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Contractors Face Restrictions in Coverage Under CGL Policies
Insurance coverage under commercial general liability (CGL) policies for construction risks has been constricting during the past several years. In large part, the reduction in coverage can be attributed to the insurance industry’s reaction to construction defect lawsuits. A series of endorsements amend the language of CGL policies to restrict insurance coverage available to contractors. The reduction in coverage potentially affects all parties involved in construction projects.
Eliminating the Subcontractor Exception
Between 1976 and 1986, CGL business risk exclusions operated collectively to preclude coverage for damage to construction projects caused by subcontractors. In 1976, insurers began offering coverage for damage to a named insured’s work caused by a subcontractor through an endorsement to the CGL policy known as the broad form property damage endorsement (BFPD). The BFPD deleted several portions from the business risk exclusions and replaced them with more specific exclusions that effectively broadened coverage. Significantly, the BFPD extended coverage to property damage caused by the work of subcontractors.
In 1986, the insurance industry incorporated this aspect of the BFPD directly into the CGL, extending coverage to an insured contractor’s completed work when the damage arises out of the work performed by a subcontractor. By including the BFPD into the 1986 standard Insurance Service Office (ISO) policy form, the insurance industry effectively conceded that a general contractor may not have the ability to control every aspect of a subcontractor’s work.
In December 2001, the ISO issued two new endorsements, CG 22 94 and CG 22 95, that eliminate the subcontractor exception incorporated into the 1986 ISO policy.
Through the introduction of CG 22 94 and CG 22 95, the insurance industry eliminated insurance coverage for the named insured’s work to the extent that it is damaged by a subcontractor. As the use of these endorsements becomes more widespread, insureds likely will have to pay a higher premium to avoid the attachment of these endorsements to their insurance policies and obtain coverage for damage to their completed work that arises out of the work of a subcontractor.
Limiting Coverage Afforded to Additional Insureds
Through the use of additional insured endorsements, the parties to a construction project transfer risk from the owner to the general contractor and from the general contractor to the subcontractor. Many additional insured endorsements are used by the insurance industry, and the coverage afforded by them can vary significantly. In the last several years, the trend has been to reduce the coverage afforded to the additional insured.
Under the 1985 CG 20 10 (the CG 20 10 11 85), the insurance coverage available to an additional insured was broad, providing coverage for liabilities arising out of the named insured’s ongoing and completed operations. The only qualification to the additional insured’s status was that liability had to arise out of the named insured’s work.
In 2004, ISO issued a revised version of the CG 20 10 (CG 20 10 07 04) that significantly reduced the amount of insurance coverage available to additional insureds.
The more recent policy restricts additional insured coverage by eliminating the “arising out of” language contained in the CG 20 10 11 85 and substituting a “causal nexus” requirement, which limits coverage to bodily injury or property damage caused in whole or part by the named insured’s acts or omissions.
Notably, the CG 20 10 07 04 eliminates coverage for third-party over actions, which typically involve personal injury actions by employees of named insureds (typically subcontractors) against additional insureds (typically general contractors and owners). Third-party over actions often allege a failure to maintain a safe workplace.
Prior to the issuance, general contractors and owners with additional insured status were afforded coverage for such claims. For an owner or general contractor that is named as an additional insured under the CG 20 10 07 04 endorsement, insurance coverage for a third-party over action is unlikely. Coverage is only triggered under this endorsement if the complaint alleges the employee’s injuries were “caused, in whole or in part,” by the subcontractor employer’s acts or omissions.
Plaintiffs in third-party over actions, however, typically do not allege any fault against the subcontractor employer because workers’ compensation statutes bar employees from suing their employers. As a result, there is a potential gap in insurance coverage that exposes owners and contractors to significant liability exposure that did not previously exist.
The CG 22 94 and the CG 20 10 07 04 endorsements have restricted insurance coverage available under CGL policies for many construction risks. Owners and general contractors that expect to benefit from the coverage afforded by CGL policies must understand what construction risks are, and are not, covered—or face exposure.
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