Many contractors, subcontractors and developers believe the purpose of having commercial general liability (CGL) insurance policies is to cover injuries to workers on-site or defective work causing property damage to the construction itself. But they do not realize that there are perhaps dozens of exclusions buried in the hundreds of pages of these CGL insurance policies that allow an insurance company to deny coverage for these claims.
Depending on the type of claim against a contractor or developer, there are three key exclusions in many insurance policies that every claimant, contractor, developer and their attorneys should be aware of: the Your Work exclusion, the Exterior Insulation and Finish System (EIFS) exclusion and the Employer’s Liability exclusion.
1. Your Work Exclusion
The Your Work exclusion is perhaps the most common exclusion relied upon by insurance companies to deny coverage for damages caused by a contractor’s (or subcontractor’s) defective work. It essentially states that the insurance company will not cover property damage to “your work” that is caused by “your [defective] work.”
For example, if a roofing contractor fails to install a roof according to plan and the roof leaks, the insurance company will not cover the costs to repair the defects in the roof. If the roof leaks cause damage to other work also performed by that roofing contractor, the insurance company will not cover the costs to repair that damage either. Typically, insurance companies will only cover damage to “other property,” or other work that was not performed by the roofing contractor.
So, if a roof defect resulted in a leak, causing water damage to the framing of a building or a condominium unit, these damages would be covered by insurance, but the costs to repair the defects in the roof itself will not.
For general contractors, all of the work is considered their own, and thus, all work falls under the Your Work exclusion in their CGL policy. However, there are exceptions to this. For general contractors, the most important is the “subcontractor exception,” which states that the Your Work exclusion does not apply if the work out of which the damage arose was performed “on your behalf by a subcontractor.”
Continuing with the aforementioned example, if a roofing subcontractor fails to perform and the roof leaks, the general contractor’s CGL policy should cover any water damage to work performed by other subcontractors on the project, such as the framer’s work. So, even though both the framing and the roofing fall under the umbrella of the general contractor’s work, the subcontractor exception requires the insurance company to provide insurance coverage to repair damages that may occur to one subcontractor’s work (e.g., the framer’s work) as a result of the negligence of another subcontractor (e.g., the roofer).
Note, however, that the costs to repair the actual defective work will never be covered. Only the costs to repair the resulting damage will be covered by insurance.
It is important for contractors, subcontractors and developers to review their CGL policies with their insurance professionals and ensure that those policies include the “subcontractor exception” to the Your Work exclusion. These exceptions can be used by property owners to argue in favor of insurance coverage for their losses, and by contractors who need their insurance carriers to provide counsel at no additional cost and to ultimately cover the costs of repairing any resulting property damage.
2. EIFS Exclusion
The EIFS exclusion is highly consequential on any project where EIFS is present, which is defined as a “non-load-bearing, exterior wall cladding system that consists of an insulation board attached either adhesively or mechanically, or both, to the substrate; an integrally reinforced base coat; and a textured protective finish coat” by the EIFS Industry Members Association.
The EIFS exclusion states that there is no coverage for bodily injury or property damage “arising directly or indirectly” out of “your EIFS product” or “your EIFS work.” The EIFS exclusion may be incredibly broad, perhaps to the point of making the entire insurance policy coverage itself illusory an unenforceable, but this is because it appears to exclude coverage for any property damage or bodily injury occurring at any property where EIFS may have been installed anywhere on the building.
Thus, if there is EIFS on any “exterior component, fixture or feature of any structure” where property damage or bodily injury resulted from an accident or defective work, coverage for such damage may be denied based on the EIFS exclusion.
If a large building has a leaking roof, insurance coverage for the damages caused by that leaking roof may be excluded because EIFS is found somewhere else on the structure. It may not matter that the EIFS itself has nothing to do with the defective work or resulting damage.
While this interpretation of the EIFS exclusion may be so broad as to render the insurance policy itself illusory, this proposition has not been fully tested in New Jersey’s courts. In contrast, a Florida District Court has found that the EIFS exclusion, when applied to exclude coverage for unrelated property damage, is illusory.
There is a very real prospect that if bodily injury or property damage is suffered on a property where EIFS has been installed, the exclusion could preclude insurance coverage for damages resulting from that accident, even if the EIFS installation itself had nothing to do with the accident. The easiest way to protect contractors and developers from this exclusion is to ensure that they do not purchase any insurance containing this clause.
On top of this, the development team, including the architect, must ensure that the term EIFS is only used if EIFS in fact appears somewhere on the construction project. Decorative EIFS may not qualify as EIFS since it may not be installed for the purpose of insulation. If that is the case, referring to decorative EIFS as “EIFS” in any design documents will increase the likelihood that an insurance carrier will deny coverage based on the EIFS exclusion.
Eventually, the EIFS exclusion will have to make its way through various state court challenges, and those courts will have to decide whether such a broad exclusion is enforceable. Short of that, property owners, developers, and general contractors must either purchase coverage without the EIFS exclusion or refrain from using the product on their construction projects.
3. Employer’s Liability Exclusion
The third exclusion injured workers, contractors and property owners must be aware of is the Employer’s Liability exclusion, which precludes coverage for any bodily injury suffered by an employee, subcontractor, independent contractor, employee of an independent contractor, temporary worker, leased worker or volunteer worker on a construction project. There may be serious consequences for a host of entities involved in a project if a worker is injured on the construction site.
Typically, if a worker suffers an injury at a construction site, the employer has worker’s compensation insurance that insures the injured worker, providing coverage for medical treatment and/or
disability payments, regardless of fault. In exchange, the injured worker is generally barred from suing his employer for those injuries. However, that injured employee may still sue any other third party they believe was negligent and caused his or her injuries.
For example, if an employee of Roofing Contractor LLC is injured while working, that employee can obtain worker’s compensation insurance coverage for their injuries through Roofing Contractor LLC but cannot sue this employer absent some applicable extenuating circumstances.
However, if that subcontractor’s employee believes the general contractor, property owner or developer was negligent and contributed to the cause of the accident, the injured employee can sue those entities for money damages in addition to whatever the employee received from worker’s compensation insurance (subject to any subrogation rights of the worker compensation insurance carrier).
If an owner, general contractor, subcontractor, construction manager or developer has the Employer’s Liability exclusion in their insurance policy, it is unlikely their insurance carrier will provide coverage for the damages claimed by the injured worker, and any damages and defense costs would have to be paid out of the company’s own pocket. Not all insurance policies contain this exclusion, and it is crucial that any company (in construction or not) reviews their own insurance policy to determine if this exclusion applies to their business dealings.