Insurance Coverage in Construction Disputes: The Case of Faulty Workmanship

In a significant judgment handed down on April 9, 2025, the Arkansas Court of Appeals provided clarity on how statutory definitions shape insurance coverage concerning construction disputes. This pivotal ruling affirmed a lower court decision mandating that Nationwide Mutual Insurance Co. must provide defense and indemnification to NWA Restore-It, Inc., a company embroiled in a lawsuit over alleged property damage caused by substandard workmanship during a flooring installation. The cornerstone of the case was a situation where homeowner Steven Hattabaugh engaged NWA Restore-It in January 2019 to install new flooring. This need arose after his home suffered water damage in November 2018. NWA then subcontracted the flooring task to L&A Flooring, with the installation completed within the same month. However, approximately six months post-installation, the floor began to show signs of damage such as rippling and cracking, prompting L&A to make unsuccessful repair attempts in September 2020. By March 2021, Hattabaugh and Amy Woods pursued legal action against NWA, alleging improper installation as the root cause of the damage. In response, NWA filed a third-party complaint against numerous parties, including Nationwide, seeking a declaration that it was entitled to defense and indemnity as per a commercial general liability (CGL) policy issued to L&A in which NWA was listed as an additional insured. Nationwide contested this claim, citing policy exclusions.

The Benton County Circuit Court ruled in favor of NWA, determining that Nationwide was obligated to provide defense and indemnity. Dissatisfied with this ruling, Nationwide lodged an appeal. Central to the appeal were exclusions within the policy's additional insured endorsement, which limited coverage for additional insureds after the completion of work or after the work had been put to its intended use by a party other than another contractor involved in the same project. Nationwide's argument hinged on the assertion that since the flooring was completed and in use when the damage surfaced, these exclusions were applicable, thus nullifying coverage. Furthermore, Nationwide posited that the damage was a result of faulty workmanship—an often controversial subject in construction-related coverage lawsuits—arguing that their policy only promised coverage for ongoing operations.

However, the Arkansas Court of Appeals did not concur with Nationwide's interpretation. The court underscored the relevance of Arkansas Code Annotated § 23-79-155 in this context, noting that the state's statutory definition includes 'property damage or bodily injury resulting from faulty workmanship' as an 'occurrence' in CGL policies. Analyzing the case, the court observed that the original complaint articulated damage that ensued during the installation process, not after its completion, thereby falling outside the scope of the cited policy exclusions. Moreover, the appellate court drew a clear distinction between this case and the precedent of S.E. Arnold & Co. v. Cincinnati Insurance Co., where the damages were restricted to the contractor's own product. In the present scenario, the damages were attributed to allegedly subpar installation performed by a subcontractor, distinguishing the case from mere product-related issues.

Ultimately, the court upheld the Benton County Circuit Court's verdict, reinforcing that when allegations involve damages occurred amid ongoing operations, coverage cannot be readily excluded. The duty to defend and indemnify was thus deemed applicable. Judge Mike Murphy delivered the opinion, with Judges Tucker and Wood concurring in the decision. Representation for Nationwide was handled by Michael P. Vanderford of Anderson, Murphy & Hopkins, L.L.P., whereas NWA Restore-It, Inc. was represented by attorneys M. Evan Stallings, Adam D. Franks, and Lauren A. Spencer from Barber Law Firm, PLLC. This case not only clarifies the role of statutory definitions but also highlights the critical nuances insurers must navigate in interpreting coverage liabilities, setting a significant precedent in the construction insurance landscape.