Cont’l Cas. Co., 935 N.E.2d 160, 172 (Ind.2010). But simply because neither the general contractor nor subcontractor intends a defective result does not make their conduct accidental. See Tri-Etch, Inc., 909 N.E.2d at 1001 (“Lack of intentional wrongdoing does not convert every business error into an ‘accident.’ ”). Rather, the inclusion of “unexpected” in our definition of accident implies a degree of fortuity that is simply not implicated by faulty workmanship claims. See Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888, 898 (2006) (“The key term in the ordinary definition of ‘accident’ is ‘unexpected.’ This implies a degree of fortuity that is not present in a claim for faulty workmanship.”); Auto-Owners Ins. Co. v. Home Pride Cos., Inc., 268 Neb. 528, 684 N.W.2d 571, 577 (2004) (“ ‘[T]he fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship.’ ” (citation omitted)).

The economic risk of faulty workmanship has not been covered by CGL policies for good reason. As the United States District Court for the Southern District of Indiana (applying Indiana law) noted, “Were CGL policies to cover such ‘economic losses,’ the ‘moral hazard would be considerable: the prospect of indemnity would lead the general contractor to save money by hiring substandard subcontractors, then turning to the insurer to fix the customers’ homes.’ ” Trinity Homes LLC, 2009 WL 3163108, at *6 (internal citation omitted) (quoting Westfield Ins. Co. v. Sheehan Constr. Co., Inc., 564 F.3d 817, 818 (7th Cir.2009)).

That is not to say that general contractors are left helpless in bearing the risk of their subcontractors’ faulty workmanship. To the contrary, the Sixth Circuit in Beazer Homes recognized other means available to protect general contractors against such business risk. Specifically, “[g]eneral contractors can require performance bonds, can contract for professional-liability insurance or subcontractor-default insurance, or can seek breach-of-contract damages against subcontractors who do not adequately perform.” Beazev Homes, 594 F.3d at 452 (citation omitted). I agree that these alternatives provide the appropriate recourse to general contractors who are faced with damage from faulty workmanship.

For the foregoing reasons, I believe we should grant Continental Casualty Company’s Petition for Rehearing and affirm the trial court’s grant of summary judgment.

SHEPARD, C.J. joins.