The Kentucky Court of Appeals has upheld a lower court’s ruling that two insurers owe no duty to defend or indemnify claims arising from faulty construction work on a Scott County residence. The decision, handed down on March 21, 2025, stems from a dispute involving Hercon Construction, Inc., and Arrowhead Systems, LLC, and clarifies how commercial general liability (CGL) policies apply to claims of defective workmanship.
The litigation originated nearly two decades ago when Thomas Young hired Hercon Construction to apply PermaCrete, a stucco-like exterior finish, to his home. Young had purchased the product from Quality Systems Inc. (QSI), a Tennessee-based supplier, which also recommended Hercon as its preferred installer. Young terminated Hercon’s contract in 2007 after alleging the company’s application damaged windows, doors, gutters, and other parts of the residence. A subsequent contractor, D&S Construction, was also dismissed for similar reasons.
In 2010, Young filed suit against QSI, Hercon, and D&S, alleging breach of contract, negligence, and fraud. During the litigation, both QSI and D&S declared bankruptcy. Young later added QSI’s and Hercon’s insurers—Pennsylvania National Mutual Insurance Co. and Zurich American Insurance Co., respectively—as defendants, seeking a declaratory judgment compelling them to cover the claims.
Both insurers denied any duty to defend or indemnify. They argued that the policies, which covered “property damage” caused by an “occurrence,” did not apply because the alleged damages were not accidental but rather the foreseeable result of Hercon’s own actions.
The policies defined “occurrence” as an “accident,” a term left open to interpretation but clarified under Tennessee law, which the courts applied in this case.
The Scott Circuit Court sided with the insurers. Applying Tennessee’s leading precedent, Travelers Indemnity Co. v. Moore & Associates, the trial court found that Hercon’s improper application of PermaCrete was not an “accident” because the damage was visible, immediate, and foreseeable to the contractor itself.
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Young and Hercon appealed, contending that even faulty workmanship can constitute an “occurrence” under standard CGL policies.
In a unanimous opinion authored by Judge Allison Eckerle, the Court of Appeals affirmed. The panel emphasized that the foreseeability of damage must be assessed 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,” Judge Eckerle wrote. She contrasted the case with Moore, where a subcontractor’s faulty window installation led to latent water damage not immediately apparent to the general contractor.
Hercon’s direct application of PermaCrete without adequate preparation, the court noted, made the resulting damage entirely foreseeable and thus outside the scope of accidental coverage.
Similarly, the court found no coverage for QSI, as Young had contracted directly with Hercon, not QSI. The allegations against QSI were derivative of Hercon’s conduct and likewise failed to trigger coverage.
The decision underscores the limits of CGL coverage for construction defects, particularly when the damage is the direct and immediate result of the insured’s own work. It reinforces the principle that foreseeable, patent defects fall outside the definition of an “occurrence” triggering 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:
