Contractor’s General Liability Coverage Limitations – A Road Filled with Landmines
Gencon, a general contractor, was nearly finished constructing a five-story apartment building when an employee accidentally damaged a sprinkler head causing a leak. Gencon made an emergency call to the plumbing store next door, and Joe the plumber promptly arrived and quickly repaired the damaged sprinkler head before any significant water damage occurred. Unfortunately, one year after completing the project, the repair failed and the building experienced significant water damage. Gencon was sued and submitted a claim to its insurer.
Much to Gencon’s dismay, the insurer denied coverage based on the fact that the faulty work was done by a subcontractor, Joe the plumber, who did not have insurance that complied with the subcontractor’s warranty limitation form on Gencon’s general liability policy. In its rush to fix the damaged sprinkler head, Gencon had failed to ask Joe the plumber for a COI. Gencon learned a hard lesson and worked with its agent to negotiate the removal of that form at its next renewal.
This type of restriction is not uncommon. Contractor’s general liability policies, particularly in the excess and surplus (E&S) marketplace, often include a variety of onerous endorsements. This article touches upon just a few of the more common and difficult. Remember different carriers apply different labels to many of these forms.
Broadened Injury to Employee Endorsements
The ISO Commercial General Liability Coverage Form (12/07) provides for an important exception to the exclusion for bodily injury to the insured’s employees (exclusion e, Section 1, Coverage A). The standard exclusion does not apply to liability assumed by the insured under an “insured contract.” It is not uncommon for carriers to attach forms that eliminate this important exception to the employee exclusion, particularly for contractors operating in New York where “action over” claims are relatively common. These endorsements are often referred to as “labor law” exclusions, and their intent is to preclude coverage for claims by injured employees. These typically involve claims made against the general contractor and/or job owner, alleging that they violated “safe place to work” requirements (e.g., N.Y. Labor Law S240 commonly referred to as “the scaffolding act”). The general contractor or owner would then typically look to the employee’s employer (i.e., the general contractor or subcontractor) for coverage via the indemnification agreement in the construction agreement. The elimination of coverage for these “action over” type claims presents a major gap in coverage, and every attempt should be made to have this type of limitation removed.
Classification Limitation
Carriers will use this type of endorsement in an attempt to restrict coverage to the specific operations/exposure that they’ve classified and rated for on the policy. One carrier’s form reads as follows:
“This insurance applies to ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ not otherwise excluded herein, arising out of only those operations which are described by the classification shown on the Commercial General Liability Coverage Declarations, its endorsements and supplements.”
The problem with these forms is that ISO commercial lines classifications were never intended to be fully descriptive of a contractor’s operations and as a result, they leave significant room for coverage disputes in situations in which a contractor is involved in ancillary activities not clearly described by the classification itself. If possible, attempts should be made to have these limitations removed or to have the carrier utilize a manuscript form that more clearly outlines the covered activities.
Contractual Limitation
The ISO Commercial General Liability Coverage Form (12/07) provides relatively broad contractual coverage within the basic contract. Most notably, item “f.” within the definition of “insured contract” (12/07) specifies that an insured contract includes:
“That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”
It’s important to note that there are exceptions to this section; refer to the policy language for details.
This is the section of the definition most applicable to contractors utilizing construction and subcontractor agreements. Carriers, particularly in the E&S markets, often attach ISO form CG2139 (10/93), Contractual Liability Limitation, which eliminates section “f.” of the definition of “insured contract.”
By eliminating section “f.” most all contractual coverages are removed. There would be no coverage for liability assumed in a construction agreement or for “action over” type claims. This is a major gap in coverage and every attempt should be made to negotiate for the removal of this endorsement.
Cross Suits Exclusion
These endorsements are sometimes very broad and may exclude coverage for suits by any insured against any other insured. There are also examples where carriers include language that precludes coverage for suits by employees (with no exception for liability assumed under an “insured contract” — a major concern in states such as New York where employee “action over” claims are common). Language that excludes coverage for suits by any insured against any other insured should be avoided, most notably because it could exclude coverage for a suit brought by any party included as an additional insured under the named insured’s policy. If this type of endorsement cannot be removed, every attempt should be made to limit its applicability to suits by one named insured against another named insured, or at least only to suits between organizations in which the named insured has a controlling interest.
Exclusion – Damage to Work Performed by Subcontractors on Your Behalf
ISO form CG2294 (10/01) or a carrier’s equivalent endorsement eliminates the exception to the exclusion for damage to “your work” (exclusion l., Section I, Coverage A of the Commercial General Liability Form 10/07) for work performed on the insured’s behalf by subcontractors. If your insured utilizes subcontractors, this type of restriction presents a significant gap in coverage. If your insured is a general contractor, it virtually eliminates completed operations property damage coverage, at least in terms of the work done by or on behalf of the insured. Once again, this type of restriction needs to be understood and, if subcontractors are utilized, every attempt should be made to negotiate for its removal.
Independent Contractors Limitation/ Subcontractor Warranty Endorsements
These endorsements establish minimum requirements for subcontractors relative to insurance and other risk management controls. These forms most often require at a minimum that a written indemnification agreement in favor of the insured be in place, certificates of insurance be obtained, specified insurance limits be required of the subcontractors and that the insured be named as an additional insured on the subcontractor’s general liability policy.
Typically, failure to comply with the terms of these endorsements results in one of four types of penalties:
You should work with your underwriter or wholesale broker to negotiate for the removal of these forms or the use of the least punitive version. In particular, every effort should be made to avoid the first type of penalty.
Residential Exclusion
Residential exclusions can be very broad (e.g., all types of residential possibly including apartments) or more narrowly focused (e.g., only applicable to work involving new condominium, multi-unit habitational or tract homes).
Some forms specify the maximum annual number of new starts for home builders or the maximum number of condominium units in a given project. It is critical to carefully read these forms to ensure your client’s operations do not include any of the excluded coverages. Ideally you should attempt to have the form removed or modified dependent upon the activities of your contractor.
Total Pollution Exclusion
The pollution exclusion within the ISO Commercial General Liability Coverage Form (12/07), although very restrictive, does provide limited pollution coverage. For example, coverage is not specifically precluded for injury or damage arising out of: the products and completed operations hazard, or for the accidental escape of fuels; lubricants or other operating fluids needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of mobile equipment; and for the accidental release of gases, fumes or vapors from materials brought into a work-site in connection with operations being performed by the contractor. Additionally, for ongoing operations at an additional insured’s site, there is the following exception:
“‘Bodily injury’ or ‘property damage’ for which you may be held liable, if you are a contractor and the owner or lessee of such premises, site or location has been added to your policy as an additional insured with respect to your ongoing operations performed for that additional insured at that premises, site or location and such premises, site or location is not and never was owned or occupied by, or rented or loaned to, any insured, other than that additional insured.”
Carriers often (E&S carriers most often) attach a “total pollution exclusion” to their policies which is much more restrictive than the standard ISO GL pollution exclusion and eliminates the exceptions to the standard exclusion noted above. If possible, this exclusion should be removed. Consideration should also be given to the purchase of a separate contractors pollution policy. Even non-environmental contractors have a need for this coverage.
Conclusion
Hopefully it is clear that a careful review of the terms and conditions, especially when dealing with E&S markets, is critical. These examples are only a few of the restrictive forms that agents and brokers need to be aware of in order to successfully navigate their contracting account’s coverage mine fields.