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Indiana Supreme Court Rules that CGL Policy May Provide Coverage to the General Contractor for the Faulty Workmanship of its Subcontractor

On September 30, 2010, the Indiana Supreme Court issued an important decision for contractors in the case of Sheehan Construction Company, Inc. v. Continental Casualty Company. The main issue decided by the Indiana Supreme Court was whether a standard commercial general liability (“CGL”) policy covers a general contractor for the faulty workmanship of its subcontractor that causes damage to the work itself. 

The Sheehan case involved the purchase of a house by Vincent and Mary Alig in April 2000. Sheehan Construction Company was the general contractor for the Alig’s house and hired the subcontractors who actually built the house. 

The Aligs experienced significant water damage to their home including leaking windows, decaying OSB sheathing, deteriorating and decaying floor joists, and water damage to the interior of the house. The investigation concluded that faulty workmanship by the subcontractors led to the significant water damage.

The Aligs eventually filed a lawsuit in Marion Circuit Court against Sheehan Construction. Continental Casualty Company thereafter filed a declaratory judgment action in the Marion Superior Court seeking a ruling from the Court that it was not obligated to indemnify Sheehan for the damages paid to the Aligs and other similarly situated homeowners. The trial court entered summary judgment in favor of the insurance company on the grounds that there was no damage to property other than the structural components of the house itself, and therefore concluded that there was no occurrence of property damage as defined in the CGL policy.

The Indiana Supreme Court reversed this decision and the decision of the Indiana Court of Appeals and ruled that faulty workmanship may constitute an accident and an occurrence under the terms of the CGL policy depending on the facts of the case. Specifically, the Indiana Supreme Court held that if the defective work of the subcontractors was done unintentionally and without design, then it is an accident that would be covered under the terms of the policy.

This case has important ramifications for contractors seeking insurance coverage for defective work by subcontractors. Please consult with a member of our Construction Law practice for assistance with such issues.