Liberty Mut. Fire Ins. Co. v. Kay & Kay Contr.
2013 U.S. App. LEXIS 23587 (6th Cir. Nov. 19, 2013)

This action arose out of a commercial general liability (“CGL”) policy issued by Liberty Mutual Fire Insurance Co. (“Liberty Mutual”) to MW Builders, Inc. (“MW Builders”) and Kay and Kay Contracting, LLC (“Kay & Kay”) for the construction of a Wal-Mart store in Morehead, Kentucky. Wal-Mart Stores, Inc. (“Wal-Mart”) contracted with MW Builders as general contractor for the construction of the building. MW Builders then entered into a subcontract with Kay & Kay to perform site preparation work and construct the building pad beneath the structure. Liberty Mutual issued the CGL policy to Kay & Kay, with MW Builders as an additional insured (the “Policy”). The Policy was the standard ISO (Insurance Services Office, Inc.) policy containing the standard coverage language. Specifically, the Policy provided: “This insurance applies to ‘bodily injury’ and ‘property damage’ only if… [t]he ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’…” The Policy defined “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” was not defined in the Policy.

After Kay & Kay had completed the building pad and the building had been erected, Wal-Mart notified MW Builders that there were cracks in the building’s walls. Wal-Mart alleged that the fill area underneath a corner of the building had experienced settling due to problems with the foundation, and that this had caused structural problems and resultant damage to the building. MW Builders demanded that Kay & Kay remedy these issues and indemnify it. Kay & Kay denied liability and turned to Liberty Mutual with defense and indemnity claims under the Policy. Liberty Mutual subsequently filed a complaint seeking declaratory relief against MW Builders and Kay & Kay (jointly the “Contractors”) alleging that the Contractors’ claims for a defense and indemnity were not covered under the Policy. Liberty Mutual and the Contractors filed cross-motions for summary judgment on the limited threshold issue of “whether there was an ‘occurrence’ as defined in the underlying policy.” The district court agreed with the Contractors and found that the damage to the building qualified as an “occurrence” and was therefore covered under the Policy. Liberty Mutual appealed.

A three-judge panel of the Sixth Circuit Court of Appeals reversed and held that the facts of the case did not present an “accident” that would trigger coverage as an “occurrence” under the Policy. Applying Kentucky law, the Court first noted that although faulty workmanship generally is not an “accident” within the meaning of a CGL policy, the Supreme Court of Kentucky has not “definitively decided whether allegedly faulty workmanship that causes damage to other property constitutes an ‘accident’ under a CGL policy.” The Contractors argued that the damage was not to the insured’s (Kay & Kay’s) allegedly defective work product itself (the building pad), but was rather “collateral damage” to other property (the building), the work of third-party subcontractors. The Contractors contended that under these circumstances, the Supreme Court of Kentucky would conclude there was indeed an “occurrence.”

The Court disagreed. The Court recognized that in order for there to have been an “occurrence”, there had to have been an “accident.” Because the term “accident” was undefined in the Policy, the Court looked to Kentucky case law and concluded that the plain meaning of the term “accident” implicated the doctrine of fortuity. Applying this doctrine, the court focused its analysis on the level of control Kay & Kay had over the construction of the building pad. The Court distinguished the case before it, where Kay and Kay had exclusive control over the construction of the building pad for a new structure, from a situation where a contractor comes to an existing property to work on only a certain aspect of that property, and the contractor’s defective workmanship causes unintentional damage to other aspects of the property beyond its control. Under the latter scenario, the Court stated that it is “certainly plausible” that the damage “qualifies as ‘fortuitous’ and therefore an ‘accident.’” However, where the damage to the building was within the control of the contractor, the Court held that it could not be considered an “accident” that would give rise to coverage under a CGL policy. The Court found that “Kay & Kay was hired precisely to prevent the settling and resultant structural damage that occurred… [i]n other words, the possibility of the type of damage in this case was exactly what Kay & Kay was hired to control.” Therefore, the Court concluded that Kay & Kay’s construction of the allegedly faulty building pad could not qualify as an “accident” that would trigger coverage as an “occurrence” under the Policy. Accordingly, the district court’s decision in favor of the Contractors was reversed and the Court ordered that summary judgment be entered in favor of Liberty Mutual.