(May 2011)

INTRODUCTION

Contractors insured under the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Forms may question the need to pay the additional premium charge for products/completed operations coverage when contractors' work appears to be excluded. There must be some coverage under the products/completed operations hazard because there is a premium charge for it.

The reason for this apparent premium and coverage dilemma is that the CGL Coverage Forms automatically insure all premises and operations hazards and products/completed operations hazards. Coverage automatically applies unless the products/completed operations hazard is specifically excluded by endorsement.

APPLICABLE EXCLUSIONS

The ISO CGL Coverage Forms have three exclusions that must be examined in order to understand the coverage provided as reflected by the premium charged. These are found in Section I–Coverages, Coverage A–Bodily Injury And Property Damage Liability, 2. Exclusions. The specific exclusions are:

• j. Damage To Property

• k. Damage To Your Product

• l. Damage To Your Work

DEFINITIONS

Two definitions must be examined to properly evaluate the issue.

16. Products/completed operations hazard

This includes all bodily injury and property damage that occurs away from the named insured's owned or rented premises that results from the named insured's product or work. It does not include those products still in the named insured's physical possession, work not yet completed, or work that has been abandoned.

Work is considered completed when the work called for in the named insured's contract has been completed. Work at one site that has been completed is a completed operation even if the contract calls for work at more than one site. In addition, a completed operation includes the part of work done at a site that is put to its intended use by any party other than a contractor or subcontractor still working on the same project. Work is considered completed, even if it may still need service, maintenance, correction, repair, or replacement.

The products/completed operations hazard does not include bodily injury and property damage that arises out of transporting property in most cases, the existence of tools, uninstalled equipment, abandoned or unused materials, or products or operations in a classification that requires products/completed operations be subject to the General Aggregate Limit.

22. Your work

This means work or operations the named insured performs, or that others perform on its behalf. It is also materials, parts, and equipment furnished in conjunction with such work or operations. It includes warranties or representations concerning the fitness, quality, durability, performance, or use of the named insured's work, and providing or failing to provide warnings or instructions.

BODILY INJURY LIABILITY COVERAGE

The exclusions examined are all property damage liability exclusions. There are no bodily injury exclusions that specifically apply to contractors and this is one important reason to have coverage for the products/completed operations hazard. This coverage is important when a lawsuit involves a claimant who alleges illness or injury. For example, a bodily injury claim could include illness that results from inhaling fumes from paints, heating units, insulation, and building materials. Coverage would also apply to injury that results from collapse of a building or structure under construction.

Exclusions

j. Damage To Property

Subparagraph (5) of this exclusion states that coverage does not apply to property damage to the specific part of real property being worked on, or having operations performed by, the named insured or any contractor or subcontractor working directly or indirectly on its behalf if the property damage arises out of that work or those operations.

Note: The portions of property attached or adjacent to such property are treated differently.

Example: We Build Houses is building a porch attaching to a dwelling. It accidentally starts a fire that burns down the entire structure as well as several other adjacent structures. In many jurisdictions, the damage to the porch is excluded but the rest of the damage is covered. Based on the coverage form's language, courts in many states have ruled that if We Build constructs only a part of or an addition to an existing building, only the part being directly worked on or having operations performed on it is excluded.

An entirely different scenario develops when a contractor builds an entire building or structure as opposed to an addition to an existing building.

Example: A dwelling under construction that was nearly completed needed some welding work done on the kitchen plumbing. The welding torch We Build Houses used for the work caused an accidental fire. In this case, the question involved determining if the dwelling was the particular part of real property being worked on and excluded or if the plumbing was the particular part and excluded, while the rest of the building was covered.

Products/completed operations property damage losses that involve personal property are easier to resolve. Personal property a contractor is working on is excluded.

On the other hand, products/completed operations property damage losses that involve real property are more complicated. In the past, the building or structure that a contractor was hired to build was considered to be in its care, custody and control and any property damage to it while in the course of construction was routinely excluded. Numerous court cases supported this position and routinely held that the CGL Coverage Forms were not performance bonds and did not guarantee the contractor's quality or workmanship. It also was not held to be builders risk coverage. Both performance bonds and builders risk coverage forms provide coverages that CGL Coverage Forms do not. For this reason, they must be purchased separately.

Courts in a few jurisdictions have recently looked differently at real property losses. In a few cases, while the construction contract arrangement called for the contractor to erect an entire building, the loss caused by a specific event affected only a single portion of the building. In those cases, the courts found that only the loss or damage to the portion of the building where the contractor or his subcontractor was working (and where the loss or damage to the entire building originated) was excluded. Coverage applied to the resulting damage to the rest of the building.

Subparagraph (6) of this exclusion states that coverage does not apply to property damage to that particular part of any property that must be restored, repaired or replaced because the named insured's work was done incorrectly. However, there are two exceptions. One is that the exclusion does not apply to liability assumed under a sidetrack agreement. The other, and more important one, states that the exclusion does not apply to property damage that the products/completed operations hazard includes.

Note: This language precludes coverage if a problem occurs during construction and before the job is complete. However, coverage applies if a problem occurs after construction is complete and the job is turned over to the customer.

k. Damage To Your Product

This exclusion is clear and straightforward. There is no coverage for property damage to the named insured's product (as defined in the coverage form) that arises out of the product itself or any part of it.

Note: This may not seem to be a problem or an area of concern for contractors. However, the argument may be made that a house might be considered a product instead of completed work.

l. Damage To Your Work

Under this exclusion, coverage does not apply to property damage to the named insured's work (as defined in the coverage form) that arises out of it or any part of it and included in the products/completed operations hazard. An exception states that it does not apply if a subcontractor working on the named insured's behalf performed the damaged work or the work out of which the damage arose.

CONCLUSION

It may initially appear that the CGL Coverage Forms do not provide much coverage for a contractor's products/completed operations exposures. However, the fact is that they do provide some important coverage and the decision to purchase or not purchase it should be considered carefully. One important point to consider is that bodily injury liability is covered even though property damage liability is excluded. Another is that, while property damage to property the contractor is working on is excluded, damage to adjacent or surrounding property not in its direct control is covered if the loss or damage is due to the contractor's negligence. The final point to consider is that damage to the contractor's work caused by subcontractors is not excluded once the project or contract is completed. This is because it then becomes a products/completed operation exposure.

RELEVANT COURT CASES

Related Court Cases:

Care, Custody Or Control Exclusion Held Applicable When Only "Care" Was Exercised By Insured

Property Damage Exclusion Held Applicable To Entire Renovation Area

Work Product Exclusion In Contractor's Liability Insurance Held Applicable To Claim For Negligent Location Of House

Work Project Exclusion Held Applicable To Control Of Project By Construction Manager

Installation Rider Held To Offset Custody And Work Performed Exclusions

Roofing Operation Exclusion Held Applicable To Claim Against Carpentry Contractor

Additional Insured Contractor On Subcontractors Policy Held Not Covered By Policy For Injury To Subcontractor's Employee

Contractor Liable For Completed Operations

General Contractor's Policy Excludes Faulty Work Performed By Subcontractor

Insured's Poor Workmanship Not Covered Under Their CGL Policy

Contractual, Incidental Damages Excluded

No Coverage For Roofer's Warranty

Products/Completed Operations Exclusions Void Insurer Duty To Defend