In From the Outfield: Coverage Defenses Outside the Policy Language in Defective Work Claims

November 13, 2000

Introduction
Construction is a dangerous business, and as a result, significant risks are sought to be transferred among the numerous parties on any construction project. Some risk transfer devices involve a single contract or agreement between two parties, such as an indemnity agreement. The majority of risks, even those transferred pursuant to an indemnification agreement, are usually supported by insurance, thus ultimately transferring the risk to a third party, an insurer in the business of bearing and spreading that risk.
 
The major means to insure property exposures on a construction site is through first party property insurance, that is, builders risk coverage. On the other hand, the major source of insurance protection for third party claims for any insured business, including owners, developers and contractors, is the commercial general liability (CGL) policy. In many instances, the line between builders risk and CGL coverage blurs, in that a CGL policy may provide coverage for a contractor, particularly for defective work, which either coincides with, or is excess of coverage provided under the builders risk policy. Moreover, even in the event of a recovery under the builders risk policy, the carrier may seek recovery from the responsible contractor or subcontractor in the absence of a waiver of subrogation in the contract documents or where they are not insured on the builders risk policy.
 
Due to the blurring between the property damage coverage under CGL policies and first party property insurance, exclusions relating to the work of contractors are included in CGL policies. This approach may work well with many types of insureds, but contractors and other service providers face property damage liability exposures which are not easily or cost-effectively covered under standard property or inland marine policies. These exposures lend themselves to coverage under liability insurance. For the most part, these types of exposures involve fortuitous occurrences, for example, where an electrician's faulty wiring of an elevator may burn down an entire building.
 
Nowhere is the distinction between first property coverage and liability coverage more blurred than in the area of defective work. Since builders risk policies, to a large extent, exclude coverage for defective work, owners, developers and contractors typically look to the CGL policy for coverage for this exposure. This exposure often dovetails with the insured's so-called "business risks," that is, those risks which are apparently under the control of the insured and which are, therefore, not regarded as fortuitous in nature. Understandably, carriers are hesitant to insure these types of risks, but it is often extremely difficult to distinguish between uninsurable business risks and accidental property damage covered under a CGL policy. These claims give insurers and insureds fits and the insurance industry has struggled for decades to draft policy language to accomplish this goal.
 
The current CGL policy form was promulgated in 1986 and, for the most part, incorporated the scope of coverage previously provided to a contractor by virtue of an endorsement commonly referred to as the "Broad Form Property Damage Endorsement" ("BFPD endorsement") which was attached to the prior policy form, revised as of 1973. While CGL coverage for most contractors has been written on the 1986 form since that form was approved by regulators, certain long-tail or delayed injury claims may still involve policies written on the 1973, or even older, forms. Moreover, in some states current CGL coverage written by surplus lines or non-admitted carriers may still be on the 1973 form.

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