Does a Michigan Contractor's CGL Policy Cover Defective Work?

Depending on the specific facts of the case, yes, defective work may be covered under a contractor's CGL policy.

A Commercial General Liability policy covers property damage caused by an "occurrence," which the policy defines as an "accident." In Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369 (1990), the Michigan Court of Appeals held that a contractor's defective concrete work, "standing alone," was not the result of an occurrence. Insurers read Hawkeye-Security broadly, taking the position that if the damage was limited to the contractor insured's own work, there was no coverage, no matter how unexpected the defect.

A later case, Radenbaugh v Farm Bureau Gen Ins Co, 240 Mich App 134 (2000), held that when defective work damages someone else's property, an accident has occurred, and it does not matter that the owner's complaint is labeled breach of contract or breach of warranty. What counts is the property damage, not the legal theory. Applying that rule, courts held that a roofer whose leak ruined the interior of a building had coverage for the interior, but not for the cost of replacing the roof.

The most recent case on point is Skanska USA Bldg Inc v MAP Mech Contractors, Inc, 505 Mich 368 (2020), which involved a construction manager on a hospital renovation in Midland. A mechanical subcontractor installed expansion joints backward, damaging the boiler system, concrete and steel. The construction manager spent about $1.4 million on repairs and sought coverage as an additional insured under the subcontractor's CGL policy. The insurer denied the claim, and the Court of Appeals agreed that damage to the construction manager's own work product could not be an occurrence.

The Supreme Court in Skanska reversed, holding that an accident "may include unintentionally faulty subcontractor work that damages an insured's work product," limiting the 1990 holding in Hawkeye-Security to insurance policies written on a CGL form that had since been updated.

The Skanska Court followed well-established rules of insurance policy interpretation to reach its holding. Applying the plain and unambiguous language of the CGL policy, the Court found that it "does not limit the definition of 'occurrence' by reference to the owner of the damaged property." Rather, the question is whether the damage was intended or expected by the insured, not whose property was damaged.

Reading the CGL policy as a whole document, the Court explained that defective work is addressed by the policy's exclusions, not by the insuring agreement, and the lower court had "failed to recognize that an insured's own defective workmanship is excluded from coverage via the explicit exclusions, not in the initial grant of coverage."

The Court considered every provision of the policy, reasoning that the "your work" exclusion carved out work performed by a subcontractor. Therefore, if faulty subcontractor work could never be an accident, that exception would be meaningless, and Michigan courts do not read contract language to be meaningless.

Courts interpret insurance policies by asking whether there is a grant of coverage and, if granted, whether an exclusion applies. Skanska found that a CGL policy may grant coverage for faulty subcontractor work because it is unintended from the standpoint of the insured. The burden then shifts to the insurance company to prove that an exclusion applies to bar coverage.

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