The Faulty Workmanship Dispute
Summit Ridge Contracting builds a 40-unit apartment complex under a $9 million contract. It carries a CGL policy with a $2,000,000 each-occurrence limit and a $25,000 self-insured retention. Eighteen months after completion, tenants report water intrusion. Investigation shows Summit Ridge installed flashing backwards on 12 units, and the resulting moisture has damaged drywall, flooring, and tenant furnishings. Repair of the defective flashing alone costs $400,000; damage to other work and furnishings totals $1,300,000. The owner sues for breach of contract and negligence. Summit Ridge's insurer denies, citing the "your work" exclusion and the impaired property exclusion. Summit Ridge argues the damage to other property is covered.
1. Analyze whether the CGL policy covers the $400,000 flashing repair, the $1,300,000 damage to other work and furnishings, and the owner's furnishings claims.
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Separate the defective work from resulting damage. The "your work" exclusion bars coverage for property damage to that part of real property on which the insured is performing operations if the damage arises out of those operations. Replacing the backwards flashing is the cost to repair Summit Ridge's own defective work, so the $400,000 is excluded. The $1,300,000 is different. Damage to drywall, flooring, and tenant furnishings is damage to other property caused by the defective work, and the standard "your work" exclusion contains an exception for damage to other property when the damaged property is not the insured's work. The impaired property exclusion may apply if the owner cannot use the units until the flashing is repaired, but courts generally require that the impaired property not be physically damaged; here the drywall and flooring are physically damaged, so the exclusion is unlikely to bar those amounts. Tenant furnishings belong to the tenants, not Summit Ridge, so they are third-party property damage. The $25,000 SIR applies before the insurer pays, and it erodes only once per occurrence, but the insurer may take the position that each unit is a separate occurrence. That allocation matters enormously: 12 occurrences would multiply the SIR and could exhaust limits.
2. Explain how the number of occurrences should be determined and how the SIR interacts with the limits.
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Occurrence counting usually turns on whether the injury or damage can be attributed to a single cause or event. A single flawed installation practice applied across 12 units may be one occurrence if the court adopts the cause theory, but a court adopting the effect theory may count each unit's damage separately. The policy language and state precedent control. For the SIR, the insured pays the retention per occurrence before the insurer responds. If one occurrence, Summit Ridge pays $25,000 and the insurer covers the remaining covered damages up to $2,000,000. If 12 occurrences, Summit Ridge could face $300,000 in retentions, and the per-occurrence limit would apply separately to each unit, which may actually increase total available limits but sharply increases the insured's out-of-pocket cost. The general aggregate also caps total payments. Summit Ridge should argue for a single occurrence to minimize retentions, while the insurer may argue multiple occurrences to reduce exposure per unit. The insured should also confirm whether the SIR is self-insured or a deductible and whether defense costs erode the SIR or the limit.