The Rough Notes Company, Inc., is not legal counsel and we cannot give legal advice. What we can do is offer some things to think about with regard to the question presented and one possible interpretation of some of the coverage forms.
Q What does products-completed operations add to the basic CGL coverage purchased by a building contractor? Is the contractor better off not paying the additional premium so that he/she will not have completed operations coverage and, therefore, the your work product exclusion would not apply?
It makes no sense to buy more insurance and wind up with less coverage.
A Perhaps it would help to understand a little better the nature of the policy before we get into the coverage concerns themselves. The current Commercial General Liability Policy automatically provides for both premises and operations exposures as well as those resulting from products-completed operations hazards. This is pre-built into the unendorsed policy as a package of coverages.
So, unless a policy has been specifically endorsed to remove the products-completed operations coverage, the coverage is provided. Premium charges for both the premises and the products-completed operations hazards are automatic also, and an insurer is entitled to them (again, unless the policy has been endorsed to exclude the coverage). Not paying for the coverage would not be a good solution. Instead, the policy must be endorsed to remove the products-completed operations coverage. Otherwise, an insured would be in jeopardy of having the entire policy canceled for nonpayment of premium, thus losing all liability protection.
The exclusion you mentioned regarding "your work" is also automatic and pre-built into the coverage form.
As far as the coverage provided and the applicable exclusions, in CG 00 01 07 98--Commercial General Liability Coverage Form, several exclusions need to be explored. Starting with the first of these exclusions, in Section I - Coverage A - Bodily Injury And Property Damage Liability, item #2. Exclusions it states:
This insurance does not apply to . . . :
j. Damage To Property
"Property damage" to:
(1) Property you own, rent, or occupy;
(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises;
(3) Property loaned to you;
(4) Personal property in the care, custody or control of the insured;
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
Paragraphs (1), (3) and (4) of this exclusion do not apply to "property damage" (other than damage by fire) to premises, including the contents of such premises, rented to you for a period of 7 or fewer consecutive days. A separate limit of insurance applies to Damage To Premises Rented To You as described in Section III - Limits Of Insurance.
Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you.
Paragraphs (3), (4), (5) and (6) of this exclusion do not apply to liability assumed under a sidetrack agreement.
Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard".
At first glance, this exclusion appears overwhelming to a contractor and may appear to eliminate all coverage. What we need to do is dissect the relevant pieces.
"Your work" is defined in the policy itself to mean:
(indent both sides)
a. Work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with such work or operations.
"Your work" includes:
a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work"; and
b. The providing of or failure to provide warnings or instructions.
For a building contractor, "your work" would be the building or structure the contractor is building.
The next piece to review would be the statement: "This insurance does not apply to..."Property damage".
The exclusion does not eliminate coverage for bodily injury liability-only property damage liability. This is an important point to be considered in the decision to keep or eliminate products-completed operations coverage. Yes, much of the property damage liability coverage for work performed by the contractor is excluded, but bodily injury is not excluded. This is important in suits where a claimant alleges injury or illness. Examples of bodily injury claims may include things such as illness from fumes from paints, heating units, insulation, building materials etc. Also included may be injury from collapse of a building or structure and so forth.
The next relevant item in the exclusion to discuss is:
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or...
The portion of the property that a contractor is directly working on is excluded. But what about those portions of the property that the contractor is not directly working on? For example, a contractor is building a porch. The contractor accidentally starts a fire that burns down the entire structure and several adjacent structures. The porch is not covered but the rest would be in many jurisdictions. Based upon the wording of the policy, many states have determined that if the contractor is not building an entire building but, as in this case, only a portion, then only the portion the contractor is directly working on is excluded.
What happens in the case of a building contractor who has been hired to build an entire building, dwelling or structure? For example, an almost finished dwelling just needs some additional welding work in the kitchen plumbing. A fire accidentally starts from the welding torch. Is there any coverage?
Products and completed operations losses to personal property are easier to answer. Coverage is excluded for the product or the personal property being worked on by a contractor.
Real property is not so cut and dried. In the past, the building or structure that a contractor was hired to build was considered to be in that contractor's care, custody and control. As such, any property damage suffered during construction was routinely excluded. Numerous court cases support this position. It has long been held that the CGL is not a performance bond; it does not guarantee the quality or workmanship of the contractor; nor is it a builders risk property policy. Those are coverages that must be purchased separately.
Only recently has real property begun to be looked at a little differently, and only in some jurisdictions, have we noticed evidence that even if the contractor has been contracted to build an entire structure and should the loss be attributed to one specific event in a particular part of the structure (as in the case of our example), only the damage to the portion of the building that the contractor (or sub) was actually working on was determined to be excluded.
The next exclusion is fairly clear. There is no coverage for:
k. Damage To Your Product
"Property damage" to "your product" arising out of it or any part of it.
The next important exclusion has a significant exception to it:
l. Damage To Your Work
"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.
Note the second paragraph that gives back property damage to work of the insured, performed by a subcontractor. However, note that this exception to the exclusion applies only to work that falls within the products-completed operations hazard--in other words, once the work has been completed and released to the customer. This is an important exception and provides the contractor with some beneficial protection when the faulty work of a subcontractor is not discovered until the project has been completed and turned over.
Two more exclusions are relevant and should be noted but will not be discussed because they are explanatory.
m. Damage To Impaired Property Or Property Not Physically Injured
"Property damage" to "impaired property" or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
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.
n. Recall Of Products, Work Or Impaired Property Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:
(1) "Your product";
(2) "Your work"; or
(3) "Impaired property";
if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
In conclusion, although it may initially appear that there is little coverage in the CGL for a contractor's products-completed operations exposures--there is enough coverage to make its purchase an important consideration. Bodily injury is not excluded and, thus, is covered. While property damage to the work the contractor is directly performing on is not covered, damage to surrounding property not directly in the contractor's control is covered--should the contractor negligently cause damage. And finally, damage to the contractor's work caused by subcontractors is not excluded once the project or contract is complete and it becomes a product-completed operation exposure.
©COPYRIGHT: The Rough Notes Magazine, 2000