The Kentucky Court of Appeals has upheld a ruling that two insurers are not obligated to defend or indemnify claims arising from defective construction work on a Scott County home. This decision, issued on March 21, 2025, involves a dispute between Hercon Construction, Inc. and Arrowhead Systems, LLC, clarifying the application of commercial general liability (CGL) policies to claims of faulty workmanship.

The case began nearly two decades ago when Thomas Young hired Hercon Construction to apply PermaCrete, a stucco-like exterior finish, to his home. After purchasing the product from Quality Systems Inc. (QSI), a Tennessee-based supplier, Young followed their recommendation to use Hercon as the preferred installer. However, after Hercon’s work allegedly damaged windows, doors, gutters, and other parts of the house, Young terminated their contract in 2007. A subsequent contractor, D&S Construction, was also dismissed for similar issues.

In 2010, Young filed a lawsuit against QSI, Hercon, and D&S, claiming breach of contract, negligence, and fraud. As QSI and D&S declared bankruptcy during the litigation, Young added QSI’s and Hercon’s insurers, Pennsylvania National Mutual Insurance Co. and Zurich American Insurance Co., as defendants, requesting a declaratory judgment compelling them to cover the claims.

Both insurers denied any obligation to defend or indemnify, arguing that their policies, which provided coverage for “property damage” caused by an “occurrence,” didn’t apply since the alleged damages were foreseeable results of Hercon’s actions, not accidents.

The policies defined “occurrence” as an “accident,” a term open to interpretation, clarified under Tennessee law, which was applied in this case.

The Scott Circuit Court sided with the insurers, applying Tennessee’s precedent in Travelers Indemnity Co. v. Moore & Associates. The court concluded that Hercon’s faulty application of PermaCrete wasn’t an “accident” because the damage was immediate, visible, and foreseeable to the contractor.

Young and Hercon appealed, arguing that even faulty workmanship could qualify as an “occurrence” under standard CGL policies.

In a unanimous opinion written by Judge Allison Eckerle, the Court of Appeals affirmed the decision. The panel explained that the foreseeability of damage must be considered from the perspective of the insured—in this case, Hercon.

“Obvious damage that is intentionally inflicted directly by a contractor is patent, seeable, and legally foreseeable,” wrote Judge Eckerle. She distinguished this case from Moore, where a subcontractor’s poor window installation led to latent water damage that wasn’t immediately obvious to the general contractor.

The court noted that Hercon’s direct application of PermaCrete without proper preparation made the damage foreseeable, thus falling outside the accidental coverage.

The court also found no coverage for QSI, since Young had contracted directly with Hercon and the allegations against QSI were derivative of Hercon’s conduct, failing to trigger coverage.

This decision highlights the limits of CGL coverage for construction defects, especially when the damage results directly from the insured’s work. It reinforces the principle that foreseeable and obvious defects do not constitute an “occurrence” triggering insurance coverage.

In this case, the Kentucky Court of Appeals further clarified how CGL policies apply to construction defects, providing a valuable precedent for future cases involving faulty workmanship. The ruling emphasizes the importance of foreseeability in determining whether a construction defect falls within the scope of insurance coverage.

While contractors and insurers often navigate complex issues regarding coverage for construction defects, the court’s interpretation strengthens the idea that obvious, foreseeable damages resulting from a contractor’s own work are not covered under typical CGL policies. It also underscores the importance of proper workmanship and the legal responsibility of contractors to prevent foreseeable damage during the construction process.

This case is a reminder to contractors and their insurers to carefully review the terms of their policies and understand how courts may interpret key terms such as “accident” and “occurrence” in the context of construction-related claims. For construction professionals, this ruling serves as a reminder of the potential risks associated with poor workmanship and the need to take preventive measures to avoid costly legal and insurance disputes.

The case also serves as a cautionary tale for homeowners and property developers, reminding them to thoroughly vet contractors and ensure that they are engaging professionals capable of performing high-quality work to minimize potential damages and liabilities.

This decision may have broader implications for the construction industry, particularly in how contractors and their insurance providers approach defective workmanship claims. With this ruling, the Kentucky Court of Appeals reinforces the concept that negligence or carelessness resulting in foreseeable damage will likely be excluded from coverage under CGL policies, thus impacting the scope of protection available to contractors facing such claims.

Originally reported by Matthew Sellers in Insurance Business.