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XV. Insurance Coverage for Construction Claims

1. Trigger of Coverage
2. Duty to Defend and Indemnify
3. Property Damage
4. Defective Workmanship/Business Risk Exclusions

A. Trigger of Coverage

The general rule appears to be that any policy in effect when damages occur will be held to provide coverage. Alaska case law on trigger of coverage is sparse, however. In Makarka v. Great American Insurance Co., 14 P.3d 964 (Alaska 2000), the court addressed when coverage would be triggered when there was a delayed injury. The court held that coverage should be based on the date of injury, not the date of the negligent act. In Mapco Alaska Petroleum, Inc. v. Central National Insurance Company of Omaha, 795 F. Supp. 941 (D. Alaska 1991), a case involving ground water contamination, the court rejected the "manifestation trigger of coverage" theory, and held that coverage should be triggered at the time the damage actually occurred, i.e., when the ground water was exposed to contaminants. See 795 F. Supp. at 948. In cases of continuing damage, each policy in effect during the time which damages occur will likely be required to respond.

B. Duty to Defend and Indemnify

Alaska law concerning an insurer's duty to defend and indemnify is relatively conventional. There are some unique wrinkles concerning the duty to defend when an insurer defends under a reservation of rights, however.

The Alaska Supreme Court an insurer's defense obligation in Fejes v. Alaska Insurance Company, 984 P.2d 519, 522 (Alaska 1999):

"The duty to defend arises 'if the complaint on its face alleges facts which, standing alone, give rise to a possible finding of liability covered by the policy.'" Even if the complaint does not contain such allegations, the insurer has a duty to defend if facts underlying the complaint are within, or potentially within, the policy coverage and are known or reasonably ascertainable by the insurer.

The legislature codified the right of independent counsel in conflict cases in AS 21.89.100. The statute provides that the insurer's defense obligation applies only to those claims for which the insurer acknowledges coverage, or has issued a reservation of rights. The insurer is apparently not responsible for defense of claims for which it properly denies coverage outright. Also, this statute provides that the insured can waive in writing the right to independent counsel.

C. Property Damage

There is little direct law in Alaska as to what qualifies as property damage. It appears, however, that Alaska would hold that deterioration of the insured's own work product would qualify as property damage. The issue was addressed in Fejes v. Alaska Insurance Co., 984 P.2d 519 (Alaska 1999), where the insurer argued that the loss - a septic drain field - did not qualify as property damage because it was "loss of bargain damage," not property damages, and that a Commercial Liability Policy (CGL) policy was not intended to cover the insured's own work product. The court rejected this argument, holding that, when a curtain drain failed causing damage to the remaining septic system, this qualified as property damage. It further stated that it would not agree that a CGL policy, particularly one containing a broad form property damage liability coverage endorsement, would never cover damages to the work of the insured. Id. at 524.³

Alaska law also appears to side with the line of cases that hold that defective workmanship can qualify as an "occurrence." In Fejes, the court held that an "accident" was "anything that begins to be, that happens, or this is a result which is not anticipated and is unforeseen and unexpected." From the insured's point of view, the failure of his product "was neither expected nor intended" and hence an accident. 984 P.2d at 523.

D. Defective Workmanship/Business Risk Exclusions

Alaska case law indicates that the court will enforce the business risk exclusions in a Commercial General Liability (CGL) policy, but will read the exclusions narrowly. The court held the "damage to your work" exclusion in U.S. Fire Insurance Co. v. Colver, 600 P.2d 1 (Alaska 1979). In Colver, claims were made against a builder based on negligent construction of a house. Addressing a similarly worded exclusion, the court held that the insured should have known that property damage arising out of his work or work product to his work or product would not be covered by the policy. See 600 P.2d at 4. Similarly, in Alaska Pacific Assurance Company v. Collins, 794 P.2d 936 (Alaska 1990), the court held that such an exclusion would bar coverage where there was damage to work performed by the Named Insured arising out of such work, but not for damages caused by external forces. Id. at 942-43. The court held that, "where damages are caused by factors beyond the scope of the insured builder's work, coverage for such damages is not defeated by a 'completed work' exclusion." Finally, Fejes v. Alaska Insurance Co., 984 P.2d 519 (Alaska 1999), held that the policy was intended to exclude damage caused by the named insured's own work to his work, but that the builder would have coverage for damage arising out of a subcontractor's work.

³The coverage previously provided by the broad form endorsement has now been incorporated into the general CGL form.