The late, great comedian Alan King used to tell a story that went like this:   “The other day, my house caught fire.  My lawyer said, ‘Shouldn’t be a problem.  What kind of coverage do you have?’  I said, ‘Fire and theft.’  The lawyer frowned.  ‘Uh oh.  Wrong kind.  Should be fire OR theft.’” 

Recently, a lot of builders and manufacturers have been experiencing similar unhappiness with their coverage for so-called “faulty workmanship” claims.  Carriers have been arguing that faulty workmanship can never constitute a covered “occurrence” that triggers insurance, and also that, even if an “occurrence” happened, liability coverage is precluded by the “your work” exclusion (one of the so-called “business risk” exclusions).

The typical “your work” exclusion in a commercial general liability policy precludes coverage for the following:

“’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’  This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

Later versions of the language eliminate the subcontractor exception.

So, what’s the purpose of the exclusion?  Some time ago, a pretty good article in Claims Magazine gave the following example:  A policyholder builds a retaining wall for a customer.  The wall falls down.  Under the exclusion, there’s no coverage for damage to the wall itself.  If the falling wall crushes a claimant’s patio furniture, though, coverage exists.  In other words, there’s no coverage for fixing defective work, but there IS coverage for consequential losses caused by the defective work.  

A few courts don’t quite seem to grasp this concept.    And now, let me distribute some sour grapes:  I lost the issue at the trial court level not long ago in Bob Meyer Communities Inc. v. James R. Slim Plastering Inc. The case involved the allegedly faulty installation of window flashing by a subcontractor, and resultant water damage to luxury homes.  The judge decided that the entire homes were the general contractor’s “work,” and that the general contractor therefore could not recover from liability insurance for allegations of faulty workmanship limited to the window flashing made by the homeowners.  The court wrote: 

“If the completed residence is viewed as [the policyholder’s] work product, under its CGL policies, [the policyholder] bears the risk of faulty workmanship causing damage to any part of the residence.”

The problem with this analysis is that the whole residence was not defective – only the window flashing installed by the subcontractor.  The consequential damages resulting from the defect (as opposed to replacement of the flashing itself) should therefore be covered, under the logic in the Claims article.  

But, there is hope. In Port Imperial Condominium Association v. K. Hovnanian, my good friend Lynda Bennett of Lowenstein Sandler (an excellent coverage lawyer) recently successfully navigated her client around the exclusion.  The case involved water damage to condominiums in a waterfront development due to allegedly improper framing, installation and flashing of balcony doors.  

In response to the carriers’ “no pay” argument, and as a result of Lynda’s great work, Judge Sarkisian (Hudson County) wrote:  “It is clear…that general liability coverage is available for consequential property damage that flows from an insured’s faulty workmanship, and that other courts have recognized that faulty workmanship can result in accidental, unexpected, and unintended damage to third party property which satisfies the definition of ‘occurrence’ of the standard general liability policy.” 

In an analogous context, the Fifth Circuit recently tried a Solomonic approach, guaranteed to make everyone unhappy.  American Home Assurance v. Cat Tech LLC involved damage to a “hydrotreating reactor,” allegedly caused by a repair contractor.  There were three categories of property damage involved:

 (1)  Damage to the specific parts of the reactor upon which Cat Tech (the policyholder) performed defective work.

(2)  Damage to the parts of the reactor upon which Cat Tech performed non-defective work, but which were damaged because of later mechanical problems in the reactor.

(3)  Damage to property upon which Cat Tech did not work, but which was nevertheless harmed, apparently because of the later mechanical problems.

The Court held that items (1) and (2) should be excluded, but not (3), writing:

“The ‘your work’ exclusion precludes coverage for damage to that part of [the reactor owner’s] property upon which Cat Tech performed repair services, defective or otherwise.  It does not preclude coverage for any damage to [the reactor owner’s] property that Cat Tech did not repair or service.”

Question:  If policy language can be this elaborate and confusing, shouldn’t the policyholder get the benefit of the doubt?