ATLANTA—A ruling by the Georgia Supreme Court that negligent construction resulting in damage to surrounding property constitutes an occurrence under a commercial general liability policy is the latest in a string of such decisions, with courts divided on the issue.

In a 6-1 opinion March 7 in American Empire Surplus Lines Insurance Co. Inc. vs. Hathaway Development Co. Inc., the Georgia high court upheld a lower court ruling that the general contractor's claim for damage caused by a subcontractor's faulty plumbing work was covered.

The ruling on construction defects follows a number of such cases across the United States that have ended in decisions that in some cases have defined defects as covered occurrences and in others decided they do not trigger coverage under CGL policies.

In one notable case, Hawaii's high court decided in May of last year that damage from construction defects does not constitute an occurrence triggering coverage under a CGL policy. The decision was reached in Group Builders Inc. and Tradewind Insurance Co. Ltd. vs. Admiral Insurance Co., upholding a lower court ruling that Admiral had no obligation under a CGL policy to indemnify the builder for mold damage from its own shoddy work installing insulation at the Hilton Hawaiian Village's Kalia Tower in 2001.

Hilton sued Group Builders, which was a subcontractor on the project, and other defendants, alleging, among other things, that the subcontractor's shoddy work caused defects that led to property damage.

As a result of the Hawaii ruling and others, some insurers and reinsurers have modified policy language to clarify that while they do not consider poor workmanship in and of itself to constitute an occurrence, the resulting property damage would be treated as a triggering occurrence.

In the Georgia case, Hathaway sued its plumbing subcontractor, Whisnant Contracting Co. Inc., alleging negligent plumbing work at three job sites. The general contractor sought to recover the costs associated with water damage to properties around the job sites.

After a default judgment against the plumbing company, Hathaway sought payment from Whisnant's insurer, American Empire Surplus Lines. The insurer denied liability and argued that the damage did not arise out of an occurrence as defined under the policy as “an accident, including continuous or repeated exposure to substantially the same, general harmful conditions.”

A trial court agreed with the insurer, but a state appeals court reversed the decision and ruled that because Whisnant's faulty workmanship caused damage, the plumbing company's acts constituted an occurrence.

In its ruling, the Georgia Supreme Court said: “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 Whisnant could not be deemed an occurrence or accident under the CGL policy because they were performed intentionally.”