So Do I Have Insurance Coverage Or Not
01/20/2010
by John V. O'Meara, Esq.1
It seems simple enough. You call your insurance broker, remind him or her that you are a contractor and that you perform that certain specialty of construction that you do and want to be protected through a good insurance policy for those annoying and baseless construction defect cases. Your broker nods his or her head with apparent understanding, takes an enormously large check from you, and you walk out the door lighter in the wallet, but with the peace of mind of knowing that your company, and family, are protected. But are you?
There is a misconception on the part of many contractors as to exactly what the traditional commercial general liability insurance ("CGL") policy covers - and what it does not. This article is intended to explain in general terms what "property damage" is covered, and what is or may not be covered depending on the wording of your insurance policy. 2
To begin, the genesis of most commercial general liability insurance policies is a standard form prepared by the Insurance Services Office ("ISO"). Most insurers utilize ISO forms, endorsements and exclusions, so there is some uniformity across the insurance universe depending on the particular forms, endorsements and exclusions which are used on any particular policy. 3
Most construction defect lawsuits concern allegations of property damage. While construction accidents and allegations of toxic exposure due to mold, asbestos and even vapors from Chinese drywall can lead to allegations of personal injury, this article will focus on property damage coverage.
In general, in the typical CGL policy, "property damage" is defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property.
b. Loss of use of tangible property that is not physically injured.
Although not defined, the term "physical injury" is generally construed to pertain to losses resulting from physical contact or physical linkage to the property at issue.
The term "tangible property" is understood to mean property (such as real estate) having physical substance apparent to the senses. Intangible economic losses do not constitute "property damage" within the meaning of a CGL policy.
Where trouble starts is when a plaintiff sues a contractor and alleges a defect which may not qualify as "property damage" under the CGL policy. For example, plaintiffs in construction cases often contend that drywall and structural hardware were not correctly installed, thereby rendering the structure less fire and structurally safe. Even though there has been no damage to the structure, the costs of repair associated with repairing these problems can be staggering. However, since the drywall and structural hardware is still intact, in other words, walls have not fallen down and the structure has not burned down (thus causing damage to other property), carriers generally take the position that no "property damage" within the meaning of a CGL policy has occurred.
Another problem is when the alleged defect has caused very little property damage (for instance, some cracked drywall), but the repair methodology includes repairing the structural components of the residence. Many carriers take the position that the cracked drywall may be a covered loss, but not the repair of the structural elements. This is due primarily to the so-called "work product" exclusion contained in many CGL insurance policies, typically at exclusion (o) or (l), depending on the form, and excludes coverage for:
Property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.
In the 1986 ISO form, exclusion (l) excludes coverage for property damage to "your work" arising out of it or any part of it and included in the products completed operations hazard...this exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. 4
To quote one California court: "The effect of the policy is to make the contractor stand for its own replacement and repair losses which the insurer takes the risk of injury to the property of others." Western Employers Insurance Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027, 1031. To quote another:
"If, for example, faulty workmanship in the framing or drywall led to rainwater leaking in and damaging a homeowner's furnishings, [the insured contractor] would be indemnified for the damage to the furnishings, but not for the cost of repairing or replacing the faulty workmanship." Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 349.
The ugly result could be that you, the contractor, could be found to have committed negligence, but
because the negligence has not led to property damage to something other than "your work", you may not be covered for the loss. 5
Understanding what is and is not a covered peril is extremely important. No liability insurance policy
covers everything. The best defense to surprise is to sit down with your insurance broker or insurance
attorney so that you can be armed with the knowledge of what your CGL insurance policy really covers.
- This article is not intended to provide legal advice.
- Many policies are different. The statements herein do not apply to every policy all the time.
- Not all insurers utilize ISO forms and some modify them. Read your own policy.
- If the work was performed by your subcontractor, this exclusion may not apply.
- Different carriers interpret these provisions differently. Also, different states interpret insurance provisions differently. Check with an expert in your state.