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Never By Accident

Coverage Concerns for Building Trade Contractors

Contractors confront some perplexing insurance coverage problems in their daily business activities. Let’s explore a few common scenarios briefly and discuss if and when coverage applies to structures.

Product and Work Exclusions
When a contractor negotiates with another party to perform some work, the contractor may extend an express warranty that its construction materials and services will be provided in a reasonably workmanlike fashion. Even if the contractor does not express such a warranty, the mere act of holding himself or herself out as being able to do the work creates an implied warranty that the materials will be fit for their particular purpose(s), and that work will be performed in a competent, skillful manner.

Insurance underwriters often refer to the consequences that can result from such warranties as business risks, or the risk that the contractor will need to repair or replace defective products or redo faulty work. While insurers are generally willing to insure the risk that the faulty work or products of the insured will cause bodily injury or property damage to another party, they are simply not willing to insure the business risk; that is, insurers do not wish to become the guarantors of the fitness, quality, or reliability of the insured’s work or products.

To that end, standard general liability insurance policies contain numerous policy provisions and exclusions aimed at excluding the business risk. Exclusion (k) in the standard commercial general liability (CGL) coverage form, for example, pertains to property damage to the named insured’s product arising out of it or any part of it. Moreover, exclusion (l) pertains to property damage to the named insured’s work arising out of it or any part of it, and included in the products-completed operations hazard.

Dueling Definitions
The term “occurrence” appears a number of times in standard liability policies. Disagreement as to its meaning has led to conflicts between insureds and insurers. Many legal actions have centered on the issue of what constitutes an occurrence for purposes of liability coverage.

An occurrence is defined on the current CGL form as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Although the word “accident” is not defined in the general liability policy, the dictionary definition calls an accident “an event that takes place without one’s foresight or expectation, an event that proceeds from an unknown cause, or is an unusual effect of a known cause, and therefore not expected.” So the question arises: if the insured contractor performed faulty work, then is that an accident, an occurrence? After all, the insured did his or her work on purpose and not by accident.

The court rulings as to whether faulty workmanship constitutes an occurrence vary with the jurisdictions and the facts of the particular case, but there are three general interpretations:

  1. If the insured acts with the specific intent to cause some injury, harm, or damage, then there is no accident, no occurrence.
  2. If the act is intentional and results in injury or damage that is a natural and probable consequence of that act, then there is no accident, no occurrence. In other words, an accident is never present when a deliberate act is performed, unless some additional unexpected, independent, and unforeseen happening occurs that produces or brings about the result of injury or damage.
  3. If the insured acted with a specific intent, but did not intend to produce the specific damage that resulted, then there was an accident, an occurrence. In other words, the intentional act itself does not produce an occurrence; there has to be an intentional result also.

The important point to take from this information is that sweeping statements to the effect that any injury or damage caused by an intentional act is not an occurrence and is then excluded from coverage under a liability policy, are inaccurate. The availability of liability insurance coverage depends on the facts and circumstances of each incident and the particular jurisdiction in which the incident occurs.

Property Damage
The CGL form will pay those sums that the insured becomes legally obligated to pay as damages because of property damage. The CFL form defines property damage, but that has not stopped legal disputes centered on the issue of what constitutes property damage for purposes of liability insurance coverage.

Property damage is defined on the standard general liability coverage form as physical injury to tangible property, including all resulting loss of use; and, loss of use of tangible property that is not physically injured. The loss of use is deemed to occur at the time of the physical injury (or occurrence, when there is no physical injury) that caused it.

The main thing to note about this definition is that it pertains to tangible property; that is, property that can be touched and is physical and material. A building is tangible property, a building plan is not; a computer is tangible property, the information in the computer is not; material sold by a contractor to a customer is tangible property, goodwill (or bad will) engendered by the sale is not. For property damage to occur, the property has to have an alteration in appearance, shape, color, or some other material dimension, and that can only occur in property that is tangible. Things like loss of income or loss of value—that is, purely economic loss—do not fit the definition of property damage.

‘That Particular Part’
The phrase “that particular part” is found in exclusion (j). This refers to damage to property in the current standard CGL form. The form excludes coverage for property damage to “that particular part of real property” on which the insured is performing operations; and excludes coverage for property damage to “that particular part of any property” that must be restored, repaired, or replaced because the named insured’s work was incorrectly performed on it. So, the question arises: what is the extent of “that particular part”?

At first reading, it would seem that only the damage to that area where the insured is working should be excluded. After all, “that particular part” seems to explicitly limit the scope of the exclusion to that specific, individual part on which the insured is working at the time the damage occurs. Those words could have been deleted from the exclusion, but they are there, and to what purpose but to limit the extent of the exclusion. In fact, the words seem to be in keeping with the accepted fact that exclusions are supposed to be interpreted narrowly and in favor of the insured receiving coverage if any reasonable ambiguity exists. But, “that particular part” does cause confusion and coverage disputes, and court rulings on the matter very much depend on the specific facts of each case and the particular jurisdiction that is hearing the case. There is simply no ironclad, bright line rule on the scope of “that particular part” to forgo the process. However, the following points are noted for help in the matter.

The sections of the damage to property exclusions that contain the phrase “that particular part” apply only to ongoing operations. If work has been completed (and the standard CGL form itself describes when this occurs), then no one need concern himself or herself with the intent or scope of “that particular part.” Also, if there is any reasonable doubt as to the application of the exclusion, then the insured is entitled (in most states) to the benefit of the doubt. Exclusions are usually construed strictly against the insurer. Finally, if the loss occurs while the insured is working on one section or one part of a single, unified, homogenous piece of property, then “that particular part” is to be seen as that one whole unit of property.

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