Not All Construction Defects Trigger CGL Coverage – – Even In California

Do construction defects incorporated into a structure constitute property damage within the ambit of a CGL policy?  Good question – – and one that has plagued the insurance industry and courts across the country.  In Regional Steel Corporation v. Liberty Surplus Insurance Corporation, a California Appellate Court ruled that the costs of removing and replacing defective work or material is an economic/commercial loss – – and not physical injury to property.

In Regional, a subcontractor supplied steel hooks later determined by the building inspector to be inappropriate for intended use.  That discovery led to repair costs of over $500,000.  Ultimately, in the context of the underlying action, Regional tendered its defense to Liberty which disclaimed on the basis that the defect in steel work did not constitute “physical injury to tangible property.”

To rule in Liberty’s favor, the Appellate Court had to grapple with precedent involving defective components that caused damage to a larger structure or to the product itself.  In one case, for example, wood chips in almonds ruined the end product – – breakfast cereal; in another, asbestos tiles incorporated into a larger structure compelled remediation because of the potential hazard.  But as the Court found in Regional: “The risk of replacing and repairing defective product or poor workmanship has generally been considered a commercial risk which is not passed on to the liability carrier.”

Regional is worth careful study.  It supports the view that expenses associated with repairs/remediation resulting from a defective product or poor workmanship – – without pleading and proof of collateral harm – – may not be covered under a CGL Policy.

For more information, please email Dennis Wade at .