The demise of broad form property?
IRMI Construction Risk Conference provides overview of emerging trends
By Donald S. Malecki, CPCU
Broad form property damage liability coverage, a staple in the insurance business for more than 40 years, appears to be evaporating from the construction marketplace. This coverage refers, among other things, to liability coverage for damage to work performed by subcontractors on behalf of owners and general contractors. The availability of this coverage is disappearing, particularly with regard to residential construction. Some contractors, however, are still able to maintain this coverage—which automatically applies unless excluded.
To their dismay, however, some insureds are learning that this coverage still may be denied because the purportedly defective work performed on their behalf: (1) is not property damage, (2) is not an occurrence, or (3) the work for which coverage is being sought violates certain legal principles that many purchasers and sellers of insurance most likely do not understand.
This was one of the messages conveyed to the 1,500 project owners, general contractors, subcontractors, agents, brokers, and others who attended the 26th annual Construction Risk Conference of the International Risk Management Institute (IRMI) in San Diego, California, in October 2006.
One would expect that if a commercial general liability policy is unendorsed with the exclusion for work performed on the named insured’s behalf by a subcontractor, (broad form property damage) coverage would apply for claims involving construction defects. The reason is that the unendorsed policy contains an exception to exclusion (l), which states that the exclusion for damage to the named insured’s work (a business risk) does not apply to work performed on the named insured’s behalf by a subcontractor.
As explained by Linda B. Foster, an attorney with Weissman, Nowack, Curry & Wilco, Atlanta, Georgia, however, an emerging trend of some courts is to rule out coverage, even where the “your work” exclusion (a business risk) contains the subcontractor exception! One recent Michigan case that she discussed ruled out coverage because the core of the dispute was not whether the damages constituted “property damage,” but instead that the “damages” were merely additional costs expended by the general contractor to remedy the defective work of the subcontractor.
Foster also advised that some courts continue to reject the notion that the subcontractor exception to the “your work” exclusion (l) creates or restores coverage that does not otherwise exist under the CGL policy. In attempting to make this point clear, she pointed out a Massachusetts case where the court so held.
With the general contractor’s work considered faulty, and a business risk, the court ruled that faulty work failed to constitute an accidental occurrence and, therefore, precluded coverage. This decision remained unchanged, she said, despite the additional argument that the subcontractor exception to the “your work” exclusion created coverage. The court rejected that argument, Foster said, stating that if it were to accept the argument that the faulty workmanship was performed by a subcontractor, this argument would prove, at most, that the named insured’s work (“your work”) exclusion is inapplicable. The subcontractor exception to the named insured’s exclusion, however, still cannot create coverage in the absence of an occurrence.
Addressing the counterarguments mounted by insurers designed to avoid the carefully tailored coverage available for construction defect exposures, such as the exception to the “your work” exclusion (l) was Patrick J. Wielinski, an attorney with Cokinos, Bosien & Young, Dallas, Texas.
Wielinski stated that some insurers have experienced success in diverting the courts’ attention from the policy, and limiting the focus to “artificial distinctions” on issues of breach of contract vs. negligence, and economic loss vs. property damage. These artificial distinctions, he said, are without basis in the policy language, or the better-reasoned case law.
In contrast, Wielinski explained, those courts that employ a more traditional analysis, such as whether the physical injury to tangible property that caused the defect was neither expected nor intended from the standpoint of “the” insured tend to find an occurrence. The court, he went on to say, then determines coverage according to the property damage exclusions, giving effect to the language of the entire policy.
“Part and parcel of this analysis,” Wielinski added, “is a determination of whether the claim involves damage to property other than the insured’s own work.” Contrary to the arguments made by many insurers, he said, the underwriting history of the CGL policy indicates a careful effort to provide a degree of coverage for property damage arising out of defective construction.
In Wielinski’s response to Foster’s presentation, he stated that insurers’ arguments that the explicit terms of the subcontractor exception to the “your work” exclusion amount to an impermissible creation of coverage by an exclusion is simply not true.
This line of argument, he said, is based on the false assumption that defective workmanship can never give rise to an “occurrence” of property damage and, thus, could never be within the initial coverage grant of the CGL policy. Making this point, Wielinski discussed a recent Wisconsin court case holding for coverage.
The court here, he explained, stated that there is coverage under the insuring agreement’s initial grant. “Coverage for the general contractor’s own work would be excluded by the business risk exclusionary language, except that the subcontractor exception to the business risk exclusion applies, which operates to restore the otherwise excluded coverage,” he said.
Wielinski went on to say that it is becoming increasingly difficult for contractors to persevere in light of insurer attempts to avoid coverage for property damage arising out of defective construction.
He said it is important to impress upon the courts that it is necessary to interpret and apply the terms of the policy without resort to concepts such as “no coverage for breach of contract,” “the economic loss rule,” or “CGL policy as a performance bond,” all of which are outside the language of the policy.
Wielinski concluded that, while courts have reached divergent results, the common thread appears to be that those courts that apply the language of the CGL policy before it are more likely to uphold coverage for the insured contractor.
While states are striving to reform workers compensation laws in order to keep costs reasonably in check, the federal government, through Medicare, has greatly increased the cost of settlements, according to James E. Pocius, a shareholder with Marshall, Dennehey, Warner, Coleman & Goggin, a Scranton, Pennsylvania, law firm. As a result, the cost of workers compensation will likely harden from the standpoint of primary insurance and reinsurance, he said.
The exclusive remedy of workers compensation, Pocius said, continues to erode in those states where civil actions are allowed after the intentional misconduct of the employer. On this issue, he added, the courts continue to expand the definition of employer’s willful negligence.
While there have been no major changes with regard to the treatment of independent contractors and leased workers, Pocius feels that pitfalls remain when attempting to transfer workers compensation risk through contracts.
He cautioned attendees to be extremely careful not to contravene the common law definitions of independent contractors and leased workers. If the relationship is not absolutely clear, he said, courts will always interpret the parties’ actions to include coverage for the injured worker. *
Donald S. Malecki, CPCU, has spent 47 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.
It is becoming increasingly difficult for contractors to persevere in light of insurer attempts to avoid coverage for property damage arising out of defective construction.
—Patrick J. Wielinski
Cokinos, Bosien & Young