A defective precedent for 'defective work' in insurance coverage

Prior to a 1986 revisions to the standard ISO CGL policy form, it had been found that the standard-form CGL policy “precluded coverage for damage to construction projects caused by subcontractors.” The subcontractor exception specifically was added to CGL policies following agreement between construction contractors and insurance companies that CGL policies “should cover defective construction claims ‘so long as the allegedly defective work had been performed by a subcontractor rather than the policyholder itself,’” (Credit: Ryland West/ALM)

Litigation following a construction project is as common as a coffee shop in Manhattan. The availability of insurance coverage can be pivotal to the defense and resolution of such lawsuits. However, insurance coverage for construction defects litigation in New York has long been clouded by misunderstandings surrounding the First Department’s 1994 decision in George A. Fuller v. U.S. Fidelity & Guaranty, 200 A.D.2d 255 (1st Dep’t 1994) leave to appeal denied sub nom. Fuller v. U.S. Fidelity & Guaranty, 84 N.Y.2d 806 (1994). Insurance companies often cite this case as a basis to deny coverage when there are underlying allegations concerning defective work — a common occurrence following a construction project. That decision has been misconstrued because of old policy language no longer used in the industry. The decision should be reexamined and not so readily cited as a basis to deny coverage.

When a lawsuit alleges property damage and defective construction, the general contractor seeks insurance coverage under commercial general liability policies. Coverage is sought from both its own insurance companies and from the subcontractors’ insurance companies because subcontractors generally agree to name the general contractor as an additional insured. A standard exclusion in the commercial general liability (CGL) policy applies to “damage to your work,” and insurance companies sometimes contend that the entirety of the construction project was the general contractor’s “work,” and thus any damages sought for resulting property damage are excluded because they seek repairs for defective work. The George A. Fuller decision and its progeny are often cited for support of this argument.