It’s amazing how, when the economy tanked, construction defects began to multiply exponentially. I’m not (necessarily) trying to ascribe purely financial motives to the plaintiffs in these cases, but there’s no doubt that, at my firm at least, we’ve seen a marked increase in the amount of coverage litigation over construction defects.
So, what’s the coverage fight all about? A lot of it involves the so-called “your work” exclusion contained in general liability policies. (In the ongoing game of words, insurance companies like to refer to this as the “business risk” exclusion, even though the words “business risk” don’t actually appear in the policy forms.) Boiled down to its essence, this type of exclusion says that if you get sued for damage to your “own work,” there’s no coverage. So if you’re a builder, and you install stucco on a building, and the stucco falls apart, and you get sued as a result, there’s no coverage under your general liability policy for repairing the stucco.
This begs the question: What if the crummy stucco falls on somebody else’s truck (or head) and totals it? If you’re the general contractor and you get sued, you’re not covered for the repair of the stucco – but how about the replacement cost of the truck (or head)?
Lots of cases say that faulty workmanship that causes damage to other property is a covered “occurrence” under a general liability policy. See Weedo v. Stone-e-Brick, Inc., 81 N.J. 233 (1978) (a contractor’s general liability policy typically does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident); Firemen=s Insurance Company of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006) (drawing a distinction between economic loss to faulty workmanship and faulty workmanship that causes damage to other property); Hartford Insurance Group v. Marson, 186 N.J. Super. 253 (App. Div. 1982) (noting that claim against policyholder for damage done by its defective workmanship to metal panels installed by another contractor is not excluded).
A few years ago, in United States Fire Insurance Company v. J.S.U.B., 979 So.2d 871 (Fla. 2007), the Florida Supreme Court provided a detailed history of the evolution of the “your work” exclusion, which is useful to anyone dealing with one of these claims. The Court noted that the 1986 version of the standard form commercial general liability policy contained language specifically stating that that the exclusion for faulty workmanship did not apply to work within the products-completed operation hazard. The 1986 policy also added a new “your work” exclusion – with an express exception for work done by subcontractors. The exception was later removed from certain standard forms.
The takeaways here:
- If you’re in a business (or if you’re representing a business) where products/completed operations coverage may be an issue, carefully examine the exclusions for “your work” and “your product” and make sure you have adequate protection before problems happen.
- Broad disclaimers of coverage based upon so-called “business risk” exclusions generally aren’t appropriate. Remember, for example, that the “your work” exclusion is designed to preclude coverage for damage to “your work” – and only “your work.” If defective work causes damage to other property, coverage exists.
- If a property damage claim is brought against a policyholder and the complaint lists “breach of contract” as the source of the claim, the insurance company should examine the facts of the incident carefully and not simply assume that breach-of-contract claim is never covered by a general liability policy.