Indiana Coverage Analysis

The Indiana Supreme Court decision in Sheehan Construction v. Continental Cas. Co., 210WL 3823107 (Ind.) is the most important decision in the history of Insurance Law in Indiana.  Traditionally, Indiana has been a non-occurrence state, meaning that defective workmanship – regardless of the nature or cause, and whether performed by the name insured or a sub-contractor – did not constitute an “occurrence” sufficient to trigger coverage under general liability policies.  Hence, the coverage analysis of construction cases in Indiana was straightforward and simple.  Damage to any portion of the insured’s work, even if caused by a component of the work constructed by a sub-contractor, was not covered, and, moreover, there was no need to apply the various exclusions applicable to construction cases.

In Sheehan Contstr., the Indiana Supreme Court decided to align Indiana with the jurisdictions which hold that “improper or faulty workmanship does constitute an accident so long as the resulting damage is an event that occurs without expectation or foresight.”  Sheehan Constr. Co., 2010 WL 3823107 * 6.  With defective work now defined as an occurrence, the various exclusions applicable to construction projects must be carefully analyzed.

Exclusion J will not apply to construction defect cases because the exception to the exclusion states that it does not apply to “property damage” included in the “products-completed operations hazard.”  Exclusion K excludes coverage for “property damage” to “your product” arising out of it or any part of it, but does not apply to real property.  Exclusion L excludes coverage for “property damage” to “your work”… included in the “products-completed operations hazard.”  However, an exception to this exclusion provides that the “exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”  Thus in most cases, coverage will turn on whether a sub performed the work.  The definition of “products-completed operations hazard” includes “all… ‘property damage’…arising out of… ‘your work except’”.  The definition makes clear, as did the court in Sheehan, that general liability policies do not cover faulty work itself, but rather only “property damage” caused by the faulty work. See, e.g. Sheehan, which stated that “this appeal requires is to determine whether damage caused by faulty workmanship is covered under a standard CGL policy.”  In short, Sheehan only addresses the issue as to whether an “occurrence” has happened; it does not affect the application of any policy exclusions.  The subcontractor exception to Exclusion 1 does not require the insurer to pay for any workmanship or materials which were initially defective.

Lastly, the elusive and confusing exclusions for impaired property will often be applicable.  Exclusion M applies to damage to impaired property or property not physically injured.  In relevant part it provides that physical injury and resulting loss of use to someone else’s tangible property (not work the insured or its subcontractors did) that cannot be used because the insured’s or its subcontractor’s work was defective, if the property can be restored to use by repairing your work, is excluded.  Therefore, on its face, Exclusion M clearly applies to any loss of use of impaired tangible property, property not constructed by the insured, impaired by the defective work or product of the insured.  Kenray Association, Inc. v. Hoosier Ins. Co., 2007 WL 2851101 (Ind. Ct. App.).