(Article from Insurance Law Alert, May 2025)
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Holding
Reversing an intermediate appellate court, the Iowa Supreme Court ruled that a consumer fraud suit against a contractor did not allege an “occurrence”—i.e., an “accident”—that caused “property damage” for purposes of triggering general liability coverage. Dostart v. Columbia Insurance Group, 2025 Iowa Sup. LEXIS 48 (Iowa Apr. 18, 2025).
Background
The coverage dispute arose after Tyler Custom Homes failed to complete a project within the contractually mandated time frame. The homeowners sued, alleging consumer fraud under Iowa statutory law, among other claims. Columbia, Tyler’s general liability insurer, agreed to defend under a reservation of rights. A jury returned a verdict in favor of the homeowners on the consumer fraud claim and awarded both actual and exemplary damages.
When Columbia refused to indemnify the judgment, the homeowners filed a coverage action against Columbia. Columbia moved for summary judgment, which the trial court granted in part and denied in part. An intermediate appellate court affirmed, and the Iowa Supreme Court reversed.
Decision
Columbia’s policy covered “those sums that the insured becomes legally obligated to pay as damages because of…‘property damage’” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The court ruled that consumer fraud is not an “occurrence” under Iowa precedent because it does not involve accidental conduct. The homeowners argued that the claim could constitute an occurrence because consumer fraud under the relevant Iowa statute can be based on reckless or potentially negligent conduct. The court rejected this assertion, emphasizing the generally accepted principle (adopted by a majority of jurisdictions) that defective workmanship, standing alone and resulting only in damages to the work product itself, is not an occurrence under a general liability policy. Allowing coverage for faulty workmanship would “convert a routine business liability policy into a performance bond,” the court noted.
Additionally, the court held that damages to complete a project that a contractor was hired to construct are not damages for “property damage,” defined as “physical injury to tangible property.”
Comments
In ruling that the consumer fraud claim did not constitute a covered occurrence, the court rejected the homeowners’ contention that a distinction exists between common law consumer fraud claims and statutory consumer fraud claims. The homeowners argued that an Iowa Supreme Court decision that rejected coverage for a common law consumer fraud claim against a contractor was inapplicable to the present case because the common law claims have a stricter mens rea requirement than analogous statutory claims. The intermediate appellate court had accepted this argument, but the Iowa Supreme Court ruled that, notwithstanding any difference in mens rea standards between common law and statutory consumer fraud, the contractor’s failure to build the home within the designated period did not constitute an occurrence under the policy.