Understanding CGL Coverage
By David D. Thamann, JD, CPCU, ARM
From the December 2006 issue of Claims Magazine
There seems to be rather large increase in the amount of questions received recently by FC&S concerning the damage to property and damage to your work exclusions on the commercial general liability (CGL) coverage form. These exclusions come into play when the insured performs work on a customer's property and that work is then judged to be faulty, so that the customer makes a claim for property damage against the insured. The exclusions are applied to prevent the CGL form from guaranteeing the work of the insured, that is, to prevent the CGL form from providing liability coverage for the insured for the costs of replacing and repairing defective materials or poor workmanship. Such damage is a business risk that the insured must bear himself.
However, the exclusions that would prevent coverage for damage to the insured's work are written in a way that insureds and claims adjusters alike often have problems with understanding the correct application. The standard damage to property exclusions on the ISO CGL form read as follows. This insurance does not apply to: property damage to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations—exclusion 2(j)(5); or to that particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it—exclusion 2 (j)(6). The damage to your work exclusion applies to “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard”—exclusion 2(l).
The following are some of the questions received due to these exclusions.
Our insured was hired to fix a plumbing problem. In order to do that, the insured would have to cut cement to access the water line. The insured marked the area for cutting and then subcontracted the actual concrete cutting to another. The subcontractor started cutting the concrete and hit an electrical line. The insured admits fault for not checking the drawings before marking the area to be cut. Would exclusions 2(j)(5) or 2(j)(6) on the CGL form apply to prevent coverage for damage to the electrical line and the concrete that was mistakenly cut?
The damage to the electrical line is covered by the CGL form because neither exclusion would apply. The insured was not performing operations on the electrical line and his work was not incorrectly performed on the line at the time of damage. This was an example of the insured's work negligently damaging another person's property and that is what the CGL form is meant to cover.
As for the damage to the concrete, exclusion 2(j)(5) would prevent coverage (leaving aside the issue of whether this was even an occurrence as defined on the CGL form). That exclusion prevents coverage for property damage to that particular part of real property on which the insured or any subcontractor of the insured is performing operations if the damage arises out of those operations. In this case, the damage to the concrete, which is real property, arose out of those operations of the subcontractor while the operations were on going. So, exclusion 2(j)(5) would apply.
The insured is doing stucco work around windows. The insured fails to protect the windows and gets cement on them, so he tries to remove the cement. In doing so, he scratches the windows. Would exclusion 2(j)(5) apply? The insured was not hired to work on the window, but he did damage them by trying to clean up his stucco work.
Exclusion 2(j)(5) would apply in this instance. The property damage occurred to a particular part of real property on which the insured was performing operations, and the damage arose out of those operations. It makes no difference that the insured was not hired to work on the windows; he was performing operations on the window when the damage occurred and he caused the damage due to his cleaning operations.
Our insured was hired to place sod around a new pool. To gain access, he had to remove and then replace a section of fencing. While replacing the fence, he damaged it. Which exclusion, if any, on the CGL form would apply?
The exclusion that would apply here depends on whether the fence is considered real property or personal property. If it is personal property, then exclusion 2(j)(4)—the care, custody, or control exclusion—would apply since the insured had the fence in his care and control when he damaged it. If the fence is considered real property, the exclusion 2(j)(5) would apply since the insured caused property damage to that particular part of real property on which he was performing operations and the property damage arose out of those operations.
The insured was hired as a subcontractor for various work at a particular location. The insured then subcontracted out some of his work to another. Part of the work that the insured subcontracted out was tile work in the various bathrooms in the project. While the subcontractor was doing the tile work, he got grout on the tubs, causing damage. Would the claim for this damage be covered under our insured's CGL form or is there an exclusion that would apply? We are thinking that either 2(j)(5) or 2(j)(6) would exclude coverage.
Neither of the exclusions you mention would apply to this claim for damages. Both exclusions apply to situations where that particular part of property is affected by the insured's work on them at the time of the damage. 2(j)(5) pertains to that particular part of real property on which the insured, or any subcontractor working on the insured's behalf, is performing operations; 2(j)(6) pertains to that particular part of any property on which the insured's work was incorrectly performed.
In this instance, the insured was not performing operations, was not working, on the tubs. He, through his subcontractor, was working on the tiles when the damage occurred. If the tiles had been damaged, that would be excluded property damage, but since exclusions have to be read and applied narrowly and in favor of the insured whenever reasonably possible, the damage to the tubs is just collateral and indirect damage since the subcontractor was not actually working on the tubs. The claim for damage to the tubs is not excluded.
Our insured installed a hardwood floor, but subcontracted out the sanding and finishing of the floor. After the job was done, the floor started to buckle. It was determined that the floor was not installed properly and moisture is getting under the floor and causing the buckling. We think that exclusion 2(l) would prevent coverage in this situation but would the work of the subcontractor change the situation?
From your description of the insured's work as being done improperly, the damage to your work exclusion—2(l)—would prevent coverage in this incident. This was a completed operations claim since the damage occurred after the work of the insured was finished, and damage to the insured's work arose out of that work. The exception to exclusion 2(l) does provide coverage for the damage if the work was performed by a subcontractor on behalf of the named insured, but the sanding and finishing work was not the cause of the damage; it was the improper installation work of the insured that basically caused the damage. So, the exception will not apply and the insured does not have coverage for this claim.
The insured was hired by the claimant to do various home repairs, including work on the windows, gutters, and roof. The insured did the window and gutters work, but subcontracted out the work on the roof. The work on the roof was completed by the subcontractor and as part of this work, a “torch down” was required. Later that day, a fire started because of this torch down and it destroyed the roof and some of the work that had been finished by the insured. Would this property damage claim be excluded from coverage due to exclusion 2(l), or does the exception provide coverage? And, if there is coverage, does it apply to the roof damage only or to all the damage done by the fire?
This is a completed operations claim since the requirements of completed work under the terms of the CGL form have been met, and the property damage occurred after the work was finished. Exclusion 2(l) will not apply because the subcontractor's work caused the damage. That exception allows coverage if the damaged work or the work out of which the damage arises was performed by a subcontractor. In this instance, the damage to the work of the insured and to the work of the subcontractor will be covered because the work out of which the damage arose was done by the subcontractor, thus empowering the exception to exclusion 2(l).
Our insured was hired to clean the carpeting of the claimants. After the job was completed, the claimant complained that the carpet smelled musty and moldy. We believe that an exclusion on the CGL form would apply here, but which one is applicable? 2(l)? 2(j)(5)? Or 2(j)(6)?
This claim is a completed operations claim because the damage occurred after the work of the insured had been completed. Exclusions 2(j)(5) and 2(j)(6) do not apply to completed operations claims. They are applicable when the property damage is done by the insured while the work is still on going. Exclusion 2(l) applies to property damage to the work of the named insured that is included in the products-completed operations hazard, a defined term on the CGL form. That definition describes this scenario and so, exclusion 2(l) will prevent coverage for this property damage claim.
The insured was hired as a general contractor to build a house for the claimant. The entire job was subcontracted out to others. At issue is damage to the deck. The insured hired one subcontractor to frame and side the house. That subcontractor built the deck with plywood, but another subcontractor then came in to install a rubberized underlayer over the plywood; this subcontractor then installed slate on the deck. The allegation against the second subcontractor is that the underlayer was installed improperly and not up to manufacturing specifications. Eventually, water got underneath the tiles and underlayer and rotted the plywood and framing. The water also entered the house and damaged the interior floors. So, what part of the deck, if any, would be covered? And, if the work of the second subcontractor damaged the plywood installed by the first subcontractor, is there coverage for that damage?
The exception to exclusion 2(l) applies to any property damage that arises out of the work of subcontractors. If the damaged work was done by a subcontractor, that is not excluded. If the damage arises out of the work of a subcontractor, that is not excluded.
The purpose behind this exception is to give the named insured coverage for property damage for which he may be held legally responsible due to his status as the general contractor, but for which he did not actually perform himself. In this case, since the property damage arose out of the work done by the second subcontractor, the damage he caused because of his work is covered by the CGL form. This includes the damaged plywood installed by the first subcontractor.