|The CGL “Your Work” Exclusion & Subcontractors
Here are three questions received by our “Ask an Expert” service recently:
Claim #1: “A general contractor builds a home. He uses subs, but only for some particular items such as the HVAC and electrical. The general’s employees install a dryer vent. The problem is that it doesn’t go all the way through to the outside. The moisture gets trapped in the walls which leads to the subflooring rotting out. Other problems also develop due to the moisture being circulated by the HVAC. Citing exclusion L., the company has denied coverage for any property damage. However, they are willing to pay for bodily injury to the occupant that has become ill due to the excess moisture which has caused excessive mold to grow in the house. The agents question is are they correct to deny the property damage?”
Claim #2: “A friend of mine had a house built by a general contractor who subcontracted flooring out to a sub. The job turned out extremely bad, with the flooring coming up and not holding down. The subcontractor has not responded. My friend does not want to sue the general contractor. Can he go directly to the sub, and if so do we have a products and/or completed operations claim?”
Claim #3: “The insured is a contractor who built a house for the claimant. The claim occurred after the insured was finished building the house and the claimant had moved in. Shortly (several weeks) after moving in, the claimant turned on the washing machine. During construction, a nail had accidentally punctured the water pipe leading to the washing machine, which in turn caused water damage to the kitchen floor and personal property of the claimants.
“The floor that was damaged was installed by the insured. The water pipe which was punctured was the work of another contractor hired by the claimant to do the plumbing. The damage was done when the insured was putting up the baseboard woodwork not while working on the floor.
“The insurer has denied coverage for the damaged floor due to the fact that the damage occurred after the home was complete and because the damage was the insured’s own work. They did provide coverage for the damaged personal property.
“I understand the insurer’s point of view with regard to denying coverage for the contractor’s own work if the damage was done while they were working on the floor. However, the damage was done while working on the baseboard woodwork. How can a contractor that builds a house from top to bottom protect himself? Any damage done would be to his own work.
What I would like to know is if there is any coverage for the damaged floor? Anything you can tell me to help me understand would be appreciated.”
Each of these claims centers on Exclusion l. of the CGL policy, a policy provision that is often misunderstood. First, let’s look at the exclusion in general, then at each claim in particular.
Here’s what the exclusion says:
l. Damage To Your Work “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.
“Your work” is defined to include “Work or operations performed by you or on your behalf….” Note that the exclusion applies only to products and completed operations claims, as defined in the policy…Exclusion j. would be controlling if the claim involved an ongoing operation.
The exception to this exclusion is important. What it does is essentially limit the exclusion to work of the insured damaged by operations of the insured. In other words, the exclusion only applies to work that meets BOTH of the following criteria:
1. The work was performed by the named insured, AND
2. The work was damaged by work performed by the named insured.
In other words, the following losses WOULD be covered:
• The work of a subcontractor causes damage to the named insured general contractor’s work or the subcontractor’s own work. • The named insured general contractor’s work (or that of a different subcontractor) causes damage to the subcontractor’s work.
With that in mind, let’s examine each of the three claims above, then take a quick look at two relatively new ISO endorsements.
Claim #1: From the scenario, it looks like the named insured general contractor’s employees’ negligence resulted in the damage. So, any damage TO work performed by another subcontractor would be covered by the general’s CGL if the general caused the damage, there does not appear to be any coverage. The bodily injury loss, as the carrier indicates, is covered…luckily, they didn’t cite the pollution exclusion!
Claim #2: This, too, is a completed operations claim and your friend can certainly go after the sub. However, it is unlikely that the sub will have any insurance coverage since the standard general liability policy excludes coverage for “your work” and both conditions 1 & 2 above are met. At best, all he’ll be able to do is get the sub to redo the work. At worst, he’ll just incur a bunch of legal fees and the sub won’t fix the poor workmanship due to various reasons, including no money.
Your friend can file a claim against the GC. While the GC’s general liability policy also excludes “your work,” it makes an exception for the GC’s liability for work done by a subcontractor. The GC’s policy would pay (IF he’s legally liable for the occurrence) and, if liable, his insurance company could subrogate against the sub in an attempt to recover the money they paid on the GC’s behalf to you.
Claim #3: Apply the rules (1 & 2) above to your claim and it’s not hard to determine whether the policy responds. When the contractor actually has damage to his own work, there’s no way in the ISO program to provide coverage for that. A CGL “gap” policy that picks up these kinds of property damage exclusions is needed. One such product that we’re aware of is provided by U.S. Risk out of Dallas, Texas…check out: www.cglgappolicy.com (Note: We understand at the time of publication, that this market is currently not available). One of our faculty members adds the following: “This is one of the most difficult things in insurance and, at times, totally illogical! If a GC is a ‘paper GC,’ he/she/it practically has coverage (if liable) for everything. If, however, he/she/it does all the work, they are in trouble. With the ‘new market,’ ISO has introduced new exclusions that are putting back the phrase ‘on behalf of’ to the PD to the work exclusion, so many GCs are also going to see their coverage restricted upon renewal this year. “I have always felt the best way to handle this whole thing is to have a $5,000 (minimum) PD deductible. Small losses are just not going to be covered because of the deductible but, after that, they will be IF there is an occurrence, of course, and IF the insured is liable,,,the classic workmanship loss is just not covered by the Insuring Agreement (insurance is not a performance bond). This is a better approach and so much easier to explain. Many carriers were willing to do this (not on BOPs, however) and some even had endorsements in this area, but they have gone (or are going) away with the new market.”
ISO has introduced two new endorsements that affect this exposure. One is the CG 22 94 10 01, Exclusion – Damage To Work Performed By Subcontractors On Your Behalf. This endorsement simply eliminates the exception, making the exclusion absolute. The second endorsement is the CG 22 95 10 01, Exclusion – Damage To Work Performed By Subcontractors On Your Behalf – Designated Sites Or Operations, which applies only to specific sites or projects.
IRMI has a couple of good articles on their web site that address this issue:
P.S. If you think these free IRMI articles are good, you should check out their product line at www.irmi.com.