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Practical Tips to Have Your Commercial General Liability Policy Cover Claims in Defect LitigationBruce E. Loren, Esq. and Kyle W. Ohlenschlaeger, Esq. | Jan 07 2017

Contractors often rely upon their commercial general liability insurance (CGL) policy to protect them from lawsuits filed by owners claiming damages caused by construction defects. When the insurance company accepts coverage under the CGL policy, it covers the contractor’s attorneys’ fees and the amount of any settlement or judgment. But, if the company rejects coverage, it is important to understand the CGL policy, its coverages, and its exclusions. This article examines a few common reasons a defect claim is rejected by an insurance company and the issues that you should discuss with your agent before insurance renewal.

Defects are Only Covered if They are Neither Expected Nor Intended

CGL policies only cover damage caused by an “occurrence,” which means an accident. Florida courts have interpreted the term “accident” to mean something that was neither expected nor intended by the contractor. Because contractors rarely expect or intend for construction defects to occur, claims can and often do constitute an “occurrence” under a CGL policy in Florida. However, construction defects will not be considered an “occurrence” if the contractor’s work varies from generally accepted standards of construction or varies from the approved plans without permission.

Practical Tips to Retain Insurance Coverage:

So long as you follow generally accepted standards and follow the approved plans, the insurance company should not reject coverage on this ground. Florida law recognizes that mistakes happen, and requires the insurance company to cover them.

However, if an owner or GC requests that you perform the work in a manner that you believe will result in a defect, you should refuse, if possible. Alternatively, require the GC and/or the owner to indemnify you from any damage.This way, if the work turns out to be defective and your insurance company denies coverage because you knowingly performed defective work, you will have a defense and another party to protect you. If the GC and/or owner refuses to indemnify you, then (at a minimum) confirm in writing and your objection. As a final caution, even if the owner or GC agrees to indemnify you, contractors should never agree to perform any work that would violate a building code or create an inherently dangerous or hazardous situation, as the law does not allow contractors to avoid these duties and such damages will not be covered under insurance.

Claims for Repair and Replacement of Defective Work are Not Covered

Another reason why insurance companies deny claims is because CGL policies only cover “property damage” other than the repair and replacement of the defective work itself. In fact, one of the most common reasons insurance companies decline coverage in defect litigation is because the lawsuit fails to allege that the faulty construction damaged something other than the defective work.

For example, if an owner sues a contractor to replace a defectively installed electrical system, the lawsuit would not be covered by the contractor’s CGL policy. However, if the defectively installed electrical system causes a fire, the resulting damage would likely be covered by the CGL policy and the insurance company would be required to cover both the contractor’s defense and any damages. Likewise, the cost to repair a defectively installed window will not be covered, but if the owner also claims that the defective window “resulted in” or “caused” other damage (such as water damage), then the claim will likely be covered.

Practical Tips to Retain Insurance Coverage:

There is unfortunately no way around this exclusion to your policy’s coverage. Contractors must accept that the repair and replacement of defective work will always be the contractor’s responsibility alone. However, if it appears that the GC and/or the owner will make a claim, we often encourage them to allege resulting damage to “other property” if such other damage exists.That will invoke the insurance company’s obligation to defend the claim and pay for damages resulting from the defective work. Most often, the owner or claimant is hoping for insurance coverage and will cooperate.

Damages to a Contractor’s Work Caused by a Subcontractor's Defects May be Covered

If a general contractor’s defective work causes damage to its own non-defective work, then CGL policy will not cover the litigation costs or resulting damages. However, if one of the general contractor’s subcontractor’s defective work causes damage to other work, then the damage will be covered if the general contractor’s GCL policy includes a “subcontractor exception” (which protects the general contractor’s project from damages caused by a subcontractor’s defective work). For example, if a general contractor properly constructs a home, but its subcontractor installs a defective plumbing system that causing a flood and results in damage to the general contractor’s work, then the “subcontractor exception” should apply and cover the damage.

Unfortunately, not all insurance companies offer a policy containing the subcontractor exception. Even if the insurance company offers the exception, many general contractors, in an effort to lower policy premiums, choose to obtain a policy with an endorsement (a document that amends the policy to either add, limit, or delete coverage) that chooses not to include the subcontractor exception.

Practical Tips to Retain Insurance Coverage:

If the increased premium is acceptable, general contractors should work with their insurance broker to make sure their CGL policy includes coverage for damages caused by its subcontractor’s defects. Alternatively, the general contractor should be diligent to ensure that all of its current and past subcontractors have sufficient insurance to cover claims caused by their defective work, that they identify the general contractor as an additional insured, and that the subcontractor’s policy does not lapse.

Damages Caused by Work That Predates the Policy May be Excluded From Coverage

A more recently-used endorsement is the “Continuous or Progressive Injury Damage” Exclusion. Among other things, this endorsement removes coverage for damages caused by defects that predate the policy. Most people are familiar with (and avoid) the “known prior claims or damage” exclusion, which bars coverage for damage or injury that began before the policy period began if the policyholder knew or should have known about it. However, the continuous or progressive injury damage exclusion is an exclusion that eliminates coverage for property damage and bodily injury that began before the policy in question became effective but continues into its coverage period. It is similar to the known prior claims or damage exclusion, except the policyholder’s knowledge of the damage or injury is not required.

If each of a policyholder’s policies in the series of its policies in effect when an instance of damage occurred contains a continuous or progressive injury or damage exclusion, then only one policy—the one in effect when the property damage first started—should cover it. By contrast, with a series of standard CGL policies lacking the exclusion, all of those consecutive policies would cover the liability under a continuous trigger analysis. That will usually make the full policy limits of all those policies available. A series of four $1 million policies could cover as much as a $4 million liability, instead of a $1 million in coverage when the continuous or progressive injury or damage exclusion is used.

Practical Tips to Retain Insurance Coverage:

Including this endorsement in a contractor’s CGL policy is extremely dangerous. Discuss this item specifically with your insurance agent and weigh the cost-benefit of having removing this endorsement. Alternatively, if you are a general contractor, require that your subcontractors obtain insurance for prior claims (even though this may be burdensome to enforce).

Damages Related to Defects to Condominium Construction May be Excluded from Coverage

Condominium exclusions are common in CGL policies. The extent of these exclusions can vary widely, and is generally selected by the contractor based upon its needs and the impact the exclusion has on its premium. In some cases, all condominium construction will be excluded from coverage. Less restrictive exclusions cover only damages resulting from defective work performed within a unit, and will exclude coverage for damages resulting from defective work performed on the exterior of the condominium or on behalf of the condominium association. Finally, even less restrictive exclusions cover damages resulting from any interior work, whether performed on behalf of a unit owner or the condominium association.

Practical Tips to Retain Insurance Coverage:

Identify the amount and type of condominium construction your company performs prior to selecting your insurance policy. It may make sense for contractors who perform no condominium related work to exclude coverage for condominium construction, as it can help keep premiums down. On the other hand, contractors who perform condominium related work, or have done so in the past, should ensure that they do not exclude their work from coverage.

Conclusion

Coverage under a CGL policy for construction defects is generally limited to lawsuits where the owner alleges some property damage or damage that was the resulting cause of some defective work.

It is important to work closely with a trusted insurance agent to identify your needs and make sure that they are not excluded from the insurance company’s coverage obligations. We can recommend trusted insurance agents who specialize in construction. If your insurance company declines coverage in a construction defect case, we encourage you to contact your construction attorney to assess whether the denial was proper and, if necessary, defend against defect litigation not covered by your CGL policy.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701