Beware: CGL Policies Don't Cover Faulty Work
Builders and contractors who buy commercial general liability (CGL) insurance policies with the impression that they will keep them safe from allegations of inadequate or faulty work must be aware of what their policies cover. It's important to know that a CGL policy does not provide coverage for work that is faulty.
Some Questions to Ask
How long is the policy period?
Does the policy cover when the accident occurred -- or when the bodily injury or property damage occurred? In other words, what if the bodily injury or property damage happens gradually over time?
What are the exclusions? Are water and mold damage excluded?
Are intellectual property claims covered under the advertising injury provisions?
How is occurrence defined?
In order to qualify for payment under a CGL policy, there must be a specific type of occurrence that causes property damage. The terms in these policies define an occurrence as an accident. This includes repeated or continuous exposure to conditions that result in bodily injury or property damage. The damages or injuries must occur during the policy period in order to qualify for coverage. These injuries or damages must not be intentional.
CGL policy terms specify that property damage is a physical injury to tangible property. This includes all losses of that property that happen as a result of the occurrence. It also covers the loss of use of tangible property that is physically unharmed.
When disputes arise as a result of defects in a building project, there are several factors that must be considered to determine whether the occurrence and property damage requirements have been satisfied. The factors include:
- The work or products listed in the contract that the policyholder was required to provide;
- The policy's definitions;
- The alleged faulty construction job; and
- The nature of the cause of the faulty work.
These dispute conditions apply to defects in a structure sold or built by the contractor. They also apply to defects in a product that the contractor manufactures and sells independently.
It's important that contractors who have this coverage, or are considering it, consult with their insurance agents to analyze the terms of a policy. An agent will explain the definitions of property damage and occurrence in the policy. This is crucial because each state's law differs regarding such issues.
You want to ensure the policy is in accordance with state laws. Some policies' terms may indicate coverage for situations that a state's laws may not provide coverage for. Keep in mind that state laws generally supersede what is written in an insurance contract. Some states specify that third-party property damage is a requirement for potential CGL coverage. Many states also specify that there is no coverage under a CGL policy for replacement or repair of damaged goods provided by the contractor. It's also important to know that the work of subcontractors is not covered.
New Jersey was a leading state in addressing and defining defects in a CGL policy. A clear distinction was made between the replacement and repair of faulty materials. This was not considered as property damage covered under the CGL. However, third-party damage to a property may be covered. Since New Jersey's definitions emerged, many other states have embraced the state's view of business risks not counting as third-party property damage in the terms of a CGL policy.
CGL policies are technical and the terms can be difficult to understand. To better understand what the terms mean, what is covered and what state laws are in effect, consult with your insurance agent, attorney and professional advisors.