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Georgia Supreme Court Addresses Scope of Commercial Liability Policies

The law often turns on the definition of a single word. In a recent decision, the Georgia Supreme Court unanimously defined the use of the word “occurrence” with respect to certain commercial insurance policies. The underlying case arose from allegations of faulty home construction.

Curiously, the faulty construction did not take place in Georgia, but California. Sixteen homeowners in that state filed a class action against their home builder over inadequately constructed foundations. The homeowners alleged the improper construction caused “terrible physical damage” to their properties.

Georgia came into the picture because of the home builder’s relationship with an insurance company providing a commercial general liability (CGL) policy subject to that state’s law. Normally, a CGL policy pays any legal liabilities arising from “bodily injury” or “property damage” caused by an “occurrence” in the specified coverage territory. In this case, the home builder’s CGL policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”

Accidents and Occurrences
The insurance company sued the home builder in a Georgia federal court, seeking an order that it was not liable for any liabilities that might arise from the California class action. The insurer argued the homeowners’ claims against the builder did not involve an “occurrence” as defined in the CGL policy. The district court agreed and granted the insurer’s motion for summary judgment. The builder appealed to the Eleventh U.S. Circuit Court of Appeals in Atlanta.

The federal appeals court, in turn, asked the Georgia Supreme Court to address two questions of state law relevant to this case. The first question dealt with whether an “occurrence” required damage to property “other than the insured’s completed work itself.” The district court agreed with the insurer that there was no “occurrence” here because there was no damage to any third-party property, only the homes completed by the builder.

The Supreme Court noted that just two years earlier, it ruled in another case that “faulty workmanship sometimes can amount to an ‘occurrence,’ at least when the property of someone other than the insured is damaged.” But that did not address this case, where only the insured’s property was damaged. The answer to that question, the Court said, turned on the definition of “accident,” which the CGL policy used here to define occurrence. “Standing alone,” the Court said, “the word [accident] is not used usually and commonly to convey information about the nature or extent of injuries worked by such a happening, much less the identity of the person whose interests are injured.” In other words, merely using the term “accident” in a CGL policy does not restrict coverage to just those injuries suffered to third-part property.

The second referral question asked whether an “occurrence” under Georgia law required the underlying claim be based on a legal theory other than fraud or breach of warranty. Here, the Court split the difference. It found that since an “occurrence” arose from an “accident,” that was incompatible with the concept of fraud under Georgia law. Conversely, there could be cases where a breach of warranty gives rise to an “occurrence” triggering CGL coverage.