Contractors and the CGL Policy's "Your Product" and "Your Work" Exclusions
Dear Contractors: The wall you just built may not be covered by your insurance the way you think it is. This is because although the commercial general liability (CGL) policy may cover bodily injury or property damage to others resulting from your product or work, the policy specifically excludes damage to your property, product or work.
It is important for agents working with contractors to understand that the products and completed operations limit does not change what is covered under the policy. This limit is simply the bucket of money available to pay for occurrences arising out of the contractor’s products and completed operations. The CGL policy pays for certain damages caused by an occurrence that occur during the policy period. Coverage comes from the policy in force when the occurrence takes place; not necessarily from the policy in force when the work was done.
If the contractor’s property, product and work are excluded, what does the CGL policy cover for contractors?
Broadly speaking, the CGL policy is designed to cover bodily injury, property damage, or personal and advertising injury to others. If a contractor builds a wall and it falls on someone else’s car that would be property damage to others. Similarly, if the wall falls and injures a stranger walking down the street, that would be bodily injury to others. Both of these should be covered under the CGL policy. However, if the wall simply falls and the only damage is to the wall itself, then there is no property damage or bodily injury to others. The CGL policy specifically excludes: “J) that particular part of real property on which you or your subcontractor was performing operations, K) your product, and L) your work.”
What the CGL policy is intending to cover is not the defective product or work, but the damage resulting from the defective work. Courts call this damage “resulting damage.” Courts have held that the CGL policy coverage applies only to resulting damage caused by the defective work of the insured. Coverage does not apply to the cost incurred to repair and replace the contractor’s defective work. The risk of replacing or repairing defective materials or poor workmanship has been considered a commercial risk that is not passed onto a liability insurer. F&H Construction v. ITT Hartford Ins.Co. (2004) 188 Cal.App.4th 364, 372.
Imagine that a particularly bad painter is hired to paint all of the walls in a hotel. All of the walls need to be repainted at a cost of $100,000. The painter also regularly spilled paint, causing $100,000 in damage to the carpets. The hotel feels like it is owed $200,000 for its damages and files a claim against the painter’s CGL policy. Assuming that the contractor was not intentionally painting the carpet, there should be coverage for the $100,000 in damage to the carpets because this damage resulted from the contractor’s work on the walls. However, the $100,000 in damage to the walls will be excluded as the contractor’s product, work, or that particular part of property on which the contractor was performing operations.
Occurrence and Aggregate Limit for Products and Completed Operations
Some contractors (and insurance professionals) will argue that there must be coverage for the contractor’s product and completed operations because the policy has a specific occurrence and aggregate limit for products and completed operations. Limits show how much money is available to pay certain kinds of occurrences. These limits are subject to the policy’s insuring agreement and exclusions. Limits do not change the provisions on who, or what, is insured or excluded in the policy.
Too often I hear people in the contractors’ insurance industry talk about how the CGL policy will cover contractors for 10 years or that the CGL policy they are selling is a 10-year statute of limitations policy. To this, I suggest the following:
If an insurance agent tells you that you are covered in the future with your current occurrence policy, ask for this in writing along with a copy of the agent’s own professional liability insurance policy, because the agent’s professional liability policy may be the only policy that will provide you with future coverage.
The above statement is intended to make insurance agents feel uncomfortable and think about how they are presenting policies to their clients. Does the CGL policy say that it covers occurrences 10 years in the future? Of course not. Does the CGL policy say that it will cover contractors for any work that they do during the policy period up until the applicable state’s statute of limitations? No.
The CGL policy states that it will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” that is caused by an occurrence that occurs during the policy period.
If there is an occurrence during this policy year that arises out of work that the contractor has completed, then this year’s CGL policy will pay out of the products and completed operations limit. This is true even if the work was completed prior to this year’s policy period. Coverage is triggered and paid out of the products and completed operations limit if there was an occurrence that occurs during the policy period arising out of products or completed operations.
Imagine that a contractor has an occurrence policy for the year 2014. If there is an occurrence after 2014 arising out of work that the contractor completed in 2014, the first question that the 2014 insurance company will ask is whether the occurrence took place during 2014. The insurer is not asking when the contractor did the work. The insurance company is asking when the occurrence that caused the bodily injury or property damage took place. If there is no occurrence during the policy period in which the work was completed, then the policy in place when the work was completed has no duty to pay or defend.
The CGL policy provides coverage for bodily injury or property damage to others resulting from the contractor’s completed operations. It even has a designated limit for these kinds of occurrences. The contractor – and insurance professionals – just need to understand that 1) the limit does not remove the exclusions for the insured’s product or work, and 2) the limit does not change that the policy responds to occurrences that occur during a policy period; not work that takes place during a policy period.
Note: This article originally appeared in the September 22, 2014 issue of the Insurance Journal.