We get a lot of calls from contractors asking about whether they have coverage under their Commercial General Liability insurance for a construction defect claim. The short answer is always–Maybe. An assessment of the claim requires a review of your policy and, equally important, which state’s law will interpret the claim.
The first question, and often times only question, to be answered is whether the damage caused by the construction defect will constitute an accidental “occurrence”. A number of courts have determined that defective or faulty workmanship can constitute an occurrence under a CGL policy because defective construction work that occurs unintentionally is a fortuitous “accident” or the defective work is an accidental occurrence if the defective work causes damage to something other than the work itself. Some courts, however, hold that construction defect claims never give rise to an accidental occurrence and therefore there is never coverage.
What does the court review?
CGL policies have two provisions that factor into a court’s analysis. First, is the grant of coverage and the second is the exclusions. The grant provides insurance coverage up to the established policy limits for amounts the policy holder becomes obligated to pay because of property damage. Courts finding coverage, have ruled that there was an “accidental” occurrence when a general contractor or subcontractor caused property damage accidentally, as opposed to intentionally causing property damage.
If the court determines that there was an occurrence, the court will then look to the exclusions. The most popular exclusion is the “Your Work” exclusion. This exclusion does what it says–it bars coverage for the cost of repairs caused by the work of the insured. There is, however, an exception to this exclusion that allows for coverage for property damage arising out of the work of subcontractors. This is an important exception for general contractors in finding coverage for a subcontractor’s defective work.
What does this mean for you?
If you are a subcontractor, you may have coverage under your CGL policy if your work causes damage to the project, outside of your scope of work. For general contractors, you may have coverage under the subcontractor’s CGL policy, as an additional insured, when the claim alleges that the subcontractor’s work caused damage to areas outside of the subcontractor’s scope of work.
Take Away: If you are still confused by this brief coverage analysis, you are not alone. If you need help interpreting your insurance policies, we recommend that you hire experienced construction attorneys to assist with experience in construction insurance coverage.