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Commercial General Liability - Part 1: CONSTRUCTION DEFECT EXCLUSION

The building increases of the late 80’s have sometimes resulted in an increase of construction defect and workmanship litigation.

Insurance coverage became an important consideration for all contractors. This became even more relevant when contractors began to subcontract to specialized trades. As the boom increased into the 90’s, subcontracting became a common practice, while the general contractor maintained more of a supervisory role. General contractors saw the opportunity to capitalize on the booming industry by having various trades working simultaneously at several projects. This evolution meant that the general contractor became the focus in court. General contractors could not directly control the actual work product in progress of all of the various aspects of the project at one time.

Prior to the 80’s, a Commercial General Liability (CGL) policy protected the general contractor and excluded the subcontractor’s workmanship. However, the insurance industry evolved to specifically address the risks and exposures related to the new trends.

During this era, the insurance industry created a new endorsement called “Broad Form Property Damage Endorsement” (BFPD). It deleted several parts of the business risk exclusions and restricted other areas. The net effect of the new limiting language was to extend coverage on a limited basis for defective work of subcontractors while limiting other areas. This eventually became the CGL as we know it today.

This revision became known as the “Work Product Exclusion” where “products-completed operations” coverage is included in the policy. The workmanship completed by the general contractor’s own employees is not covered. The workmanship of the subcontractors hired by the general contractor is covered.

IRMI tells us “In addition to changes in the CGL coverage form itself, the 2001 ISO revision also includes a number of new standard endorsements that can be used to modify coverage in various ways.” Among the most important of these are the following.

Damage to Work Performed by Subcontractors on Your Behalf—Two new optional endorsements (CG 22 94 and CG 22 95) eliminate coverage for damage to the named insured's work when the damaged work or the work out of which the damage arises was performed by a subcontractor. CG 22 94 imposes this additional exclusion absolutely; CG 22 95 allows it to be targeted to specific work sites or operations.”

Even if property damage associated with defective construction is found to fall within the scope of the general contractor’s CGL policy, coverage may still be defeated by the operation of one or more exclusions within the policy. The standard-form CGL policies typically contain exclusion for property damage to “that particular part of real property” on which the general contractor or its subcontractors “are performing operations.”

There is another question that has become a topic in litigation. The policy covers claims for “property damage” that are caused by an “occurrence” as those terms are defined in the policy.

Look for Part II defining “Occurrence” and “Claims Made” where it relates to construction defect.

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