NU Online News Service, Aug. 12, 3:40 p.m. EDT
Pennsylvania court cases ruling that subcontractors' faulty work should be excluded from commercial general liability (CGL) policies have caused a coverage gap for insureds and confusion for agents selling the policies, a state agent association said.
According to the Insurance Agents and Brokers of Pennsylvania (IA&B), the rulings have upset a longstanding interpretation of CGL coverage for faulty workmanship and are causing confusion among agents and carriers alike.
"We get the feeling that not everyone is on the same page," said Claire Pantaloni, Industry Affairs director at IA&B.
IA&B said traditional CGL policies, although excluding coverage for faulty work, have previously permitted an "exception to the exclusion" when the faulty work was performed by a subcontractor.
But in 2006 the Pennsylvania Supreme Court–in Kvaerner Metals v. Commercial Union Insurance Co.–overturned the exception and ruled that a subcontractor's faulty work could not trigger coverage because it was not an "occurrence" under the contractor's CGL policy.
Subsequently, in Millers Capital Insurance Company v. Gambone Bros, the Superior Court also excluded coverage for consequential damage caused by any faulty workmanship.
And in June 2010, the argument and conclusion were upheld in Specialty Surfaces v. Continental Casualty.
In response, IA&B said many insurance companies have filed endorsements redefining "occurrence" in order to restore coverage for their policyholders, while others have taken no action.
Essentially, Ms. Pantaloni said, there is a lot of confusion about how carriers are interpreting the cases and whether or not the carriers are providing coverage for subcontractors' faulty work.
Agents, she added, may not know what they are selling to clients, which could open them up to errors and omissions (E&O) exposure.
The cases, which IA&B said have ultimately resulted in a "coverage gap," have also left agents with contractor clients in search of coverage for subcontractors' faulty work.
"What it ultimately comes down to is confusion in the industry," said Jason Ernest, vice president of Advocacy at IA&B.
If carriers want to cover subcontractors' faulty work, that's fine, and if not, that's fine too, he said.
"But agents need to know one way or the other" in order to protect their own E&O exposure and to know what information to give to clients, he said.
IA&B has sent a letter and issue summary to carriers encouraging them to provide a clear understanding of their position on this issue to agents.
In addition, IA&B noted it will host a webinar in August for member agencies to learn how interpretations affect them and how they should respond.
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