Defective Contractual Performance Is Not an “Occurrence” Under a Commercial General Liability Policy

In Lumbermens Mut. Ins. Co. v. Timber Treatment Techs., LLC (TTT), the District Court for the Eastern District of Virginia considered whether the allegations constituted an “occurrence” under TTT’s commercial general liability (CGL) policy (the “Policy”).

The insuring agreement of the Policy provided potential coverage for “property damage” caused by an “occurrence,” so long as the damage occurred within the policy period.^[1] The Policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The Underlying Claims

The underlying lawsuits against TTT included claims for negligence, breach of warranty, fraud, and violation of the consumer protection statutes. Each claim related to TTT’s product, “TimberSIL.” TimberSIL was a wood product infused with glass for use in decks. TTT promoted TimberSIL as long-lasting and resistant to rot, decay, and termites.

The underlying allegations, however, claimed that TimberSIL was highly susceptible to rot and mold, causing weakness and decay. The alleged damages in the underlying claims only pertained to TTT’s allegedly defective TimberSIL product and costs of removing and replacing the product.

Insurance Coverage Dispute

TTT’s CGL insurer disclaimed coverage because the underlying lawsuits alleged damages that were not caused by “occurrences.” The underlying lawsuits only alleged damages relating to TTT’s TimberSIL product and the costs of repair, replacement, and removal of the product. There were no allegations that the product caused damages to separate property. The insurer argued that this did not involve an “occurrence,” as defined by the CGL policy.

Applying both the plain language of the Policy and applicable caselaw, the Court agreed with the insurer that damages limited to an insured’s defective product do not involve “occurrences” under CGL policies. Defective performance of a contract is not an “occurrence” for two primary reasons. First, CGL policies do not cover “expected” damages, and damages limited to an insured’s work product are “expected” business risks. Second, CGL policies do not cover damages relating solely to poor workmanship or defective products. To amount to an “occurrence,” the damages must spread to other non-defective areas, causing additional damages.

Insurance Coverage Implications

For damages to fall within the insuring agreement of a CGL policy, there must be an “occurrence.” There is no “occurrence” if the alleged damages only relate to a defective product or defective workmanship. If, however, a defective product or defective workmanship causes damages to other separate property or injury to persons, those damages may qualify as an “occurrence.”

When preparing a claim, therefore, it is important to consider whether there are damages to other separate property or whether the damages are limited to the product/work itself. If damages extend to separate property, it is important to plead them to trigger applicable insurance. Because Virginia follows the “Eight Corners Rule,” whereby courts look at the complaints and policies to determine the potential for coverage, allegations in the complaint will affect the potential for coverage.

[1] The Policy included an “expected or intended injury” exclusion, a “your product” exclusion, and a “fungi or bacteria” exclusion. Application of the exclusions is beyond the scope of this update. It is also not necessary to the extent the allegations fail to satisfy the insuring agreement’s scope of potential coverage.