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On June 29, 2020, the Michigan Supreme Court corrected 30 years of jurisprudence that had been wrongfully denying insurance coverage for construction defects. In Skanska USA Building Inc. v M.A.P. Mechanical Contractors, et al. the Court enforced what it properly regarded as plain policy language, and thereby opened the door to coverage. Kotz Sangster is proud to have represented the winning party, Skanska.
The case impacts more than $10 Billion of annual economic activity in the State of Michigan. Each year, this state’s governmental bodies, its residents, and its businesses spend more than $10 Billion on infrastructure, commercial, industrial, and residential construction projects. Virtually every single one of these transactions is covered by commercial general liability insurance. Prior to the Skanska USA Building Inc. v M.A.P. Mechanical Contractors ruling, however, a vein of jurisprudence flowing from the Court of Appeals’ decision in Hawkeye-Security Ins. Co. v Vector Construction Co., 185 Mich App 369; 460 NW2d 329 (1990), prohibited insurance coverage for the insured’s own faulty workmanship, and thereby defeated coverage.
This vein of case law was both erroneous and created tremendous practical and jurisprudential problems. The standard general liability insurance policy was revised in 1986 to provide expanded coverage for certain construction defects. The Hawkeye-Security decision concerned the old, pre-1986 policy and was correctly decided, but the Court of Appeals continued to apply its holding without ever once considering the impact of the 1986 revisions to standard insurance policy. At least 15 panels repeated Hawkeye-Security’s “principle of law” and not one of them even mentioned the revised language. The result was justice by happenstance. When the Court of Appeals applied its “principle of law” to disputes arising under the post-1986 policy, the result was sometimes correct, as not all construction defects are covered under a plain reading of the current policy language. But the result was sometimes been wrong, too, as many construction defects should in fact be covered under a plain reading of the current policy language.
This vein of jurisprudence had an adverse effect on Michigan’s $10 Billion construction industry. As in all industries, parties to a construction contract base their price on the allocation of risk. By shifting some risks to an insurance company, such as the risk of bodily injury or the risk of certain defects, the parties are able to lower the cost of the project. But prior to the Court’s decision in Skanska USA Building Inc. v M.A.P. Mechanical Contractors, parties to a construction contract in Michigan lacked confidence that their allocation of risk to an insurance company would be respected by the judiciary. The language of the insurance policy set the parties’ expectations about coverage, but those expectations may or may not have been met if the insurer forced the insured to litigate. Michiganders paid more for construction services because of this unpredictability. And because governmental bodies are the dominant purchaser of construction services, the brunt of this burden was forced onto all of us.
The Michigan Supreme Court corrected this problem by enforcing the plain language of the insurance policy in Skanska USA Building Inc. v M.A.P. Mechanical Contractors. In so doing, the Court reinforced its fidelity to a fundamental principle of our law: freedom of contract. Time and again the Court has bedrocked rulings on what it calls the “ancient and irrefutable” right of “free men and women [to] reach agreements regarding their affairs without government interference” and to have those agreements enforced. By basing its decision in Skanska USA Building Inc. v M.A.P. Mechanical Contractors on this standard, the Court reached the right result for the right reason.
Kotz Sangster is grateful to Skanska USA Building Inc. for partnering with us. The victory was a team effort, but special recognition goes to Ed Boucher, Lauren Virzi, and Tyler Phillips, whose advocacy pointed the Court to the correct outcome.