Construction on an Annual Policy

For many insurance professionals focusing on construction, any in-depth discussion of coverage triggers, prior-work exclusions and continuous/progressive damage wording is likely to cause serious confusion. Of course, it doesn’t have to. Focusing on the basics of occurrence policies — how coverage is triggered and, more importantly, how the products and completed operations coverage apply — allows agents to understand how Montrose wording and prior work exclusions affect coverage. Even better, this understanding can enable agents to negotiate and sell a better insurance product.

The most important understanding to have when dealing with construction on an annual basis is how the policy coverage is triggered. Put simply, the policy applies to bodily injury (BI) or property damage (PD) that occurs during the policy period, provided that such bodily injury or property damage arises out of an occurrence.

With construction, however, the policy period concept is complicated because BI and PD occur over time and multiple policy periods. As a result of several cases where the date of the bodily injury or property damage could not be determined, states have varying theories on how coverage is triggered.

In California, the “continuous trigger,” resulted from the 1995 court decision in the Montrose Chemical Corp v Admiral Insurance Co.case. The court ruled that all commercial general liability (CGL) policies in force during the time of exposure and subsequent manifestation of the bodily injury and property damage are triggered. Thus, gradual property damage or bodily injury can effectively trigger several policies over successive policy periods.

In addition to the policy trigger, it is essential that insurance agents understand how the products and completed operations coverage applies. Remember, regardless of when the work is completed, the CGL policy only responds to bodily injury or property damage that occurs during the policy period. The products and completed operations coverage do not extend the policy period or provide any kind of “tail” going forward. Bodily injury or property damage arising out of past work is not covered by the policy that was in place during construction, but rather by the policy that is in place when the bodily injury or property damage occurs. Thus, the most valuable feature of products and completed operations coverage is the coverage it provides for past, completed work that may give rise to bodily injury or property damage in the present. You can see how amending the CGL policy with prior work exclusions and continuous/ progressive damage limitation endorsements affect the continuity of coverage over a number of years that an insured would otherwise enjoy.

As insurance carriers have made clear in the past few years, prior work exclusion is no longer a term with a single meaning. There are countless variations of this exclusion appearing in policies today. However, they generally fit into three basic categories:

A total prior work exclusions generally precludes coverage for any work commencing prior to the policy period. This of course creates problems for contractors with large amounts of work carrying over from one policy period to another. Furthermore, completed work from years’ past is not covered.

Prior completed work exclusions, on the other hand, are somewhat less restrictive. The exclusion applies only to work completed prior to the policy period but would not exclude work that began but was not completed during a prior policy period.

The hybrid of the two types of exclusions is typically a prior completed work exclusion with restrictive definitions on what constitutes “completed.” In many cases, 90-day pauses in construction or certain portions being put to use before others render the construction complete, even if the owner and the contractor do not.

The best scenario is not to have any of those exclusions on the policy. However, in many cases, the coverage sought by elimination of those types of exclusions is not commercially available.

Unlike prior work exclusions, continuous/ progressive damage limitations do not have to be feared. However, some forensic analysis is needed. In a nutshell, bodily injury and property damage is considered continuous or progressive if it first commenced/existed prior to the policy period, whether the insured knew about it or not. By itself, this wording could be disastrous in a continuous-trigger state such as California.

For example, if as a result of faulty window installations in a tract housing development, water intrusion and subsequent property damage began in a prior policy period but was not known to have occurred until the current policy period (when homeowners began seeing the damage), the current policy might exclude the loss because it first began in a subsequent policy period and, the subsequent policy might only provide coverage for the property damage that occurred during that policy period — which could be a very small portion of the loss.

However, in 2004, ISO revised the insuring agreement in their CGL form to include bodily injury or property damage occurring during the policy period (and for which the insured was unaware that the bodily injury or property damage began in a prior policy period) and “any continuation, change or resumption … after the end of the policy period.” That led to a policy with a known manifestation trigger.

For example, water damage that occurred over six years, in theory would only trigger the policy in force when the damage first became known to the insured and, that policy would continue to provide coverage for the continuation of that water damage after policy expiration. However, before binding a policy with continuous/progressive wording, it is imperative that the insurance agent check the coverage provided on the expiring policy to ensure that its insuring agreement covers the “continuation, change and resumption” that the new policy will not.

When it comes to insuring contractors on an annual basis, the importance of understanding policy triggers and how the products and completed operations coverage apply cannot be understated. Prior work exclusions and continuous/progressive damage limitations can manipulate and sometimes destroy continuity of coverage from policy period to policy period. Continuing to understand the product you are selling is the most proactive way to weather the storm.