(April 2019)
When covering contractors with a Commercial General Liability Policy (CGL), the question will arise as to why a contractor should pay the additional premium for products-completed operations coverage because it appears that the contractor’s work is excluded. However, a premium is charged, so there must be some coverage. SO, the question is—what is the CGL products-completed operations hazard coverage for a contractor?
Before starting the analysis, it is important to understand the nature of the CGL. The CGL automatically provides for both premises and operations exposures as well as those resulting from products-completed operations hazards. This is pre-built into the unendorsed policy as a package of coverages. Unless a policy is specifically endorsed to remove the products-completed operations coverage, the coverage is provided.
In order to understand
the question, it is important to review the coverage form definitions that
relate to this subject. 16. Products-completed operations hazard
Bodily injury and property damage that occurs away from the named insured's owned or rented premises as a result of the named insured's product or work. Products that are in the named insured's physical possession and work that have not yet been either completed or abandoned are not product-completed operations hazard.
Work is considered completed when the work called for in the named insured’s contract has been completed. When there is a contract for work at multiple sites, the work at one site is considered completed even if there is still work to be done at other sites. Whenever part of work done at a site is put to its intended use by any party, other than a contractor or subcontractor still working on the same project, that part of the work is considered complete. Work is considered completed, even if it may still need service, maintenance, correction, repair, or replacement.
This definition does not include bodily injury or property damage that arises from any of the following:
22. Your work
This is work or operations performed by the named insured or by others on its behalf. Materials, parts, or equipment furnished in connection with such work are included. The warranties or representations made concerning the fitness, quality, durability, performance, or use of the work are also your work. The providing of warnings or instructions that are adequate is also your work and this includes the failing to provide them.
The only completed operations specific exclusions apply to only property damage. This provides a powerful reason for a contractor to have coverage for potential bodily injury claims. For example, a bodily injury claim could include illness that results from inhaling fumes from paints, heating units, insulation, and building materials. Coverage would also apply to injury that results from a fire caused by improper electrical installation.
The ISO CGL Coverage Forms does contain three exclusions that must be examined in order to understand the coverage that is provided. These exclusions are found in Section I Coverages Coverage A Bodily Injury and Property Damage Liability 2. Exclusions. The specific exclusions are:
j. Damage to Property
Note: The portions of property attached or adjacent to such property are treated differently.
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Example: We Build Houses is building a porch attached to a dwelling. We Build’s employee accidentally starts a fire that burnt down the entire structure as well as several other adjacent structures. In many jurisdictions, the damage to the porch is excluded but the rest of the damage is covered. Based on the coverage form's language, courts in many states have ruled that if We Build Houses constructs only a part of or an addition to an existing building, only the part being directly worked on or having operations performed on it is excluded. |
An entirely different scenario develops when a contractor builds an entire building or structure as opposed to an addition to an existing building.
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Example: A dwelling under construction that was nearly completed needed some welding work done on the kitchen plumbing. The welding torch We Build Houses used for the work caused an accidental fire. In this case, the question involved determining if the dwelling was the particular part of real property being worked on and excluded or if the plumbing was the particular part and excluded, while the rest of the building was covered. |
Products-completed operations property damage losses that involve personal property are easier to resolve. Personal property a contractor works on is excluded.
On the other hand, products-completed operations property damage losses that involve real property are more complicated. In the past, the building or structure that a contractor was hired to build was considered to be in its care, custody, and control and any property damage to it while in the course of construction was excluded. Numerous court cases supported this position and held that the CGL Coverage Forms were not performance bonds and did not guarantee the contractor's quality or workmanship. It also was not held to be builders risk coverage. Both performance bonds and builders risk coverage forms provide coverages that CGL Coverage Forms do not. For this reason, they must be purchased separately.
Courts in a few jurisdictions have recently looked at real property losses differently. In a few cases, while the construction contract arrangement called for the contractor to erect an entire building, the loss a specific event caused affected only a single portion of the building. In those cases, the courts found that only the loss or damage to the portion of the building where the contractor or its subcontractor was working and where the loss or damage to the entire building originated was excluded. Coverage applied to the resulting damage to the rest of the building.
Note: This language excludes coverage if a problem occurs during construction and before the job is complete. However, coverage applies if a problem occurs after construction is complete and the job is turned over to the customer.
k. Damage to Your
Product
This exclusion is clear and straightforward. There is no coverage for property damage to the named insured's product (as the coverage form defines it) that arises out of the product itself or any part of it.
Note: This may not seem to be a problem or an area of concern for contractors. However, the argument may be made that a house might be considered a product instead of completed work.
l. Damage to Your Work
There is no coverage for property damage to the named insured's work when
the damage arises out of that work or any part of it that is included in the
products-completed operations hazard.
There is an exception to
this exclusion though for work that is performed by a subcontractor hired by an
insured Coverage applies if the damage to property is the result of the
subcontractor’s completed work.
Some may believe that products-completed operations hazard coverage for contractors under the CGL Coverage Forms is not significant compared with the premiums charged. However, the fact is that they do provide some important coverage and the decision to purchase or not purchase it should be considered carefully.
The bodily injury coverage alone should be cause for the purchase. In addition, while property damage to property the contractor worked on is excluded, damage to adjacent or surrounding property that was not in its direct control is covered if the loss or damage is due to the contractor's negligence. The final point to consider is that while property damage to the contractor’s work within the products-completed operations hazard is excluded there is coverage when such damage is caused by subcontractors.
Related Court Cases:
Care, Custody, or Control Exclusion Held Applicable When Only "Care" Was Exercised by Insured
Property Damage Exclusion Held Applicable to Entire Renovation Area
Work Project Exclusion Held Applicable to Control of Project by Construction Manager
Installation Rider Held to Offset Custody and Work Performed Exclusions
Roofing Operation Exclusion Held Applicable to Claim against Carpentry Contractor
Contractor Liable for Completed Operations
General Contractor's Policy Excludes Faulty Work Performed by Subcontractor
Insured's Poor Workmanship Not Covered Under Their CGL Policy
Contractual, Incidental Damages Excluded
No Coverage for Roofer's Warranty
Products-Completed Operations Exclusions Void Insurer Duty to Defend
Commercial General Liability Damage from Leaky Windows Covered Under Contractor's Policy