The Kentucky Court of Appeals recently upheld a lower court’s decision, clarifying the scope of commercial general liability (CGL) insurance policies in cases of faulty construction. The ruling, issued on March 21, 2025, centered on a dispute involving Hercon Construction, Inc., and clarified when such policies cover defective workmanship. The court determined that insurers were not obligated to defend or indemnify claims related to the construction of a Scott County residence.
The legal battle began approximately two decades ago when Thomas Young hired Hercon Construction to apply PermaCrete, an exterior finish, to his home. Young acquired the product from Quality Systems Inc. (QSI), which also suggested Hercon as their preferred installer. Young terminated Hercon’s contract in 2007, alleging the company’s application of the product caused damage to various parts of his home, including windows and gutters. A subsequent contractor, D&S Construction, was also dismissed after similar complaints.
In 2010, Young initiated legal proceedings against QSI, Hercon, and D&S, citing breach of contract, negligence, and fraud. Both QSI and D&S later declared bankruptcy. Young subsequently included QSI’s and Hercon’s insurers—Pennsylvania National Mutual Insurance Co. and Zurich American Insurance Co., respectively—as defendants, seeking a declaratory judgment for coverage of the claims. The insurers contested any duty to defend or indemnify, asserting that the policies did not apply because the alleged damages were a foreseeable outcome of Hercon’s actions and not accidental.
The Scott Circuit Court sided with the insurers, referencing the Tennessee precedent set in Travelers Indemnity Co. v. Moore & Associates. The court concluded that Hercon’s improper PermaCrete application was not an ‘accident’ because the resulting damage was immediate and reasonably foreseeable to the contractor.
Young and Hercon appealed the decision, arguing that faulty workmanship could constitute an “occurrence” under standard CGL policies. Judge Allison Eckerle, writing the unanimous opinion for the Court of Appeals, affirmed the lower court’s ruling. The court emphasized that the foreseeability of damage must be assessed from the contractor’s perspective—Hercon in this instance. Judge Eckerle stated, “Obvious damage that is intentionally inflicted directly by a contractor is patent, seeable, and legally foreseeable.” She differentiated the case from Moore, where a subcontractor’s inadequate window installation led to hidden water damage not immediately apparent to the general contractor. The court noted that Hercon’s direct PermaCrete application without proper preparation made the resulting damage entirely foreseeable, thereby excluding it from accidental coverage.
Similarly, the court dismissed coverage for QSI, as Young had directly contracted with Hercon, not QSI. The allegations against QSI stemmed from Hercon’s conduct and did not trigger insurance coverage.
This ruling highlights the limitations of CGL coverage concerning construction defects when the damage is the direct result of the insured’s work. It supports the idea that predictable, obvious defects fall outside the definition of an ‘occurrence’ that would trigger insurance coverage.
Case Details
- Case: Hercon Construction, Inc. v. Arrowhead Systems, LLC, et al.
- Court: Kentucky Court of Appeals
- Opinion by: Judge Allison Eckerle
- Panel: Chief Judge Thompson, Judges Eckerle and A. Jones
- Parties and Counsel: Hercon Construction, Inc.: Douglas L. Hoots, Susan Y.W. Chun, Lexington, Ky. Zurich American Insurance Co.: Robert E. Stopher, Robert D. Bobrow, Louisville, Ky. Pennsylvania National Mutual Insurance Co.: Donald M. Wakefield, J. Stefan Bing, Lexington, Ky. Arrowhead Systems, LLC & Thomas Young: John N. Billings, Richard J. Dieffenbach, Zachary G. Cato, Lexington, Ky.
