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Property policy ruling favoring AIG unit upheld

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Faulty workmanship cannot be considered an occurrence under a property policy, says an appeals court in upholding a ruling in favor of an American International Group Inc. unit.

Grand Rapids, Michigan-based Armada Group Inc. had purchased an insurance policy from AIG unit Illinois National Insurance Co. on behalf of its subsidiaries, including Grand Rapids-based Steel Supply & Engineering Co., according to Thursday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Steel Supply & Engineering Co. v. Illinois National Insurance Co.

The policy, which covered the period April 1, 2009, through April 1, 2010, only covered property damage caused by an occurrence, according to the ruling.

In January 2008, Steel Supply contracted with Carmel, Indiana-based Carmel Redevelopment Corp. In January, 2009, one of the iron workers at the site at which Steel Supply had erected steel discovered defects in the steel, according to the ruling, and Carmel sued Steel Supply for breach of contract, among other claims.

Illinois National initially assumed Steel Supply’s defense in the case, but in January 2013 denied coverage. Steel Supply filed suit against Illinois National, and the U.S. District Court in Grand Rapids ruled in AIG’s favor in August 2013. Steel Supply appealed the ruling.

“As a general matter, mere faulty workmanship does not constitute an occurrence” under Michigan law, said a unanimous three-judge appellate panel.

“This rule is intuitive: the purpose of such insurance contracts is to protect the insured against the sort of accidents that give rise to liability. It is not to insure against malpractice.”

The exception to faulty workmanship being considered an occurrence is if it harms a third party’s property, but that is not the case here, said the ruling. “Here, there is no record that a third party sought contribution” from Carmel, said the panel, in reaffirming the case’s dismissal.