Commercial general liability (CGL) coverage for a general contractor is not guaranteed, even if property damage is all a subcontractor’s fault. Consider the following example: A general contractor builds a stadium for which a subcontractor builds the frame. After the project is complete, a wall collapses. An independent investigation reveals the subcontractor’s defective framing work caused the collapse. The owner sues the general contractor, and the general contractor tenders the claim to its CGL insurer. The insurer denies coverage. Is there coverage?
The typical CGL policy contains a “Your Work” exclusion. This exclusion precludes coverage for “property damage to Your Work arising out of it or any part of it and included in the Products-completed Operations Hazard.” In general, the Products-Completed Operations Hazard extends the CGL policy to property damage that occurs after the project is complete, such as, for example, building settlement. This exclusion then may be read to say that the policy will NOT respond if there is property damage to the Contractor’s work that arises out of that work or some part of it. On its face, the Your Work exclusion may bar coverage even if a subcontractor’s faulty work caused the property damage. A leaking drain on the 23d floor of a condominium tower that damages sheet rock for the 22 floors below is arguably NOT covered. Accordingly, many policies include a “subcontractor exception” which states that the Your Work 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.”
Although the subcontractor exception has rescued some faultless contractors by providing coverage, in a few cases, lower state courts have sometimes negated the exception by holding that a CGL policy does not cover faulty work in the first place because faulty workmanship cannot be an “accident” or “occurrence” under a CGL policy or because the faulty workmanship did not damage other property. At least one of these courts declined to reach the question of whether the subcontractor exception applied, because there had not been an “occurrence” (other than the alleged faulty workmanship which was not an “occurrence” in that court’s view). Without an “occurrence,” the “your work” exclusion never applied, and the subcontractor exception was essentially irrelevant to the analysis.
So what can a contractor do?
- Read your CGL policy, including endorsements and determine if your policy has the “your work” exclusion and the subcontractor exception to that exclusion.
- Recognize risks, and understand potential exposure arising from the “your work” exclusion.
- When tendering a claim to your insurer, evaluate the “occurrence” which caused the damages, the underlying cause of the “occurrence,” and the damages that the “occurrence” caused.
For more on the subcontractor exception, please view the “Filling the Gap: The Subcontractor Exception” presentation slides.