A general contractor builds a new home and hires a subcontractor to install certain components. After the homes are completed, those components prove defective and the defects begin to affect other parts of the buildings. The homeowner sues the builder, and the general contractor faces large defense costs and potential judgments.
The contractor submitted claims to its insurers, but an insurer denied coverage on the ground that the loss was not an "accident" as the policy required. The dispute reached a federal appellate court in the case Stanley Martin Companies, Inc. v. Ohio Casualty Group, which considered whether damage that spread from defective subcontractor work to nondefective work qualified as an "occurrence" under the policy.
In the case, Stanley Martin hired Shoffner Industries to supply wood trusses and Shoffner warranted the trusses were free of mold and agreed to reimburse Martin for liability or costs arising from defects. After homeowners complained of mold, investigations showed the mold growth started with defective trusses and adjacent materials, and Martin faced litigation and cleanup costs exceeding $1.7 million.
Martin sought coverage under its General Liability Insurance for Construction Contractors and Umbrella policies. Ohio Casualty, the umbrella insurer, argued the mold and resulting damage were not an "occurrence" under the policy's definition of "accident," and the trial court agreed; Martin appealed and won on appeal.
The appeals court relied on precedent holding that damage spreading from a subcontractor's defective work to a contractor's nondefective work can be an "occurrence." The court emphasized that an "accident" is an event taking place without foresight or expectation, and that the general contractor neither expected the subcontractor to supply moldy trusses nor intended the mold to spread through the buildings. The court concluded the spread of mold to nondefective components was an occurrence and therefore covered, while the need to replace the defective trusses themselves was not an unexpected loss and remained the contractor's responsibility.
Although this decision may not bind courts in every state, it illustrates how insurers and contractors may treat similar claims. Insurers offering Construction Contractors Liability Insurance may require stricter subcontractor vetting and quality controls, and policies often include deductibles or loss-control requirements. Some insurers may also look to specialized coverages such as Machinery Construction Pollution Liability when environmental or contamination risks like mold are involved.
Both insurers and contractors should take practical steps to reduce these risks, including stronger subcontractor selection, detailed warranties, clear contract allocation of repair obligations, and routine documentation of construction quality. For help assessing coverage or policy options, you can talk to an agent.
Frequently Asked Questions
When is damage from a subcontractor considered an "accident" under liability insurance?
Courts often treat unexpected spread of damage from defective subcontractor work to otherwise nondefective work as an "accident" or "occurrence" when the insured did not foresee or intend the resulting harm.
Will insurance cover replacing the defective subcontractor work itself?
Generally, insurers treat replacing or repairing the originally defective work as the contractor's business risk and may deny coverage for those costs, while coverage is more likely for resulting damage to other property.
What steps can contractors take to reduce the chance of coverage disputes?
Contractors should vet subcontractors, obtain strong warranties and indemnities, document quality controls, and discuss policy terms and deductibles with their insurer.
Should contractors expect insurers to add deductibles or exclusions for these risks?
Yes; insurers commonly add deductibles, exclusions, or loss-control conditions to encourage risk management and limit exposure for property-damage claims arising from construction defects.