Understanding General Liability Insurance for Contractors

Designing an insurance and risk management program for a contractor usually begins with the Commercial General Liability (CGL) policy. This policy creates a platform by which other policies are subsequently integrated to coordinate coverages, such as Builder’s Risk, Umbrella/Excess Liability, Professional Liability or Contractor’s Pollution Liability. All of these coverages should be reviewed in tandem to be sure gaps are properly sealed.

A CGL Policy—Why It’s the Foundation of Your Program

The CGL policy provides coverage for liability arising from bodily injury, personal injury or damage to property of third parties. Some insurers have developed their own policy forms, but most subscribe to the standard ISO (Insurance Service Office) form. The most recent ISO edition for contractors is the CG 0001 1207. 

The CGL policy is designed to insure the following:

• Premises/operations—Premises owned but also project locations
• Independent contractors—Liability exposures that might arise from subcontractors or suppliers
• Contractual liability—Obligations arising out of indemnity agreements found in contracts
• Products and completed operations— Liability claims arising out of the project after it has been completed and put to its intended use
•  Defense coverage—In addition to paying awards or settlements for covered liability claims, the CGL policy covers the cost to investigate and defend such claims or suits. Supplementary payments are also included in this policy, which are designed to cover cost of bail bonds, court cost and pre-judgment interest cost.

Construction Defect Claims & Coverage Uncertainty 
Across States

One of the primary goals of any contractor’s risk management program is to have some certainty as to expectations of coverage under the CGL policy. However, recent court cases involving construction defect claims have placed contractors into a position of uncertainty. Significant variations exist among state laws with respect to whether construction defect claims are in fact an “occurrence” and considered “property damage” as defined in the policy. 

Most states have held that property damage arising out of a construction defect constitutes an “occurrence” as long as it meets the test of unexpected or unintended. Other state courts have determined that property damage arising out of a construction defect is viewed as foreseeable and, therefore, not “an occurrence.” 

In 2006, the Pennsylvania Supreme Court held in Kvaerner Metals Division vs. Commercial Union Insurance Co. that a general contractor’s coverage for damage to a building caused by a subcontractor’s faulty workmanship does not constitute an “occurrence” under the CGL policy and would not be a covered claim. Since the Kvaerner case, other states have had newsworthy lawsuits with similar outcomes. 

Case law is becoming fluid and unpredictable. In a recent Texas case, Gilbert Texas Construction, L.P. vs. Underwriters at Lloyd’s London, the Supreme Court ignored well-established case history and used the “contractual liability” exclusion to remove coverage involving a direct breach of contract. This interpretation runs counter to the policy language and to the vast amount of case history at both state and federal levels.

Other states, including South Carolina and Arkansas, have had their share of newsworthy cases involving construction defect claims and general liability coverage. This coverage issue will continue to remain a problem, which begs the question: “What should a contractor do?”  

Sit down with your insurance professionals and underwriters, and do not leave anything to chance. To remove the cloud of uncertainty as much as possible, redefine the definition of “occurrence” to include construction defect claims. Much of the case law surrounding the definition of “occurrence” is being driven by underwriters who are not major players in the construction industry, so it is important to look beyond price and develop an alignment with underwriters who understand the business and employ professionals to deal with such claims.

Key Endorsements & Coverage Considerations

Also, be aware of several other coverage expansions and restrictions. Use the following list as a guide:

• Per project aggregates will provide the policy general aggregate on a per location or per project basis. This is usually required by many contracts with owners or general contractors. It will also have a positive impact on the pricing of the Umbrella/Excess Policy.
• Pollution exclusions are typical in CGL policies. Certain specialty markets will provide broadened coverage for the exposures of contractors.
• Residential restrictions are becoming more common. Each insurance company defines “residential” differently. Some define residential as hotels, dormitories, prisons, etc. They do not restrict the definition to a single family home or condo unit. If a contractor’s work involves apartments or other work considered “residential,” this can be a significant restriction of coverage.
• Employee Benefit Liability coverage is important to include in the program. 
• Blanket waivers of subrogation will normally be required by owner contracts. Negotiating this upfront will provide an advantage.
• A blanket additional insured endorsement will normally be required by owner contracts. Get this done upfront to save time and money during the year.
• Residual wrap-up coverage can be important for contractors who perform work under either Owner Controlled or Contractor Controlled Insurance Programs. This will provide coverage to the contractor after the wrap-up coverage’s completed operations term has expired.

Coordinating coverages between the primary CGL and the Umbrella/Excess is becoming more vital in today’s market. Exclusions and definitions are easily used for coverage denials under the Umbrella/Excess programs, despite coverage being granted under the CGL policy.