American Empire Surplus Lines v. Hathaway Dev. Co.: an Important Occurrence in Georgia Insurance Law
| Publication year | 2011 |
| Pages | 0010 |
American Empire Surplus Lines v. Hathaway Dev. Co.:
An Important Occurrence in Georgia Insurance Law
by John L. Watkins
On March 11, 2011, the Supreme Court of Georgia decided American Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co.[1] In Hathaway, the Court held that a general contractor could recover from its subcontractor's insurers for the cost of repairs for damage to surrounding property resulting from the subcontractor's faulty workmanship. The decision was 6-1 and affirmed a decision by the Court of Appeals of Georgia.[2] Further, the Court of Appeals had issued two prior decisions reaching the same conclusion.[3]
Given a strong affirmance with prior Court of Appeals precedent, it would be easy to assume that Hathaway simply confirmed established Georgia law. Although this is one possible view of Hathaway, it is, as is so often the case in the law, not nearly so simple.
Hathaway is important in two areas of substantive law. First, Hathaway is an important decision in construction law, confirming a potential source of recovery for general contractors when property is damaged by a subcontractor’s negligence. From a different perspective, the reasoning of the Hathaway case provides a potential source of recovery for property owners when property is damaged by a contractor’s negligence.
Second, the Hathaway decision's broad reasoning also definitively resolves an important question of insurance law. Commercial general liability insurance is typically written on an "occurrence" form which provides the insured with coverage for claims for bodily injury or property damage caused by an "occurrence," which is typically defined as an "accident." A number of recent cases decided under Georgia law in the federal court system had restricted coverage by holding that a chain of events resulting from what began as a volitional act was not an "occurrence." The Hathaway court disagreed:
[W]e . . . hold that an occurrence can arise where faulty workmanship causes unforeseen or unexpected damage to other property. In reaching this holding, we reject out of hand the assertion that the acts of [the subcontractor] could not be deemed an occurrence or accident under the CGL policy because they were performed intentionally. "[A] deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly."[4]
By establishing controlling precedent in two important areas of substantive law, Hathaway is an important decision. The remainder of this article will examine the significance of the decision in greater detail.
What's the Big Deal?
Literally tens of thousands of Georgia insureds rely on liability insurance to protect them in the event a claim is asserted against them for personal injury (termed "bodily injury" in insurance parlance; "personal injury" is another type of coverage) or property damage. Most commercial general liability (CGL) policies are written on what is called an "occurrence" form. Most CGL policies cover " 'bodily injury' or 'property damage' to which this insurance applies . . ."[5] The CGL coverage "applies" to "bodily injury" or "property damage" "caused by an occurrence" during the policy period.[6]
The term occurrence is defined by most CGL policies to mean an "accident, including continuous or repeated exposure to the same general harmful conditions." The word "accident" is typically not defined in CGL policies, but O.C.G.A. § 1-3-3(2) defines "accident" to mean "an event which takes place without one's foresight or expectation or design."[7] Notably, all of the words mentioned—"occurrence," "accident" and "event"— are extremely broad.[8]
Claims under CGL policies often arise from various aspects of construction activity. For example, a contractor may negligently install a beam in a structure, causing damage to the structure supported by the beam. A welding subcontractor may cause a fire, causing a building to burn to the ground. A contractor clearing property for a development may try to avoid run-off by placing a silt fence, but the silt fence may fail because it was improperly installed, resulting in run-off onto neighboring property.[9]
The obvious purpose of the use of the term "occurrence" in CGL policies is to provide an insured broad coverage for bodily injury or property damage resulting from unexpected events as opposed to damages specifically caused by intentional misconduct. Despite the breadth of the word "occurrence," federal courts sitting in Georgia, prior to Hathaway, had decided a growing number of cases, typically in the construction context, using a very narrow interpretation of the term that resulted in an extraordinarily limited grant of coverage.
These decisions held that an unexpected or unintended consequence resulting from what began as volitional behavior was not an occurrence even if there was no intent to cause injury or damage. The issue first seems to have arisen in Owners Ins. Co. v. James.[10] In James, the claim was for property damage allegedly caused by negligent installation of synthetic stucco at a residence. One of the issues was whether the damage was caused by an occurrence under the policy, which, as noted, is generally defined as an accident.
The court's analysis of the issue started in a fairly straightforward manner:
Although "accident" is not defined in the policies, Georgia courts have construed that term to signify "an unintended happening rather than one occurring through intention or design." See, e.g., Allstate Ins. Co. v. Grayes, 216 Ga. App. 419, 421, 454 S.E.2d 616, 618 (1995); Thrif-Mart, Inc. v. Commercial Union Assurance Cos., 154 Ga. App. 344, 346, 268 S.E.2d 397, 400 (1980). See also O.C.G.A. § 1-3-3(2) (" 'Accident' means an event which takes place without one's foresight or expectation or design."). "Accident" and "intention" are thus interpreted as converse terms. Thrif-Mart, 154 Ga. App. at 346, 268 S.E.2d at 399-400.[11]
However, the court went on to state:
It is true that Georgia law distinguishes between insurance coverage for accidental injuries and coverage for injuries caused by accidental means. See Provident Life and Accident Ins. Co. v. Hallum, 276 Ga. 147, 147, 576 S.E.2d 849, 851 (2003). An accidental injury is an injury that is unexpected but may arise from a conscious voluntary act. Id. In contrast, an injury from accidental means is one that is the unexpected result of an unforeseen or unexpected act that was involuntarily or unintentionally done. Id.[12]
Based on this interpretation the court concluded that "the insurance policies at issue in this case provide coverage for injury resulting from accidental acts, but not for an injury accidentally caused by intentional acts."[13] Because the synthetic stucco was intentionally installed, although there was no intent to cause damage, the court reasoned that there was no occurrence, and hence no coverage, and the insurer was granted summary judgment.
The issue was then addressed in Owners Ins. Co. v. Chadd's Lake Homeowners Ass'n., Inc. (Chadd's Lake I).[14] In Chadd's Lake I, the insureds allegedly caused silt, sediment and storm water runoff to be deposited into a lake despite taking considerable preventative precautions. Although the bulk of the court's order was spent discussing the pollution exclusion, the court also discussed whether there was an occurrence. The court relied heavily on James and adopted its analysis:
Here, as in James, the Policy covers only injuries resulting from accidental acts and not injuries accidentally caused by intentional acts. It is undisputed that the damages alleged . . . although unintended, were caused by the . . . Defendants' intentional construction activities . . . . Because the damage alleged by the Association was the result of the . . . Defendants' intentional construction activities, it was not an 'occurrence' and thus is not covered by the Policy.[15]
Interestingly, the fact that the insureds had tried to prevent the runoff from happening in the first place was not found to be a fact in their favor. The court stated: "[t]he fact that the . . . Defendants anticipated this damage would result from its activities and attempted (unsuccessfully) to prevent the damage does not render their intentional conduct accidental—to the contrary, it underscores the intentional quality of their conduct."[16]
The issue was yet again addressed in Travelers Indem. Co. of Connecticut v. Douglasville Dev., LLC.[17] Douglasville Development was another storm water runoff case, where a developer...
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