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INSURANCE NOTES

U.S. District Court, Arizona, Finds Coverage For Insured's Faulty Tennis Courts

08.01.2006
In Arizona, "mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the policy, nor would the cost of repairing the defect constitute property damage." United States Fidelity & Guaranty Co. v. Advance Roofing and Supply Co., 163 Ariz. 476, 788 P.2d 1227, 1233 (Ariz.Ct.App. 1989).

In General Acrylics Inc. v. Maryland Casualty Co., U.S. District Court, No. CIV 03-1495 (D.Ariz. 2006), 2006 US.Dist. LEXIS 17264, the U.S. District Court in Arizona granted summary judgment to an insured who had constructed tennis courts that blistered and delaminated, finding "property damage" that had "gone beyond mere faulty workmanship by the insured."

The insured had installed tennis courts, basketball courts and multi-purpose courts. Thereafter, the surface of the courts blistered and delaminated. The concrete for the courts had been provided by a third-party supplier. The district court concluded that "property damage" had occurred because of a chemical reaction between "the reactive silica in aggregates to make concrete and the alkalis (sodium and/or potassium) present in the concrete mix ... cause[d] the formation of a gel that absorb[ed] water, swell[ed], and then force[d] its way through the coating leaving behind a residue and holes that then caused further coating degradation and bubbling."

The General Acrylics court distinguished Advanced Roofing on the ground that "this case involves tennis courts, basketball courts and/or multipurpose courts that were indisputably damaged due to [alkali/silica reaction], an unexpected and unintended reaction of the aggregates in concrete, which was designed, mixed and manufactured by a third-party subcontractor." Thus, the court added, the damages had "gone beyond mere faulty workmanship by the insured."

The district court then ruled that the exclusion for the insured's work did not bar coverage because an exception provided the exclusion did not apply if the damaged work was performed by a subcontractor. The court rejected the insurer's argument that the third party supplier of the concrete was a material man rather than a subcontractor, observing that the insurance policy did not define the word "subcontractor" and the third party was more than just a material man because "it custom-manufactured concrete with an intended mixture of ingredients."

Like Arizona, California courts hold there is no coverage for faulty workmanship. Purely economic loss resulting from inferior materials or workmanship that does not damage other property is not "property damage" under a liability policy. Thus, there is no coverage for claims that the insured's poor workmanship lowered the value for the property or for loss of use of the property during the repairs. St. Paul Fire & Marine Insurance Co. v. Coss, 80 Cal.App.3d 888, 892 (1978). Further, the cost of removing and replacing defective work does not create "property damage." New Hampshire Ins. Co. v. Vieira, 930 F.2d 696, 697 (9th Circuit 1991). However, the result is different where the insured's poor workmanship results in physical injury to another's property. Maryland Cas. Co. v. Reeder, 221 Cal.App.3d 961, 971 (1990).

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