With some limited exceptions, the Commercial General Liability (CGL) policy doesn't cover a contractor's business risks as damage to the named insured's work, or products or to impaired property.
Some insurers do provide limited coverage to contractors for their liability having to do with damage to their work, to products they may install, or to impaired property. Because there is no shortage of claims dealing with liability emanating from construction work, the insurers willing to provide this limited coverage typically limit their target marketing to trade contractors — electricians, plumbers, and heating and air conditioning contractors — when the exposures are not catastrophic.
Contractors' E&O coverage should not be confused with contractors' professional liability insurance, which is intended for contractors involved in construction management and design-build work.
Related: Builders risk insurance
Characteristics of the CGL policy
The majority of discussions of the CGL policy deal primarily with the standard provisions of the Insurance Services Office (ISO) form. Keep in mind, however, that many insurers rely on their own independently filed policies that often contain some provisions identical to the ISO standard, but may also include other nonstandard forms. Those insurers within the excess and surplus lines markets likewise issue standard ISO forms but may also mix and match other forms. The CGL policy can be a standard or nonstandard form. Wherever reference is made to standard, it means the provisions of ISO.
See also: Is that claim covered?
The CGL policy is generally written on an occurrence basis, although a standard claims-made form has been available since 1986. Typically, the CGL policy consists of three primary coverages: (1) bodily injury and property damage, (2) personal and advertising injury, and (3) premises medical payments. The form doesn’t cover exposures relating to (1) risks insurable under other policies; (2) risks subject to CGL coverage by endorsement, usually for an additional charge; and (3) risks not otherwise insurable.
The CGL policy, both standard and nonstandard, typically excludes property damage to the named insured's work, the insured's product, and impaired property.
Characteristics of contractors' E&O coverage
Based on the contractors' E&O policies reviewed, all are nonstandard, meaning each insurer has its own format and provisions; and are written on a claims-made basis.
The contractors' E&O policy is not meant to duplicate what the CGL policy covers; it specifically excludes liability for bodily injury, property damage, and personal and advertising injury. It also doesn’t cover any property damage liability not excluded by the CGL policy.
What is covered, depending on the in specific contractors’ E&O policy, is property damage to the named insured’s work, the insured’s product, and impaired property. This example was provided by an insurer offering this specialized coverage: A contractor completes a $35,000 electrical job. A few months after the building’s occupancy, the named insured’s product (a faulty junction box) causes a fire that extensively damages the building. The electrician’s CGL policy would cover damage to the building, but exclude the $35,000 electrical work. If the electrician had a contractors’ E&O policy, the remaining damages would have been covered, provided sufficient limits.
Related: Professional Liability gets crowded
The insuring agreement
The insuring agreements of the contractors’ E&O policy are somewhat more limited. These policies may duplicate what the standard ISO policy says but refine the agreement more narrowly. For example, an insuring agreement may reference "legally obligated to pay damages" but go on to say that the damages must result from an insured’s negligent act, error, or omission. The contractors’ E&O policy, in other words, doesn't cover liability for intentional acts or torts under contract.
The insuring agreements of these policies do appear to hinge coverage on errors, omissions, or negligent acts. Thus, if a contractor knowingly decides to cut a corner for purposes of cutting costs and a problem arises, the insurer could deny coverage because of the conscious, intentional act of making that decision, even though there was no expectation of a future problem.
The trigger of a standard CGL policy written on an occurrence basis is at the time of injury or damage, during the policy period. When the standard claims-made policy is issued, the trigger is when notice of the claim for damages because of bodily injury or property damage is received and recorded by the insured or insurer, whichever is first.
Contractors’ E&O coverage should not be confused with contractors' professional liability insurance, which is intended for contractors involved in construction management and design-build work. (Photo: iStock)
Nature of injury or damage covered
The standard CGL policy provides coverage for damages because of bodily injury, property damage, and personal and advertising injury. Property damage coverage consists of two parts: (1) physical injury to tangible property, including all resulting loss of use; or (2) loss of use of tangible property that is not physically injured. Also covered, to the extent no exclusion applies, is damage to tangible property, other than the named insured’s work, product, or impaired property. However, property damage does not include electronic data.
Not covered and the reason for contactors’ E&O coverage is damage to the named insured’s work, products or impaired property, with some exceptions.
The contractors’ E&O policy applies solely to property damage, usually defined to the same extent as the standard CGL policy. One contractors’ E&O policy covers damages because of claims for faulty workmanship, material, design, or products; or consequential loss resulting (1) from the insured’s actual or alleged error, omission, or negligent act; or (2) from a defect in material or in a product sold, either of which is installed by the insured. Another insurer covers damages while acting in the named insured’s capacity, as described in the declarations, or from a defect in material or a product sold or installed by the insured, while acting in this capacity.
These policies are nonstandard, so they must be viewed carefully to make sure they apply to the kind of exposure that confronts the contractor. If a contractor does electrical work, the insurer will likely want to limit its coverage to that specialty and not be surprised to learn that the contractor also does metal roofing or installation of fiber optics.
Unless a CGL policy is modified with CG 21 04, Exclusion — Products-Completed Operations Hazard, coverage applies for liability stemming from an occurrence while work is in progress, as well as after work is completed or a product has been relinquished.
Contractors’ E&O liability coverage, on the other hand, applies only after work has been completed or a product has been relinquished. No coverage applies while work is in progress.
Agents and brokers should review the following considerations when discussing contractors’ E&O coverage with clients:
— Because these policies or endorsements cover business risks, which commonly are assumed by insureds and can amount to large claims, think about the insurer offering the coverage. A standard line insurer might be more advantageous than an excess and surplus lines insurer. Longevity of the insurer is also important.
— Be certain not to confuse contractors’ E&O coverage with contractors’ professional liability, which is intended for such exposures as construction management and design-build work.
— Knowledge of CGL policy provisions is important because it may be easier to determine whether the E&O coverage is appropriate for the contractor.
— Even though the same insurer of contractors’ E&O coverage issues the CGL policy, don’t assume all gaps between the two policies are eliminated. Also, don’t assume that if the CGL policy does not apply, the E&O coverage will. Remember the foregoing discussion of General Casualty Company of Wisconsin v. Rainbow Insulators, Inc.
— Because property damage under the contractors’ E&O policy or endorsement must occur after the work (impaired or otherwise) is completed, it may sometimes be difficult to determine when damage first occurred and, as a result, generate a coverage problem.
— The contractors’ E&O policy limits coverage to negligent acts, errors, or omissions. The CGL policy covers any act (intentional or unintentional), error, or omission unless an exclusion applies.
— Contractors’ E&O coverage varies by insurer. Although it’s not a large market, some coverage is broad and other forms are narrow. The forms, therefore, must be reviewed carefully with the prospective contractor in mind.
— Don’t rely on the title of exclusions. An E&O policy with a delay exclusion should exclude only liability arising from a delay or failure to complete a contract on time. If the policy or endorsement also excludes liability arising from the failure to complete a contract, it should be avoided, to the extent possible. A problem is that contractors’ E&O coverage exists in a limited market, for certain kinds of contracts, and usually for low sublimits.
Karen L. Sorrell, CPCU is an editor with FC&S, the premier resource for insurance coverage analysis. She has an extensive background in commercial insurance underwriting. She may be reached at firstname.lastname@example.org. Additional information about FC&S Online is available at www.NationalUnderwriter.com.