CGL Extends Coverage for Injury Arising from Defective Construction

Property damage resulting from defective construction is unquestionably excluded in the commercial general liability policy; but what about bodily injury? And is injury or damage caused by the growth and proliferation of mold covered because it is not excluded by the unendorsed CGL?

InsuranceJournal.com recently featured a story about a central-Ohio family whose home was contaminated with toxic mold, making it unfit for continued occupancy. In early May, the judge hearing the case concluded that defective construction practices lead directly to the growth of the injurious mold and handed down a $3 million judgment against the contractor who built the home.

Prompted by this verdict, the availability of insurance coverage to pay for injury or damage resulting from defective construction and/or mold was explored on this same Website. In last week’s first of three commentaries, the four commercial general liability coverage triggers were documented, and three were specifically applied to construction defect and mold claims.

The final coverage trigger question was left unanswered. Open for discussion and debate among readers this past week has been the question: was the injury or damage the result of a specific exclusion, excluded action or an excluded cause? Although three of the four requirements for coverage have been hypothetically satisfied, all four must be met before coverage exists. If the fourth trigger question is answered “yes,’ then no coverage is available for injury.

This article will focus solely on defective construction and leave the question of coverage for damage caused by mold to the third issue.

Exclusions Applicable to Defective Construction

Poor and shoddy workmanship does not, of itself, qualify as an “occurrence.” Previously discussed was the coverage trigger requirement that there must be an incident exploiting the defective construction for there to be any chance of coverage. Two standard exclusions in ISO’s commercial general liability policy leave little doubt as to the insurance industry’s intent to exclude coverage for any property damage claims resulting from defective construction even if an incident occurs:
• Damage to Impaired Property or Property not Physically Impaired; and
• Damage to “Your Work.”

Damage to Impaired Property or Property not Physically Impaired: As the name suggests this CGL exclusion removes any coverage for property damage when such damage arises out of a defective, deficient, inadequate or dangerous condition of the insured’s work (“Your work”). Further, this exclusion states that no coverage is provided for “impaired property” arising out of the same listed conditions.

“Impaired property” is property that has not been damaged, but which cannot be used or is made less useful because of the insured’s poor workmanship. This definition applies when the work is known, or only thought, to be defective, deficient, inadequate or dangerous. The definition goes on to state that property is considered impaired if it can be fixed or repaired by the removal and replacement of the insured’s work.

Failing to attach the structure to the foundation, improper application of the waterproofing and installation of the wrong size windows individually qualify as defective, deficient and inadequate conditions – even before any damage occurs. These conditions in the subject case lead to damage and to the unhealthy conditions within the house.

Even if the structure itself were not damaged, the house would still qualify as “impaired property” because it became useless until it can be repaired; further it is now subject to diminished value (made less useful) both resulting from the contractor’s work.

Exception wording in this exclusion does not preclude all claims for property damage resulting from defective construction: “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.” A second exclusion is necessary to assure that the contractor does not get paid for ANY property damage to his work caused by the poor quality work itself once it has been put to its intended use (a “completed operation”).

Damage to Your Work: Property damage to the contractor’s work directly arising from or attributable to the work performed by the contractor is excluded. The breadth of the definition of “Your Work” within this exclusion is often overstated and leads to its misapplication, but the full range of such misapplication is outside the scope of this article. In essence, insurance is not intended to be a warranty and this exclusion responds to keep the policy from being used as such.

Installing the wrong size windows can be a good example of the application of this exclusion. The windows leak causing them to warp – they warp because they leak because they are the wrong size. See the circle of events? The windows are damaged due to the poor workmanship of the contractor. Had the contractor just done adequate work, the windows would not have leaked and would not have been damaged. There is an unbroken chain of events from the poor workmanship to the damage; no extraordinary or external incident was required or occurred causing the damage.

Growth of the mold in the subject case can likewise be attributed to the contractor’s work, or lack thereof. Individually, the various defective conditions may not have resulted in the development and ultimate growth of the toxic mold. But collectively, all misdeeds combined to allow the growth of the mold ultimately damaging the property. Would the cost to tear out and replace the damage be covered by the CGL? No, because the damage to the work was caused by the original work; there is an unbroken chain of events that began with poor construction habits and ended in damage – with no intervening incidents. The damage to the work arose from the work itself.

If the work were done by a subcontractor, an exception to the “Your Work” exclusion would make coverage available. This exception exists because the carrier has a theoretical means of subrogation by which they can recover any payment made to the insured contractor necessary to fix or repair the damage caused by the poor workmanship.

Insurance carriers are undertaking to remove this exception by attachment of the CG 22 94 (Exclusion – Damage to Work by Subcontractors). Its use is growing because of the volatility of the subcontractor market, especially in residential construction. Subcontractors come in and go out of business so quickly that insurers are concerned that there will be no one against whom they can subrogate in cases of poor workmanship and defecient construction, thus they remove the exception; the result is that the entire structure becomes the general contractor’s work – effectively excluding coverage for all property damage resulting from defective construction.

The effect of these two exclusions and the exclusionary endorsement – no property damage coverage exists for claims arising from defective construction. But notice, these exclusions only apply to property damage, nothing in any of these exclude bodily injury.

Defective Construction & Bodily Injury

None of the exclusions detailed thus far remove coverage for bodily injury resulting from a contractor’s poor work habits. If there is no exclusion within the commercial general liability policy or added by endorsement, there is coverage. Bodily injury to a third party resulting from defective construction techniques is covered by the CGL.

For example, a contractor incorrectly installs a large chandelier, it falls landing on the homeowner. The cost to repair or replace the chandelier is obviously excluded by the exclusionary wording above, but the cost to pay for the injury suffered by the homeowner is not excluded.

Defective construction practices in the Ohio case lead to toxic mold growth; the mold caused breathing problems with the potential for death (thus the term “toxic”), and made the house unlivable. Just like the above example, bodily injury would be covered by the commercial general liability policy, provided there were no contravening endorsements, even though the cost to repair or replace the mold-damaged property is excluded.

There are only a few endorsements that remove coverage for bodily injury and relate to construction and possibly defective construction.

Conclusion

Property damage resulting from defective construction is excluded, but bodily injury is still covered. Traditional insurance is not intended to cover an operation’s business risk, and choosing to allow defective construction methods is a business risk. The unintended bodily injury resulting from such choices is covered by insurance.

Still the question of coverage for damage caused by mold apart from any defective construction issues remains to be answered. The next installment in this series will apply the fourth coverage trigger to mold claims.