In Dostart v. Columbia Insurance Group, the Iowa Supreme Court reaffirmed the rule — in Iowa, and many other jurisdictions — that faulty workmanship by a contractor does not constitute an “occurrence” as defined in a standard commercial general liability (CGL) policy. And the court extended this rule to damages caused by delay, holding that failure to deliver a construction project on time — like failure to build the project in a workmanlike manner — does not constitute an “accident,” and thus is not an occurrence.
On its way up to the Iowa Supreme Court, the parties in Dostart focused their arguments on when fraud constitutes an occurrence. The insureds — a general contractor and its owner — had contracted with the plaintiffs to build a single-family home. After the insureds blew past the substantial completion deadline, the plaintiffs sued for commercial fraud, a statutory fraud claim that can be committed through negligence.
After the plaintiffs obtained a verdict against the insureds, their carrier declined coverage. The carrier took the position that because the verdict was for fraud, the insureds’ conduct was necessarily intentional and, thus, not an accident, as required to constitute an occurrence. When the plaintiffs sued the carrier to collect their judgment, they took the position that Iowa’s consumer fraud statute did not require intentional false statements, so the verdict did not, by itself, show that the insureds’ misrepresentations were not accidental.
Taking the case as the parties framed it, the Iowa Court of Appeals agreed with the plaintiffs. The appellate court held that the fraud verdict did not establish by itself that the insureds’ conduct was intentional. The court further found there was insufficient evidence in the record to determine whether the insureds had committed the consumer fraud intentionally or merely recklessly.
The Iowa Supreme Court took the case, but rather than resolve whether liability for consumer fraud was per se intentional, and thus not an occurrence, the court reframed the question. Putting the mens rea issue to the side, the court pointed to a line of its cases holding that “defective workmanship standing alone, that is, resulting in damages to the work product itself, is not an occurrence under a CGL policy.” This principle, the court said, extended to the plaintiffs’ claim because they “only sought damages for the very property upon which [the insureds] performed work.” According to the justices, the plaintiffs’ claim was “from beginning to end, a claim of poor performance in constructing a residence.” To hold otherwise, the court said, would turn a CGL policy into a performance bond. Put another way, the court concluded that CGL policies under Iowa law categorically do not cover damages that are “limited to the very property upon which the contractor performed work.”
