Many contractors often consider their biggest challenge is the financial side of their business, including raising sufficient capital to form their companies and protecting their investment from the inevitable slow-downs that can occur due to decreased demand, higher interest rates or even a pandemic. While contractors are experts in their individual trades of construction, many do not have the same training or experience in fundraising, finance or investment strategies. One of the most basic efforts contractors can take to protect their capital is to purchase a commercial general liability insurance policy.

Although a CGL policy is certainly a necessity for general liability protection, as well as a job requirement from most owners and developers, it does not provide coverage for all potential losses. A general understanding of the basics of the CGL policy, including what is typically not covered, can mentally and financially prepare contractors for a potential denial from their carrier of certain claims.

The Policy Period

Each CGL policy has a defined “policy period,” which typically lasts one year from the date of issuance. A CGL policy will only cover incidents that occur during its policy period. Contractors need to be aware of this “policy period,” not only for the purpose of obtaining a renewal policy or a policy from another carrier, but also for the purpose of reporting to the correct carrier when a loss occurs. This is especially of concern in construction defect cases, which may cause delayed damage to a larger project. Determining when the “injury” occurred, and therefore which policy may provide coverage, will be dependent on the policy language and state law, both of which can vary widely. The best practice for contractors when faced with notice of a potential claim is to notify the current carrier, the carrier at the time of the project and any carriers who issued policies between the two. A delay by the contractor in providing notice to its carrier could have an impact on coverage for the loss.

Types of Claimed Injuries

The CGL policy is written to generally protect insureds from liability to the general public associated with the work being performed by the insured contractor (including its employees and subcontractors). This includes providing both a legal defense and coverage for three types of claimed injury:

• bodily injury;
• property damage; and
• personal and advertising injury.

Bodily injury and property damage, even in the legal world, are fairly self-explanatory. Personal and advertising injury is more completely defined within the policy and typically applies to actions involving intangible or economic injury, including false arrest or imprisonment, invasion of privacy, libel or slander and copyright infringement. As an example, the CGL policy typically provides coverage for a trip and fall injury to a pedestrian passing by the jobsite, damage to underground utilities or a neighboring structure as a result of the contractor’s work and/or the contractor’s inappropriate use of another’s likeness or protected marketing materials on its website.

Types of Exclusions

However, the protection provided by a CGL policy is not all inclusive. After providing for blanket coverage in its initial policy provisions, the CGL policy’s exclusionary language thereafter restricts coverage in both expected and sometimes unexpected ways.

For example, if a person injured by the contractor’s work is an employee of the contractor, rather than a mere passerby, the CGL policy will typically exclude coverage for such a claim under its Workers’ Compensation and/or Employer’s Liability exclusions. This is true even in circumstances where the injury is not compensable under the applicable state’s workers’ compensation law. See Scottsdale Ins. Co. v. GFM Operations, Inc., 789 F. Supp. 2d 1278, 1288 (S.D. Fla. 2011) (“the only coverage intended, and the only coverage for which a premium has been paid, is for liability to the general public as opposed to liability for the insured's employees.”).

“Business risk exclusions” are particularly significant. Generally, in the construction context, the most prevalent business risk exclusions are those relating to “damage to property” and “damage to your work.”

In reference to the scope of these exclusions, the U.S. District Court of the Southern District of California stated (quoting the Court of Appeals of Georgia):

There are two kinds of risks that are incurred by a contractor. The first is the business risk borne by the contractor to replace or repair defective work to make the building project conform to the agreed contractual requirements. This type of risk is not covered by the [CGL] policy, and the business risk exclusions in the policy make this clear. The second is the risk that the defective or faulty workmanship will cause injury to people or damage to other property. Because of the potentially limitless liability associated with this risk, it is the type for which [...] commercial general liability coverage is contemplated.

Pulte Home Corp. v. Am. Safety Indem. Co., 264 F. Supp. 3d 1073, 1079 (S.D. Cal. 2017) (quoting SawHorse, Inc. v. S. Guar. Ins. Co. of Georgia, 604 S.E.2d 541, 544 (2004)).

The interpretation of these exclusions varies somewhat state by state, and their application is fact specific. The pertinent sections of the “damage to property” exclusion (sections (5) and (6)) seek to preclude coverage for damage to both real property and other structures where work is being performed by a contractor, if the damage arises out of the contractor’s defective work and the work is still ongoing.

Similarly, the exclusion for “your work” excludes coverage for any damages to the specific work the contractor has performed (e.g., damage to concrete walls constructed by the mason due to the mason’s defective work). This exclusion is only applicable where the work has been completed. In the insurance policy, the term for completed work is the “products-completed operations hazard,” which is more specifically defined in the policy and contains conditions that do not necessarily apply to all completed work.

Other important exclusions are those relating to expected or intended injury, pollution and the transportation of mobile equipment (e.g., bulldozers or forklifts). Additionally, various endorsements added to a CGL policy may impact the scope of coverage and/or alter the applicability of the exclusions discussed herein.

Indemnity Provisions

Most independent construction contracts include fairly broad indemnity provisions requiring a subcontractor to defend; hold harmless; and completely indemnify the general contractor, owner and/or developer from any and all claims, demands, etc. arising out of the subcontractor’s work. These provisions are not just boilerplate contract language; rather, contractors at every level rely upon and enforce these provisions as an extra layer of protection from liabilities over which they may have little control.

The good news is that most CGL policies provide comprehensive coverage for this contractual liability. Indeed, CGL policies typically contain a general exclusion for “Contractual Liability,” but then walk back the exclusionary language and render it inapplicable to indemnity provisions like the ones found in most construction contracts. This includes coverage for the defense costs and attorney’s fees of the party to be indemnified.

There are thousands of state appellate, district court and circuit court opinions across the country that have interpreted the application of CGL insurance policies to specific construction contexts. The factual distinctions in each case also make it difficult to predict how certain policy language may apply to the next scenario.

The best practice for contractors is to address any concerns with a broker at the time the policy is issued, so that they can put a financial plan in place for potentially uninsured risks associated with faulty workmanship.