Insurers are accustomed to courts finding coverage under policies that was not intended.
It’s rare that insurers find themselves fighting to maintain coverage that some of them, at least, intended to provide.
But, that’s the case in regard to exceptions to “your work” and “faulty workmanship” exclusions in policies that provide general liability coverage.
Insurers that write contractors and artisans may have thought that their insureds were protected for faulty workmanship by subcontractors, but recent court cases have thrown that into doubt.
As a result, several insurers have filed endorsements seeking, in effect, to preserve the coverage. AAIS has provided sample endorsement language to one member company that requested it, but does not contemplate filing action at this time.
Once again, the line between “business risk” and “fortuitous loss” is being re-examined.
The “subcontractor exception” to the “your work” exclusion is one of the most litigated provisions of policies that provide general liability coverage for contractors and artisans.
Before the exception was introduced, GL coverage for artisans and contractors was written on the premise that it could not serve as a performance bond for workmanship.
Accidental damage to other property, arising from negligence of the insured, could be covered as the type of fortuitous loss contemplated under GL coverage. But damage to or flaws in work done by or on behalf of the insured was to be retained by the insured as a “business risk.”
That changed somewhat in the mid-1970s with the introduction of the “broad form property damage endorsement” by the Insurance Services Office (ISO), then based in New York City, now in Jersey City, N.J. That endorsement introduced an exception to the “your work” exclusion for damage arising from work of an insured’s subcontractor.
The exception was incorporated into standard general liability policies in the mid-1980s, but the intent has apparently not been universally accepted by insurers.
What’s an insurer to do when it objects to certain applications of standardized wording?
Regulators may not accept more restrictive alternatives. Even if they did, agents and brokers may balk at selling policies that did not include a standard provision.
In the case of “your work” exceptions, some carriers have challenged coverage for claims over subcontractor work. Among other things, insurers argued that “your work” exceptions violated legal standards of insurance by, in effect, creating a warranty for the work of subcontractors.
Those objections were, for the most part, overruled on the basis of the plain reading of the exceptions. But another line of attack may hold more promise for carriers seeking to limit the application of your-work exceptions.
A more recent argument holds that the faulty work of a subcontractor, in and of itself,
does not meet the definition of “occurrence” needed to trigger general liability coverage.
As of 2007, some courts had agreed, although not a majority, according to Tampa-based attorneys R. Steven Rawls and Rebecca Applebaum, co-authors of an article on the topic found at www.IRMIonline.com.
“Several jurisdictions adhere to the position that faulty completed work is not an occurrence,” they wrote. “These jurisdictions similarly find that . . . the general contractor has accepted the subcontractors’ work and incorporated it into its own finished product.”
Even in those jurisdictions with a more restrictive reading of the “your work” exception, however, there was a good chance a court would find coverage for damage to other property besides that being worked on by a subcontractor.
Thus, it came as something of a shock when a lower court in Pennsylvania ruled in December 2007 that there was no distinction between insuring a subcontractor’s faulty work and damage to other property arising from that work.
The court upheld the insurer’s decision to deny coverage, and the Pennsylvania Supreme Court essentially upheld the ruling by declining to hear an appeal of the case.
“The practical effect of [the case] has been to preclude coverage under Pennsylvania law for the foreseeable consequential damages that are caused by faulty workmanship,” wrote attorney Randy Maniloff, of the Philadelphia firm White and Williams LLP, in December 2008.
Another practical effect of the ruling is to prompt a series of company filings in Pennsylvania. They implement endorsements that explicitly state that the term “occurrence” includes property damage to “your work” arising from work performed on the insured’s behalf by a subcontractor; property damage is included in the “products-completed operations hazard.”
According to Tony Leist, AAIS assistant vice president, commercial lines, carriers are preparing the optional endorsements to allow agents to provide their contractor customers with coverage they have come to expect.
By putting the coverage into an endorsement amending the definition of “occurrence,” carriers can choose for themselves whether to grant the coverage or not.
For those companies that want to exclude exposure to claims arising from subcontractors, AAIS provides two endorsements for doing so under its Artisans, Businessowners, and Commercial Liability programs.
One endorsement amends the “your work” exclusion by deleting the subcontractor exception entirely; the other deletes the exception only for locations or projects identified on a schedule that accompanies the endorsement.
AAIS faces a different situation regarding two of the construction classes for inland marine insurance: Installation Floater and Riggers Insurance.
Installation floaters cover loss to property that is being installed at a location; riggers insurance covers loss to property that is being hoisted into position. One or both of the coverages might be used to insure, for example, an air-conditioning unit being hoisted and installed on top of a building.
Under both classes, coverage is traditionally written as open-perils first party property coverage, and the coverage for property of others is triggered regardless of whether the insured is at fault. (The AAIS Riggers Insurance forms also include a form for covering legal liability, however.)
As with most first-party forms, the AAIS base forms for Installation Floater and Riggers Insurance include an exclusion for “faulty, inadequate, or defective . . . workmanship,” among other causes of loss.
Recently, some AAIS affiliates have expressed concern that the exclusion, if interpreted broadly, would substantially reduce coverage under the two classes. As it is, most losses under installation floaters or riggers insurance are the result of some error or miscalculation by the insured.
Some form of the exclusion is needed to preclude coverage for damage caused by a defect in the property that is being hoisted or installed, says Robert Guevara, AAIS vice president of inland marine.
Still, he adds, “I understand how agents and claims adjusters might read this exclusion too broadly.
“Since most losses involve operator error, applying the exclusion to errors during installation would eliminate most claims and the need for the coverage.”
The answer, he says, may be to revise exclusions so they continue to exclude coverage for losses arising from defects of the insured property itself, but provide coverage for losses that result from accidents that occur when hoisting or installing it.
AAIS affiliated companies in affected lines will be notified by bulletin of filing action addressing “your work” and “faulty workmanship” exclusions.
Works in Progress 
