Here’s some advice I would give to anyone contemplating becoming a general contractor:  Don’t.   The liability insurance coverage picture is too muddy, and coverage for completed operations is too uncertain.  My secondary, and perhaps more realistic, advice: Review your subcontractors’ general liability coverage and make sure there’s adequate protection if you need to bring suit against the subs for negligence.  Don’t rely on certificates of insurance. (My general contractor clients laugh when I tell them things like that. Who has the time to review actual policies, they say, even if the subs would give them to us.  I guess that should make me happy, since it creates more work for litigation attorneys.)

Completed operations coverage (supposedly) insures against the liability incurred by a contractor for property damage or injuries that may happen to a third party, once contracted operations have ceased or been abandoned.  But sometimes, the question is whether operations have ceased or been abandoned, or not.  If there isn’t complete cessation, there may be no coverage.    

Let’s take a look at a recent Third Circuit case, Allegheny Design Management, Inc. v. Travelers Indemnity Co., which you can read by clicking here.  In Allegheny, the general contractor (ADM) hired a couple of subcontractors to work on a retail store.  Elite was hired to install windows, and Gold Star was hired to do the final cleaning of the windows.  Gold Star began cleaning the windows, but then informed an ADM representative that the windows were scratched.  ADM told Gold Star to finish cleaning the glass, and the store later asserted a claim (“informally,” whatever that means) against ADM.

Travelers denied coverage, invoking common provisions in ADM’s insurance policy that excluded coverage for “property damage” to:

“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…
That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The “your work” exclusion contained an exception for “’property damage’ included in the ‘products-completed operations hazard.'”

So, I think you can see where this is headed.   ADM (the general contractor) argued that the exclusionary language didn’t apply, because the loss fell within the exception for products-completed operations.

The Court disagreed with ADM, writing:  “ADM argues that the glass was no longer physically possessed by ADM and had been put to its intended use by Finish Line (the store lessee). Once the glass was installed in the storefront, it urges, it was put to its intended use because Finish Line had begun stocking, inventorying and moving into the store…The District Court found, and we agree, that the damage to the glass occurred before the glass was put to its intended use. The purpose of the glass was clearly to serve as a window through which potential customers could survey items for sale. Accordingly, ADM’s work (the glass) was only put to its intended use by Finish Line when the store opened for business – two days after the damage was first noticed. The glass was not put to its intended use before the store was open to the public. For this reason, the damage did not constitute a products-completed operations hazard.”  (Emphasis added.)

The idea that the glass was only put to its “intended use” after the store was opened is logically shaky, and I’m not sure that all courts would agree with it.  The actual  “intended use” was to enclose the store from the outside mall corridor, after all.  The bigger problem, though, is that the subcontractors had not really finished their work when the glass was damaged…so, by definition, the Court found that “operations” were not “completed.”

You can see how difficult general liability coverage can be for general contractors. I think, though, that this case gets at the root of the real purpose of the “your work” exclusion. Here, a faulty part (scratched glass) was used, and replacement of that faulty part was necessary.  The faulty part, however, didn’t cause other damage to the store.  The purpose of the “your work” exclusion, really, is to preclude coverage for the replacement of defective workmanship. If, however, that defective workmanship causes other damage that must be repaired, then coverage should exist for the other damage. In the context of construction litigation, the problem is that many insurance companies and judges read the exclusion very broadly, so that if a defective part causes damage to other aspects of the project, there’s no coverage for anything, because the whole project is (I think incorrectly) considered to be “your work” for purposes of the exclusion.

Bottom line:  If you’re a general contractor, you can’t really  go into a project knowing that you can rely on your own general liability insurance to cover mishaps. You’d better make sure that there are other sources of potential protection.