General Contractors: Make Sure you Have a Subcontractor Exception to Your Work Exclusion in Your CGL Policy
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Do you know what your CGL insurance policy covers? General contractors may expect that their CGL policy covers the cost to repair defective work, or other components of the project that were damaged by defective work. This may be one of the primary reasons a contractor purchases CGL insurance. However, this coverage may not exist. It depends on the language of the policy and endorsements. Of particular importance is the “your work” exclusion and the “subcontractor exception,” which were the subject of a recent Florida case. In J.B.D. Construction, Inc. v. Mid-Continent Casualty Company, 2014 U.S. App. LEXIS 13358 (11th Cir. July 11, 2014), the court denied coverage based on the “your work” exclusion. This blog looks first at the concept of “property damage” coverage and then examines how the holding of J.B.D. Construction impacts the breadth of property excluded from “property damage” coverage by the “your work” exclusion. Lastly, we examine how elimination of the “subcontractor exception” renders your insurance nearly useless in construction defect cases.
CGL insurance covers “property damage” that the insured becomes legally obligated to pay. Generally speaking, “property damage” does not include the cost of repairing or removing defective work. Id. at *14. However, the cost of repairing damage to other property caused by defective work generally does qualify for coverage. By way of example, consider a defective window that leaks and causes damage to drywall and wood framing. The cost of repairing the damaged drywall and wood framing may be covered as an insurance claim whereas the cost to replace the defective window may not be covered. The language of the policy must be examined to determine the extent of “property damage” that is covered. Standard CGL policies contain numerous exclusions from “property damage.” The topic of this blog is the “your work” exclusion.
Generally, a “your work” exclusion provides that the CGL policy does not apply to “property damage” to “your work.” There is no coverage to repair damage to “your work” caused by “your work.” Id. at *19-20. This begs the question: what is considered “your work.” Of primary importance to this question is whether the policy includes a “subcontractor exception.”
A “subcontractor exception” 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.” Id. at *19. In J.B.D. Construction, the base policy included the “subcontractor exception.” However, this exception was eliminated by Endorsement CG 22 94 101 01. Therefore, the contractor’s insurance did not cover claims for damages to or caused by work performed by subcontractors.
The court went on to conclude that there was no coverage for the entire project. The entire project was completed by subcontractors. Any part of the project damaged by a construction defect was a part completed by a subcontractor (or self-performed by the contractor).
In J.B.D. Construction, a window leak caused damage to drywall and other building components. There was no coverage to repair the drywall and building components because the “subcontractor exception” was eliminated. The window sub’s work caused damage to the drywall sub’s work. Without the “subcontractor exception” in the policy, both of these subcontracted work scopes were considered “your work.” Damage to “your work” is not covered. If the “subcontractor exception” had not been eliminated, J.B.D. may have had coverage to repair the damaged drywall and other building components.
The takeaway from this case is simple. Review your insurance policy. If the “subcontractor exception” has been eliminated (or is not in the policy), you have no coverage for construction defects causing property damage to the project. You should consider calling your insurance agent immediately.