8.1.1 Occurrence

• Jurisdiction: Arizona

In standard commercial general liability ("CGL") policies, the insuring agreement obligates the issuing company to pay those sums that it becomes legally obligated to pay as damages because of "bodily injury" or "property damage" caused by an "occurrence." The "bodily injury" or "property damage" must occur during the policy period.

The standard CGL policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

The Arizona courts have generally construed the term "accident" as connoting an "undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force . . ."^[1]

What constitutes an accident has always been difficult for the courts to resolve. The problems in this area are reflected by numerous decisions reaching varying results from similar fact situations.^[2] It has been argued that the purpose of using the term "occurrence" instead of "accident" in a comprehensive general liability policy was to expand coverage. For example, in Patrick v. Head of the Lakes Co-Op Ass'n,^[3] the court reviewed an occurrence clause and expressly rejected the insurance company's argument that the term "occurrence" was synonymous with the term "accident." The court explained that the insurance company's argument did not take into consideration the portion of the policy definition of occurrence that requires consideration of whether the result of the accident was "expected or intended from the standpoint of the insured." The court stated:

The term "occurrence" originally came into use in insurance policies because a restricted construction of the term "accident" proved unsatisfactory to the insured, the public, and the court. The purpose of using "occurrence" rather than "accident" was to expand coverage. [Citation omitted.] Its use permits consideration of the state of mind of the actor as it relates to the resulting in damage, rather than only as it relates to causation. [Citation omitted.] Its use affords coverage for an intended act and intended result if they caused damage unintended from the standpoint of the insured.^[4]

In Grand River Lime Co. v. Ohio Casualty Co.,^[5] the court observed:

To begin with, the word "occurrence," to the lay mind, as well as to the judicial mind, has a meaning much broader than the word "accident." As those words are generally understood, accident means something that must have come about or happened in a certain manner, while occurrence means something that happened or came about in any way. Thus, accident is a special type of occurrence, if occurrence goes beyond such special confines and while, including accident, encompasses many other situations as well.^[6]

The analysis of whether an occurrence has taken place is fact intensive and each case will be decided on its own merits without specific guidance in reference to the terms used in the definition. Notwithstanding the analysis adopted by courts in other jurisdictions, which have broadened the scope of "occurrence" beyond "accident," the Arizona courts have followed an analysis centering on whether the precipitating conduct was "accidental." Instructive on this point is Kema Steel, Inc. v. Home Insurance Co.,^[7] where the court construed the definition of "occurrence" in relation to general commercial activity.

In Kema Steel, an employee brought suit against his employer, alleging that the employer failed to procure major medical insurance coverage for the employee and his dependents. In the complaint, the employee alleged that as a direct and proximate result of the employer's negligence, he and his family members suffered emotional distress damages. The employee also alleged that the employer breached its contract to procure major medical coverage for the employee, and that, as a direct result of the breach, the employee and his dependents suffered financial damages. The court held that the employee's filing of a lawsuit was not an accident constituting an occurrence under the policy, and it did not result in bodily injury or property damage to the employee, so as to be covered under the liability policy. In a supplemental opinion, the court in Kema Steel held that the failure of the insured's employer to provide major medical health insurance coverage to employees, as promised, was not an accident constituting an occurrence for the purposes of the policy.^[8]

In United States Fidelity & Guaranty Co. v. Advance Roofing & Supply Co.,^[9] the Arizona Court of Appeals held that a claim for faulty workmanship was not an occurrence within USF&G's policy definition. After recognizing that other jurisdictions had concluded that the mere showing of faulty work was sufficient to bring a claim for resulting damages (of whatever nature) within policy coverage, the court rejected these authorities, stating:

In our opinion, these authorities disregard the fundamental nature of a comprehensive general liability policy of the type involved in this litigation, and ignore the policy requirement that an occurrence be an accident. If the policy is construed as protecting a contractor against mere faulty or defective workmanship, the insurer becomes a guarantor of the insured's performance of the contract, and the policy takes on the attributes of a performance bond. We find these authorities unpersuasive.

In our opinion, the better reasoned authorities hold that mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the policy, nor would the cost of repairing the defect constitute property damages.^[10]

The coverage afforded by standard CGL policies is for tort liability for bodily injury or physical damage to property and not for contractual liability for economic loss because the insured's product or work is not that for which the damaged...