Imagine the following scenario: A large power plant hires a global construction firm to produce eight reactors designed to remove toxic pollutants from exhaust that the plant releases into the atmosphere. The reactors are large and extremely complicated pieces of machinery, so the construction company subcontracts the manufacturing and installation of their internal components to multiple different subcontractors. Shortly after the power plant puts three of the reactors into operation, plant supervisors discover cracking and fracturing in the reactors caused by a defect in an internal gas riser manufactured by a subcontractor. The damage to those reactors is so severe that they must be completely replaced. And while the plant has not begun operating the other five reactors, the construction company already installed the same faulty gas riser in them. Workers cannot replace the faulty gas risers in the tight confines of the reactors without damaging them.
The construction company incurs over $200 million in costs repairing the reactors for the power plant. Luckily, they procured commercial general liability (“CGL”) insurance to cover their work on the reactors before they began the project. A payout within the limits of the policy would indemnify them for a great deal of the repair costs. But the insurance company refuses to pay, claiming that the damage to the reactors is not covered under the CGL policy. First, they insist that the damage to the reactors is not a coverable occurrence as defined in the policy because it was caused by the subcontractor’s faulty work, and faulty work is foreseeable. Second, they argue that even if it was an “occurrence,” the damage is not coverable under the policy because it occurred to the work that was the subject of the construction contract and not to the property of a third party as defined in the policy.
This exact factual scenario is the subject of Black & Veatch Corp. v. Aspen Insurance (U.K.) Ltd. There, the Tenth Circuit held that under New York law, faulty subcontractor work can be a coverable occurrence under a standard form CGL policy, and the faulty gas riser installation at issue was such an occurrence. The court also found that the damage to the reactors was property damage as defined in the CGL policy, and therefore the company was entitled to indemnification for the cost of repairing that damage. If this decision is indicative of how the New York Court of Appeals would rule, then New York will join the “overwhelming trend” of state supreme courts that recognize faulty work as an occurrence.