Damage to "Your work" exclusion on CGL policy

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Rob
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Damage to "Your work" exclusion on CGL policy

Post by Rob »

I thought this was interesting and thought it may be good for discussion. I think the "damage to your work" exclusion with respect to completed operations is probably one of the most misunderstood exclusions. Or maybe not, and maybe its just me and if that is the case maybe you can help me out here so I can better explain it to my customers. In one of my continuing education courses, it gives the following scenario:

GC Construction contracts to build a warehouse for ABC company. GC Construction does 30% of the work itself, and subcontracts the remaining 70%.

Loss: 1 year after completion, the warehouse is destroyed by fire and the investigation determines the cause of the fire to faulty wiring installed by GC Construction.

The warehouse structure is a total loss valued at $1M. The amount covered is $700,000 as this 70% was performed by subcontractors and is an exception to the "your work" exclusion. The 30% of the work performed by GC Construction is excluded.

First question: How do you explain why this is not covered?

Second question: Isn't it in a contractor's best interest then, from a risk management standpoint, to subcontract out as much as possible? If your answer is yes, then why do so many carriers shy away from contractors subbing out more than a certain percentage?
Rob
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

Any idea why 15 views and no comments?
Big Dog
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Re: Damage to "Your work" exclusion on CGL policy

Post by Big Dog »

Much depends upon the contract with the GC, and state laws. If the contract required the GC to warrent the workmanship for a set period of time, and if the contract were properly worded requiring GL coverage (in particular, Completed Operations) to be maintained for that period of time, then coverage would fall under the GC's coverages.

GC's are normally responsible for overseeing and guaranteeing the workmanship of all of their sub's. If a sub screws up, it's the GC's responsibility.

The second factor, state law, will have a definite bearing on who is responsible.

The key is making sure that the contract with the GC is properly worded, and that proper evidence of insurance coverages are in place.
Rob
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

Big Dog wrote:Much depends upon the contract with the GC, and state laws. If the contract required the GC to warrent the workmanship for a set period of time, and if the contract were properly worded requiring GL coverage (in particular, Completed Operations) to be maintained for that period of time, then coverage would fall under the GC's coverages.

GC's are normally responsible for overseeing and guaranteeing the workmanship of all of their sub's. If a sub screws up, it's the GC's responsibility.

The second factor, state law, will have a definite bearing on who is responsible.

The key is making sure that the contract with the GC is properly worded, and that proper evidence of insurance coverages are in place.
Hi Big Dog, thanks for responding. I understand what you are saying in terms of whether he is legally liable, however what I was saying is that the occurrence policy, according to the continuing education provider (a well respected institute, not sure If I can use their name since I used their example, although I did change names around), there is no coverage for the GC's portion of the work in THIS particular case due to the "damage to your work" exclusion.
simiinsuranceguy
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Re: Damage to "Your work" exclusion on CGL policy

Post by simiinsuranceguy »

As I have understood the exclusion, the GC's "work" would not be covered, but the damage that it did would. For example, if a plumber installs a pipe in your wall, and after the wall is closed up a small leak developes and damages the drywall, insulation etc., the damage property, (drywall, insulation, etc.) would be covered, but the cost to replace the pipe would not. That is the way it was explained to me in my ARM classes and various Underwriters have concurred. So, in this case, since the GC did not install just the wiring, any "work" that they did that was damaged by the fire would not be covered. If they just re-wired the warehouse, then the damage to the warehouse would be covered, not the cost to re-wire.
Rlevine
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rlevine »

The purpose of the exclusion is to prevent the carrier from being the contractor's warantee/guarantee that they will complete the job correctly.
I was taught the exclusion using a repair shop. They perform an oil change. The engine ceases and causes an accident. All the damages would be covered except for the new oil change.
Your GC example is tricky because the entire building could be defined as "your work" versus what they actually physically performed. Ask a claims rep from one of your carriers for an understanding from their point of view. It may help.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

simiinsuranceguy wrote:As I have understood the exclusion, the GC's "work" would not be covered, but the damage that it did would. For example, if a plumber installs a pipe in your wall, and after the wall is closed up a small leak developes and damages the drywall, insulation etc., the damage property, (drywall, insulation, etc.) would be covered, but the cost to replace the pipe would not. That is the way it was explained to me in my ARM classes and various Underwriters have concurred. So, in this case, since the GC did not install just the wiring, any "work" that they did that was damaged by the fire would not be covered. If they just re-wired the warehouse, then the damage to the warehouse would be covered, not the cost to re-wire.
Precisely, and that is how I've always understood the exclusion. However, the book is stating that 30% of the resultant damage to the building is not covered. This baffles me.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

Rlevine wrote:The purpose of the exclusion is to prevent the carrier from being the contractor's warantee/guarantee that they will complete the job correctly.
I was taught the exclusion using a repair shop. They perform an oil change. The engine ceases and causes an accident. All the damages would be covered except for the new oil change.
Your GC example is tricky because the entire building could be defined as "your work" versus what they actually physically performed. Ask a claims rep from one of your carriers for an understanding from their point of view. It may help.
Why would the building damage possibly be defined as "your work"?
etimer
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Re: Damage to "Your work" exclusion on CGL policy

Post by etimer »

Just a few thoughts on this one.

Doesn't the exclusion specifically apply only to liability arising out of the "products-completed operations hazard," which limits its application to completed work.

The exclusion does not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor. Coverage is preserved for damage to a subcontractors' work and damage caused by a subcontractor's work.

The only property damage to completed work that is not covered, therefore, is damage to the insured contractor's own work that is the result of that work.

I would think that the workmanship exclusion does narrow the scope of completed operations coverage, it does not render it useless.
Rob wrote:
simiinsuranceguy wrote:As I have understood the exclusion, the GC's "work" would not be covered, but the damage that it did would. For example, if a plumber installs a pipe in your wall, and after the wall is closed up a small leak developes and damages the drywall, insulation etc., the damage property, (drywall, insulation, etc.) would be covered, but the cost to replace the pipe would not. That is the way it was explained to me in my ARM classes and various Underwriters have concurred. So, in this case, since the GC did not install just the wiring, any "work" that they did that was damaged by the fire would not be covered. If they just re-wired the warehouse, then the damage to the warehouse would be covered, not the cost to re-wire.
Precisely, and that is how I've always understood the exclusion. However, the book is stating that 30% of the resultant damage to the building is not covered. This baffles me.
Rob
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

etimer wrote:Just a few thoughts on this one.

Doesn't the exclusion specifically apply only to liability arising out of the "products-completed operations hazard," which limits its application to completed work.

The exclusion does not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor. Coverage is preserved for damage to a subcontractors' work and damage caused by a subcontractor's work.

The only property damage to completed work that is not covered, therefore, is damage to the insured contractor's own work that is the result of that work.

I would think that the workmanship exclusion does narrow the scope of completed operations coverage, it does not render it useless.
Rob wrote:
simiinsuranceguy wrote:As I have understood the exclusion, the GC's "work" would not be covered, but the damage that it did would. For example, if a plumber installs a pipe in your wall, and after the wall is closed up a small leak developes and damages the drywall, insulation etc., the damage property, (drywall, insulation, etc.) would be covered, but the cost to replace the pipe would not. That is the way it was explained to me in my ARM classes and various Underwriters have concurred. So, in this case, since the GC did not install just the wiring, any "work" that they did that was damaged by the fire would not be covered. If they just re-wired the warehouse, then the damage to the warehouse would be covered, not the cost to re-wire.
Precisely, and that is how I've always understood the exclusion. However, the book is stating that 30% of the resultant damage to the building is not covered. This baffles me.
Correct, the exclusion applies to the "prod/comp ops" and the exclusion does not apply to the work performed by subs.

So if a contractor installs faulty wiring and a building burns down 1 year later, according to this source, the damage to the building is not covered. This still baffles me as to why. This doesn't seem like workmanship to me. Excluding replacement of the faulty wiring does make sense but excluding the resultant damage to the building doesn't make sense to me still.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Insismypassion »

Rob,

I, too, have always been taught the 70% paid and 30% not paid rule of thumb in a claim; but I think it is an incorrect interpretation of the policy language. In fact, the policy is actually rather ambiguous in regards to this coverage.

You have to combine two exclusions (and exceptions to the exclusions) and a definition to find the ambiguity.

Look at Exclusion J. - Damage to Property: This excludes "property damage" to
(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises; and
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

On the face it appears that any house or building constructed by a GC (regardless of how much is subed out) would be excluded. This would settle the issue up front; but there are two exceptions to this exclusionary wording that must be considered:
Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you. And
Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard".

This gives coverage back to the contractor that builds or has a building constructed. In fact, it specfically gives back coverage for "property damage" included in the "products-completed operations hazard." Now, no part of the structure is excluded from coverage if loss or damage occurs.

Move to the subject exclusion: l. Damage To Your Work. When you couple this exclusion with Exclusion J., the combination can be confusing, but the intent appears to be that the only damage excluded in your "for instance" case is the cost to rewire. The damage to the building is covered under the exception to the "Property Damage" exlusion.

If it excludes all work done by the contractor, there would be no real purpose for have products-completed operations coverage - exclude it and enjoy the premium savings.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

Insismypassion wrote:Rob,

I, too, have always been taught the 70% paid and 30% not paid rule of thumb in a claim; but I think it is an incorrect interpretation of the policy language. In fact, the policy is actually rather ambiguous in regards to this coverage.

You have to combine two exclusions (and exceptions to the exclusions) and a definition to find the ambiguity.

Look at Exclusion J. - Damage to Property: This excludes "property damage" to
(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises; and
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

On the face it appears that any house or building constructed by a GC (regardless of how much is subed out) would be excluded. This would settle the issue up front; but there are two exceptions to this exclusionary wording that must be considered:
Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you. And
Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard".

This gives coverage back to the contractor that builds or has a building constructed. In fact, it specfically gives back coverage for "property damage" included in the "products-completed operations hazard." Now, no part of the structure is excluded from coverage if loss or damage occurs.

Move to the subject exclusion: l. Damage To Your Work. When you couple this exclusion with Exclusion J., the combination can be confusing, but the intent appears to be that the only damage excluded in your "for instance" case is the cost to rewire. The damage to the building is covered under the exception to the "Property Damage" exlusion.

If it excludes all work done by the contractor, there would be no real purpose for have products-completed operations coverage - exclude it and enjoy the premium savings.
Ok so this is interesting. So far everyone agrees that the damage to the building in this "for instance" should be covered in full. However that is not what the book says and this "for instance" is not mine but the books. And the provider of the book is a well respected "Institute" of Risk Management.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Insismypassion »

Rob,

I may have missed it in the previous postings, but another argument I have is: what happens if the CG 22 94 (Exclusion - Damage to Work Performed by Subcontractors on Your Behalf) is attached.

The exception in the Your Work Exclusion is removed by attachment of this endorsement. This would mean that the insured GC would have very little in the way of completed operations coverage. At least, not the breath of coverage the premium charged warrants.

Let's say a subcontracted electician incorrectly wired the home rather than an employee of the GC; what would the electician's insurance carrier ultimately be required to pay if his actions caused the house (or building) to burn down? The cost to rebuild the building less the cost of wiring. He's the one that caused the damage, not the GC. Why should the GC's policy be any different if his work causes the damage? Not all of the GC's work caused the damage, just one part of it. I can accept excluding the part of the work that caused the loss, but not all work of the GC.

Also, let's not forget subrogation in this discussion. In most states, the GC has ultimate responsibility for the job during and after construction. If the building burns dow, the property carrier for the building owner if going to pay the claim; if it is found that it was a problem in construction means or methods, they will subrogate against the GC. The GC's insurer (hopefully) will pay giving the insurance carrier the right to subrogate against any party that may have caused the damage (a subcontractor).

As I mentioned earlier, there is ambiguity in the policy and ambiguity is usually found in favor of the individual or entity that didn't write the contract - the insured.

Don't misunderstand, I'm not saying that this exlusion is not routinely applied just as you presented it (I had a GC suffer the same denial, and explaining it to him was hard); I just think it has been historically taught and applied incorrectly.

I don't know of any court cases that can be applied to this, I'm sure there are some, though.
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Re: Damage to "Your work" exclusion on CGL policy

Post by Rob »

Insismypassion wrote:Rob,

I may have missed it in the previous postings, but another argument I have is: what happens if the CG 22 94 (Exclusion - Damage to Work Performed by Subcontractors on Your Behalf) is attached.

The exception in the Your Work Exclusion is removed by attachment of this endorsement. This would mean that the insured GC would have very little in the way of completed operations coverage. At least, not the breath of coverage the premium charged warrants.

Let's say a subcontracted electician incorrectly wired the home rather than an employee of the GC; what would the electician's insurance carrier ultimately be required to pay if his actions caused the house (or building) to burn down? The cost to rebuild the building less the cost of wiring. He's the one that caused the damage, not the GC. Why should the GC's policy be any different if his work causes the damage? Not all of the GC's work caused the damage, just one part of it. I can accept excluding the part of the work that caused the loss, but not all work of the GC.

Also, let's not forget subrogation in this discussion. In most states, the GC has ultimate responsibility for the job during and after construction. If the building burns dow, the property carrier for the building owner if going to pay the claim; if it is found that it was a problem in construction means or methods, they will subrogate against the GC. The GC's insurer (hopefully) will pay giving the insurance carrier the right to subrogate against any party that may have caused the damage (a subcontractor).

As I mentioned earlier, there is ambiguity in the policy and ambiguity is usually found in favor of the individual or entity that didn't write the contract - the insured.

Don't misunderstand, I'm not saying that this exlusion is not routinely applied just as you presented it (I had a GC suffer the same denial, and explaining it to him was hard); I just think it has been historically taught and applied incorrectly.

I don't know of any court cases that can be applied to this, I'm sure there are some, though.
I can imagine explaining to an insured after a loss that it would be hard. Mr. Jones, the building that burnt to the ground isn't covered fully because of an exclusion in the policy called "exclusion for damage to your work". I'm sure he would still not understand after explaining it because I still don't understand why it isn't covered. The building does not seem to be "your work".
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Re: Damage to "Your work" exclusion on CGL policy

Post by Insismypassion »

I agree; the building is not "Your Work." But that's my opinion. Sadly, it's been taught and applied incorrectly for too long to pull it back to a reasonable application of the exclusion.

Sadly, several national training institutes perpetuate this seemingly incorrect interpretation.

But I have always felt, "people are entitled to be wrong until they learn what's right."

Forgot to mention - this was a GREAT post you put out.
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