Arkansas Faulty Workmanship Statute Does Not Have Retroactive Application

The Arkansas Legislature enacted ARK. CODE ANN. § 23-79-155 in 2011. This statute provides in relevant part CGL policies are required to contain a definition of “occurrence” that included “[p]roperty damage … resulting from faulty workmanship.” § 23-79-155(a)(2). Recently, the United States Eighth Circuit Court of Appeals found that § 23-79-155 did not have retroactive application.

The retroactivity issue came before the United States Eighth Circuit Court of Appeals in J McDaniel Const. Co., Inc. v. Mid-Continent Cas. Co., 761 F.3d 916 (8th Cir. 2014). In J McDaniel, a general contractor brought an action against its own insurer to recover under a CGL policy for the costs of settling a lawsuit arising from a subcontractor’s faulty workmanship. The Court held that the subcontractor’s faulty workmanship was not a covered “occurrence” under the policy and that Arkansas statutes requiring CGL policies to include coverage for faulty workmanship did not apply retroactively.

The Court began its analysis by noting that the Arkansas Supreme Court in Essex Ins. Co. v. Holder, 370 Ark. 465, 261 S.W.3d 456, 460 (2008) held that “defective workmanship standing alone—resulting in damages only to the work product itself—is not an occurrence” as defined in a CGL policy. J-McDaniel, 761 F.3d at 917 citing Essex.

The general contractor argued for a reversal of the Essex decision and for the Court of Appeals to apply Arkansas statute (§ 23 79 155) retroactively. The Eighth Circuit declined the invitation to reverse Essex.

First, Arkansas law contained a presumption against retroactive application of statutes generally. (Citing Steward v. Statler, 371 Ark. 351, 266 S.W.3d 710, 713 (2007) (“Generally, retroactivity is a matter of legislative intent, and unless it expressly states otherwise, we presume the legislature intends for its laws to apply only prospectively.”)).

Additionally, the Eighth Circuit noted that the Arkansas Supreme Court had previously held that an “[insurer’s] right to deny coverage under the law then in effect is a substantive right. Legislation which changes substantive rights does not operate retroactively.” J McDaniel, 761 F.3d at 919 (citing Carmichael v. Nationwide Life Ins. Co., 305 Ark. 549, 810 S.W.3d 39, 42 (1991)).

Arkansas courts had also held that insurance policies are governed by statutes in effect at the time of the issuance of the policy and not afterwards. J-McDaniel, 761 F.3d at 919 (citing State Farm Mut. Auto. Ins. Co. v. Henderson, 356 Ark. 335, 150 S.W.3d 276, 281 (2004)).

Based upon this strong judicial precedent, the Eighth Circuit Court of Appeals found that Arkansas law clearly indicated that the Court was not permitted to retroactively apply §23 79 155 to the insurance contract between the parties. J McDaniel, 761 F.3d at 919.