CGL Extends Coverage for Injury Arising from Defective Construction

[Guest guest]

CGL Extends Coverage for Injury Arising from Defective Construction

Insurance Journal - San Diego,CA*

By J. Boggs, CPCU, ARM

May 28, 2008

http://www.insurancejournal.com/news/national/2008/05/28/90368.htm

Property damage resulting from defective construction is

unquestionably excluded in the commercial general liability policy;

but what about bodily injury? And is injury or damage caused by the

growth and proliferation of mold covered because it is not excluded

by the unendorsed CGL?

Advertisement

InsuranceJournal.com recently featured a story about a central-Ohio

family whose home was contaminated with toxic mold, making it unfit

for continued occupancy. In early May, the judge hearing the case

concluded that defective construction practices lead directly to the

growth of the injurious mold and handed down a $3 million judgment

against the contractor who built the home.

Prompted by this verdict, the availability of insurance coverage to

pay for injury or damage resulting from defective construction

and/or mold was explored on this same Website. In last week's first

of three commentaries, the four commercial general liability

coverage triggers were documented, and three were specifically

applied to construction defect and mold claims.

The final coverage trigger question was left unanswered. Open for

discussion and debate among readers this past week has been the

question: was the injury or damage the result of a specific

exclusion, excluded action or an excluded cause? Although three of

the four requirements for coverage have been hypothetically

satisfied, all four must be met before coverage exists. If the

fourth trigger question is answered " yes,' then no coverage is

available for injury.

This article will focus solely on defective construction and leave

the question of coverage for damage caused by mold to the third

issue.

Exclusions Applicable to Defective Construction

Poor and shoddy workmanship does not, of itself, qualify as

an " occurrence. " Previously discussed was the coverage trigger

requirement that there must be an incident exploiting the defective

construction for there to be any chance of coverage. Two standard

exclusions in ISO's commercial general liability policy leave little

doubt as to the insurance industry's intent to exclude coverage for

any property damage claims resulting from defective construction

even if an incident occurs:

• Damage to Impaired Property or Property not Physically Impaired;

and

• Damage to " Your Work. "

Damage to Impaired Property or Property not Physically Impaired: As

the name suggests this CGL exclusion removes any coverage for

property damage when such damage arises out of a defective,

deficient, inadequate or dangerous condition of the insured's work

( " Your work " ). Further, this exclusion states that no coverage is

provided for " impaired property " arising out of the same listed

conditions.

" Impaired property " is property that has not been damaged, but which

cannot be used or is made less useful because of the insured's poor

workmanship. This definition applies when the work is known, or only

thought, to be defective, deficient, inadequate or dangerous. The

definition goes on to state that property is considered impaired if

it can be fixed or repaired by the removal and replacement of the

insured's work.

Failing to attach the structure to the foundation, improper

application of the waterproofing and installation of the wrong size

windows individually qualify as defective, deficient and inadequate

conditions - even before any damage occurs. These conditions in the

subject case lead to damage and to the unhealthy conditions within

the house.

Even if the structure itself were not damaged, the house would still

qualify as " impaired property " because it became useless until it

can be repaired; further it is now subject to diminished value (made

less useful) both resulting from the contractor's work.

Exception wording in this exclusion does not preclude all claims for

property damage resulting from defective construction: " This

exclusion does not apply to the loss of use of other property

arising out of sudden and accidental physical injury to " your

product " or " your work " after it has been put to its intended use. "

A second exclusion is necessary to assure that the contractor does

not get paid for ANY property damage to his work caused by the poor

quality work itself once it has been put to its intended use

(a " completed operation " ).

Damage to Your Work: Property damage to the contractor's work

directly arising from or attributable to the work performed by the

contractor is excluded. The breadth of the definition of " Your Work "

within this exclusion is often overstated and leads to its

misapplication, but the full range of such misapplication is outside

the scope of this article. In essence, insurance is not intended to

be a warranty and this exclusion responds to keep the policy from

being used as such.

Installing the wrong size windows can be a good example of the

application of this exclusion. The windows leak causing them to

warp - they warp because they leak because they are the wrong size.

See the circle of events? The windows are damaged due to the poor

workmanship of the contractor. Had the contractor just done adequate

work, the windows would not have leaked and would not have been

damaged. There is an unbroken chain of events from the poor

workmanship to the damage; no extraordinary or external incident was

required or occurred causing the damage.

Growth of the mold in the subject case can likewise be attributed to

the contractor's work, or lack thereof. Individually, the various

defective conditions may not have resulted in the development and

ultimate growth of the toxic mold. But collectively, all misdeeds

combined to allow the growth of the mold ultimately damaging the

property. Would the cost to tear out and replace the damage be

covered by the CGL? No, because the damage to the work was caused by

the original work; there is an unbroken chain of events that began

with poor construction habits and ended in damage - with no

intervening incidents. The damage to the work arose from the work

itself.

If the work were done by a subcontractor, an exception to the " Your

Work " exclusion would make coverage available. This exception exists

because the carrier has a theoretical means of subrogation by which

they can recover any payment made to the insured contractor

necessary to fix or repair the damage caused by the poor workmanship.

Insurance carriers are undertaking to remove this exception by

attachment of the CG 22 94 (Exclusion - Damage to Work by

Subcontractors). Its use is growing because of the volatility of the

subcontractor market, especially in residential construction.

Subcontractors come in and go out of business so quickly that

insurers are concerned that there will be no one against whom they

can subrogate in cases of poor workmanship and defecient

construction, thus they remove the exception; the result is that the

entire structure becomes the general contractor's work - effectively

excluding coverage for all property damage resulting from defective

construction.

The effect of these two exclusions and the exclusionary endorsement -

no property damage coverage exists for claims arising from

defective construction. But notice, these exclusions only apply to

property damage, nothing in any of these exclude bodily injury.

Defective Construction & Bodily Injury

None of the exclusions detailed thus far remove coverage for bodily

injury resulting from a contractor's poor work habits. If there is

no exclusion within the commercial general liability policy or added

by endorsement, there is coverage. Bodily injury to a third party

resulting from defective construction techniques is covered by the

CGL.

For example, a contractor incorrectly installs a large chandelier,

it falls landing on the homeowner. The cost to repair or replace the

chandelier is obviously excluded by the exclusionary wording above,

but the cost to pay for the injury suffered by the homeowner is not

excluded.

Defective construction practices in the Ohio case lead to toxic mold

growth; the mold caused breathing problems with the potential for

death (thus the term " toxic " ), and made the house unlivable. Just

like the above example, bodily injury would be covered by the

commercial general liability policy, provided there were no

contravening endorsements, even though the cost to repair or replace

the mold-damaged property is excluded.

There are only a few endorsements that remove coverage for bodily

injury and relate to construction and possibly defective

construction.

Conclusion

Property damage resulting from defective construction is excluded,

but bodily injury is still covered. Traditional insurance is not

intended to cover an operation's business risk, and choosing to

allow defective construction methods is a business risk. The

unintended bodily injury resulting from such choices is covered by

insurance.

Still the question of coverage for damage caused by mold apart from

any defective construction issues remains to be answered. The next

installment in this series will apply the fourth coverage trigger to

mold claims.