As homeowners or business owners we would like our insurance to cover everything. If it did, however, our premiums would be astronomical. So, what do you do when you hire a contractor or service provider whose negligence results in damage to your property? Most of us would pursue recovery against the contractor or service provider, and, depending on the circumstances, it is becoming clearer that this may be preferable to seeking coverage under your own insurance policy.
The Recent Case of Terra Nova Gas Station, Inc. v. Amco Ins. Co (Terra Nova)
In Terra Nova, a San Diego U.S. District court applied the negligent work exclusion “faulty, inadequate or defective … workmanship
work methods” to a preclude coverage for damage to a fuel tank that resulted when the delivery personnel dropped a measuring tool in the tank, puncturing it. The court further held that the negligent maintenance provision also applied. The Terra Nova ruling has produced some ripples in the coverage arena in California because the facts presented no potential for an argument that the delivery person’s services constituted a product, a determining factor for some courts in applying the faulty workmanship exclusion. The Terra Nova Gas decision, however, does not present a new development in the law.
A Line of California Law Applies the Negligent Work Exclusion Without Regard to the Flawed Process or Defective Product Distinction.
California decisions have been split as to whether the faulty workmanship exclusions apply where there is arguably no defective product. The primary case cited by policyholders arguing that the exclusion should not apply to negligent processes is Allstate v. Smith, which dealt with a water loss resulting from the failure of a roof tarp to prevent rain water from entering the building. However, California courts have applied the negligent work exclusions to both defective processes and defective products. Beginning with Waldsmith v. Smith (a determination that the city’s negligent maintenance of a city water main caused the landslide that damaged the insured’s home triggered the policy’s faulty maintenance exclusion), and more recent cases including Reichert v. State Farm Gen. Ins. Co. (contractor’s negligence in removing a wall that triggered the city’s order to demolish triggered the acts or decisions or faulty workmanship exclusions) and Freedman v. State Farm (contractor’s negligent hammering of nail through a pipe, causing an eventual leak, pipe corrosion and water damage triggered the faulty workmanship exclusion), courts have recognized that the negligence exclusion (that includes faulty workmanship, faulty planning and sometimes, faulty maintenance) applies to faulty processes as well as faulty work product. Moreover, in Julian v. Hartford the California Supreme Court held that clearly delineated exclusions do not run afoul of Insurance Code section 530 or the efficient proximate cause doctrine. As the concurring opinion noted, an insurer can exclude a specific category of perils and then restore a certain amount of coverage through an exception to the exclusion.