Anyone involved in handling construction property damage claims or actions is familiar with the standard ISO CGL exclusion entitled, “Damage to Your Work.” This exclusion, including the subcontractor exception, reads:
This insurance does not apply to:
l. “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
This exclusion is simple enough to apply in the usual claim in which the named insured is a contractor against whom a claim of damage is made regarding the insured’s own work. The exclusion eliminates coverage when property damage to the named insured’s own work is caused by work performed by the insured contractor after the work has been completed.
The standard ISO CGL definition of “your work” is that it means work or operations performed by the insured or on the insured’s behalf, including materials, parts, or equipment furnished in connection with the insured’s work. “Your product” means goods or products manufactured, sold, handled, distributed, or disposed of by the insured, including containers.
Complications arise when the named insured is a subcontractor hired by another contractor, and the named insured subcontractor is an additional insured of the contractor’s liability policy. In such a claim, the ramifications of the subcontractor exception to this exclusion can be confusing.
Even without consideration of the complications created by the additional insured coverage, pursuant to the Subcontractor Exception, the named insured has coverage for damage to work performed by a named insured contractor when it is caused by the work of the insured’s subcontractor. Similarly, if the insured’s subcontractor damages the subcontractor’s own work, the named insured contractor has coverage for this.
In claims where the named insured contractor is working on the project along with his subcontractor, if the named insured damages the work performed by the insured’s subcontractor, coverage is afforded for this damage. If the work performed by the insured’s subcontractor is damaged due to the work of yet another subcontractor on the job, the named insured has coverage for this, as well.
Based on the foregoing examples, it is important to read the subcontractor exception as stating two distinct concepts. Initially, the “your work” exclusion does not apply if the damage to the named insured’s work was caused by a subcontractor. Secondly, the exclusion does not apply if the work that was damaged was the work of a subcontractor. In other words, the net effect of the exclusion and the exception is to state that there is no coverage if the named insured contractor itself damages work performed by the named insured. Contrary to common belief, the “your work” exclusion does not exclude coverage for the cost of repairing any and all damage at a construction project other than “resultant damage” to other property.
Using Examples
In a claim involving a contractor that is an additional insured of his subcontractor’s CGL form policy, further analysis is required. This is especially true when the additional insured endorsement excludes “completed operations” coverage because it uses the standard “ongoing operations” language. Reviewing the above examples under this scenario may lead to the following conclusions.
Where work performed by the contractor is damaged by the work of his subcontractor after operations are completed, the contractor has coverage under his own policy. The contractor may not have coverage under the subcontractor’s policy because the coverage afforded to the contractor does not include “completed operations” by the subcontractor.
The subcontractor has coverage under his policy for the damage to the work of the contractor because the “your work” exclusion does not apply due to the exception to that exclusion. While the contractor is an additional insured of the subcontractor’s policy, he does not have the required “completed operations” coverage and, thus, the “other insurance” provision of his policy that made his coverage excess to that afforded by the subcontractor’s policy would not apply. The standard “other insurance” provision of a CGL policy states coverage to the named insured is “excess” over:
Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.” (Emphasis added.)
Under the next scenario where the subcontractor damages his own work, the contractor has coverage for this damage under his own policy due to the exception. The subcontractor would not have coverage under his own policy because of the application of the “your work” exclusion and the fact that the exception does not apply. As an additional insured of the subcontractor’s policy that does not afford him “completed operations” coverage, the contractor may not have coverage for this claim. In this claim, the only policy that affords coverage is the contractor’s policy.
Analyzing the third scenario again, the contractor would have coverage under his own policy for his work causing damage to the work by his subcontractor. The subcontractor should have coverage under his policy due to the exception to the “your work” exclusion. Again, the “excess other insurance” provision of the contractor’s policy probably would not apply because of the lack of coverage under the additional insured endorsement. Both policies would apply as primary coverage for the respective insureds for the same claim, conceivably sharing pro rata by limits.
Lastly, where the work by the subcontractor is damaged by yet another subcontractor working on the same project to the extent that the contractor is sued, his policy should afford him coverage because the “your work” exclusion does not apply. Coverage would apply under the subcontractor’s policy since he could not be said to have damaged his own work. Hopefully, there also would be coverage under a policy issued to the subcontractor who caused the damage. Again, the “other insurance” issues could be resolved by a sharing of the applicable coverages.
It also should be kept in mind that most states have recognized that if the contractor in the above examples is the general contractor on the project, the concept of “your work” includes all the work performed on the project by all the subcontractors. However, the “your work” exclusion and the exception do not strictly follow this concept.
Instead, the exception recognizes a division between the general contractor’s work and the work of the subcontractors. Otherwise, the exception would be meaningless because damage to any “work” at the project would be the work of the general contractor and, thus, excluded.
Another way of viewing the exception to the “your work” exclusion is to state that the exception distinguishes between an insured contractor’s liability for his own negligence in damaging his own work for which there is no coverage, and the insured contractor’s derivative liability for negligence by his subcontractor for which there is coverage. Put yet another way, the operation of the exception to the “your work” exclusion is that it provides coverage for negligence by a subcontractor who assumed the insured contractor’s liability and for which the insured contractor is derivatively liable.
As an example, a contractor usually hires a subcontractor pursuant to a written subcontract. The subcontract usually requires the subcontractor to defend and indemnify the hiring contractor for damage arising out of the work performed by the subcontractor for which the contractor is derivatively liable. If the subcontractor through his work causes damage to the work of other subcontractors for which the contractor is derivatively liable to the property owner, the contractor has coverage for this under his own policy due to the exception to the “your work” exclusion.
It is conceivable that a contractor’s own negligence could contribute to damage to the contractor’s own work along with the negligence of his subcontractor. However, at least one California case has held that the fact that the insured contractor’s work was a contributing cause of damage to his own work does not prevent coverage for damage to his work by subcontractors. The suggestion was made that an apportionment might be necessary to allocate the extent of liability caused by the insured contractor’s own negligence as compared with the negligence of a subcontractor who damaged his work. The purpose of allowing coverage to the contractor in such a mixed example is the recognition that the insured contractor may be derivatively liable where a subcontractor damages his work and the property owner sues him for that liability.
Finding Support
As a final note, in claims arising out of construction projects, the use of the word “work” in the “your work” sometimes can be over extended. While “work” is meant to include an insured’s physical labor and the materials he installs in a home or building, cases have held that it is improper to combine the exclusion for damage to an insured’s own product with the “your work” exclusion. Where the insured is a general contractor-developer of a large residential or commercial project, courts have rejected applying the exclusion for damage to the insured’s own product to exclude coverage for damage to any part of the project. The damages that are claimed are deemed to have been caused by the faulty services of constructing the building and not by the products that were installed.
Support for this analysis can be seen in the CGL form definitions of “your work” and “your product” referred to at the beginning of this article. “Your product” is defined to mean goods or products manufactured, sold, handled, distributed, or disposed of by the insured, including containers. “Your work” means work or operations performed by the insured or on the insured’s behalf, including materials, parts, or equipment furnished in connection with the insured’s work.
Based on these definitions, when an insured general contractor-developer has a commercial or residential project constructed, the entire building or structures cannot be considered the insured’s “own product” for the purposes of the exclusion for damage to the insured’s “own product.” Such a coverage determination would deprive the insured of the protection for which the insured paid a premium: the products-completed operations hazard coverage.