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Just the Facts

Why Vague Complaints Against Insured Subs No Longer Trigger Occurrence Coverage

July 02, 2014 Photo

You received a new case against an insured subcontractor, but the pleadings have no specific facts defining an occurrence. The complaint against the general contractor says nothing particular about whether the sub’s errors were accidental or intentional. And the GC’s third-party complaint against all the subs is conclusory — again, nothing specific about whether or how each sub’s errors were accidental or intentional.
As a CGL insurer, do you have a duty to defend such vague allegations? Has the insured sub met its burden of showing an occurrence? If you deny coverage and the insured brings a declaratory judgment action, can you successfully move to dismiss under Rule 12(b)(6)?

In the past, CGL insurers normally accepted the defense of claims against subcontractors, reasoning that the courts will find the vague pleadings to be “close enough” to defining an occurrence. Until recently, that decision made sense. However, two trends are combining to make coverage challenges to subcontractors far more likely to succeed: enhanced fact-pleading requirements for the duty to defend, and a more narrow accidental-acts definition for the occurrence trigger. How do these trends affect the construction defect coverage arena?

Enhanced Fact-Pleading Requirement

Most jurisdictions have case law stating that the duty to defend is based mainly on the facts pled in the complaint, rather than the legal conclusions the complaint assigns to those facts.    

However, until recently, most experienced attorneys assumed that this rule did not require any level of factual detail — that conclusions were sufficient. For the most part, this was due to a very generous reading of Rule 8 notice pleading and Rule 12(b)(6) motions to dismiss, which until very recently were assumed to require only the most general statements of fact in a complaint.

Back in 1957, the U.S. Supreme Court adopted a very lenient rule for Rule 12(b)(6) motions. In Conley v. Gibson, 355 U.S. 41 (1957), the Supreme Court stated that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” When followed literally, the Conley v. Gibson rule meant that, if any factual scenario were plausible that would produce a viable claim, even though those facts were unpled, the Rule 12(b) motion would be denied.

However, two recent U.S. Supreme Court decisions have breathed new life into Rule 12(b)(6) motions. The first case was Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), an antitrust case decided in 2007. In Twombly, the Supreme Court held that, although the facts in the complaint are taken as true, the conclusions in the complaint need not be accepted. Specifically, the Supreme Court held that, though the facts alleged in the Twombly complaint were consistent with the alleged antitrust conspiracy, the facts did not show that the conspiracy was plausible. Thus, the complaint was legally defective, and was dismissed under Rule 12(b)(6).

The Twombly Court rejected the “no set of facts” language in Conley as permitting a complaint with only “a wholly conclusory statement of [the] claim” to survive, and expressly “retire[d]” the Conley standard. Initially, some attorneys thought that Twombly might be limited to antitrust cases. However, in 2009, the Supreme Court followed up with Ashcroft v. Iqbal, 556 U.S. 662 (2009), which applied the Twombly pleading standard to a discrimination case. Thus, it is now clear that Twombly applies to all civil cases.

Under this heightened pleading standard, the courts only take as true the complaint’s “well-pleaded facts.” A complaint that offers only “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Nor does a complaint suffice if it makes “naked assertion[s]” devoid of “further factual enhancement.”

The heightened pleading standard of Twombly/Iqbal has great potential to save defense costs, bypassing the expense of discovery. Vague complaints are no longer legally significant. Only fact-based pleading is relevant, for coverage or any other purpose. And the allegation must be specific to the particular sub.

Accidental-Acts Occurrence Trigger

A CGL “occurrence” is by definition an “accident.” But does this mean an accidental act, or accidental damage?
Most case law on the issue is conclusory. However, to the extent cases address the question, they generally state or imply that the occurrence trigger is satisfied by either (a) an accidental act or (b) accidental damage to other property. Thus, many cases find that there is an occurrence in a construction defect case, if damage to other property was accidental — not expected or intended. But a careful reading of the ISO policy language shows this accidental-damage case law is a holdover from older CGL policies, and that “occurrence” now simply means an accidental act. The accidental-damage issue is no longer relevant to the occurrence trigger.

Up through 1986, the ISO definition of “occurrence” did include a foreseeable-damage component — “an accident…which results…in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” In 1986, though, there was a significant change. ISO removed the expected/intended damage language from the occurrence definition, placing it in a new intentional-damage exclusion. The exclusion used the same language: bodily injury or property damage “expected or intended from the standpoint of the insured.”

To continue reading an expected/intended damage prohibition into the occurrence requirement renders the intentional-damage exclusion a nullity. Insurance policies should be read as a whole, harmonizing all provisions. A construction should be avoided that renders an exclusion superfluous.

The incoherence of the current majority rule is further shown by the broader language of the post-1986 occurrence trigger, which is for “bodily injury or property damage caused by an occurrence.” If “occurrence” encompassed accidental BI/PD, then we would have “BI/PD caused by accidental BI/PD.” Such a reading makes no sense, since it makes the damage its own cause.

Courts are beginning to recognize that it is time to discard the accidental-damage component of occurrence analysis. It is a relic of the pre-1986 ISO. The plain language now calls for a simplified accidental-act analysis. For example, in Schinner v. Gundrum, 833 N.W.2d 685 (Wis. 2013), the Wisconsin Supreme Court construed the occurrence trigger in a homeowners policy with the same occurrence definition as the ISO CGL. The Court found there was no occurrence because the insured’s act was intentional, even though the damage was accidental. The decision took a straight-forward approach to the actual policy language. The “expected or intended damage” language was removed from the occurrence definition in 1986 and placed in a new, separate intentional-damage exclusion. Thus, the intent of the damage is no longer relevant to the occurrence trigger.

This plain-language approach has a particular impact in construction defect litigation. Subcontractors are presumed to know what they are doing. To trigger the duty to defend, they have the burden of proving that their construction defect was an accident. The vague pleadings in most CD litigation rarely state that the subcontractor’s act was an accident. Thus, under the new coverage and pleading standards, subcontractor insureds can rarely meet their burden of proof on the duty to defend.

In conclusion, vague allegations against subcontractors in construction cases are no longer sufficient to trigger coverage. In appropriate cases, insurers may deny coverage for lack of an occurrence, knowing that Rule 12(b)(6) allows the immediate dismissal of non-viable complaints.

About The Authors
Multiple Contributors
Christopher Reid

Christopher Reid is the owner of Market Claim Services in Houston.

Britton D. Weimer

Britton D. Weimer is a partner with the commercial litigation firm of Jones Satre & Weimer PLLC in Minneapolis.  

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