Dramatic Changes On The Horizon For CGL Coverage Law

Originally published by Risk Management magazine (November 1, 2013)

Recent changes in national case law suggest that a major shift is under way for CGL coverage of property damage to an insured contractor's own work. Contractors of all tiers, property and project owners and developers, risk managers, and concerned others should watch this development closely.

For many years, perhaps as many as 50% of the U.S. jurisdictions that considered the point completely barred CGL coverage for property damage to an insured contractor's own work under one theory or another, such as by holding that defective construction cannot satisfy the "occurrence," "property damage" or "legally obligated" requirements in the CGL policy insuring agreement. Courts and commentators sometimes lump these theories together under the banner of "business risk doctrine," as they are motivated by the underlying and mistaken belief that to allow such coverage would encourage negligent construction practices. (Of course, this begs the question, "Why are lawyers, doctors and design professionals deemed trustworthy of insurance for their mistakes, while contractors are not?" There's a musty whiff of old school class prejudice in the air here.)

That position starkly contradicted the ISO policy drafters' original intent for the modern CGL and the policy language, which carefully delineates between many such business risks that the drafters intended to insure and those they deemed uninsurable, usually because of moral hazard. Originally, this partialbut very substantialcoverage for property damage to the policyholder's own work was known as "broad form coverage," as it was first available by an endorsement of that name. Since 1985, that coverage was drafted into the body of the standard CGL forms, but the name for this aspect of CGL coverage lingers on. An example of this coverage is the current "your work Exclusion, exclusion l," which begins by excluding coverage for any property damage to the policyholder's completed work. But it then carves out a significant exception for property damage either caused by the work of the policyholder's subcontractors or that was experienced by work performed by subcontractors. Of course, most general contractors perform most, if not all, of their work through subcontractors, so this subcontractor exception largely voids the exclusion. Other aspects of broad form coverage allow coverage for many instances of property damage to a policyholders'...

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