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Evaluating Occurrences, Carriers, and Parties

Occurrences under CGL Policies

What You need to Know About Occurrences under CGL Policies

An “occurrence” under a standard commercial general liability (CGL) policy is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” A construction defect claim may therefore involve more than one occurrence during a single policy period or during multiple policy periods where, for example, a building envelope failure occurs at multiple locations at various times. In such event, the available policy limits of an insured may be increased.  Typically, contractors obtain CGL coverage of $1 million per occurrence, with $2 million in the aggregate. Thus, if there are two separate failures, there could potentially be $2 million of available coverage. While these limits are common, additional limits may apply and would be reflected on a certificate of insurance.

While not as common, a contractor may have CGL coverage with different carriers within the same policy period such as where the contractor changes carriers during the period. In the preceding example, if the property damage occurred throughout, or during each of, the policy periods of both carriers, there potentially could be coverage under each policy subject to separate policy limits, provided the damage occurred during the policy period.

Even where there is an occurrence that causes property damage during the relevant policy period, coverage may be excluded by various exclusions within the policy.  A CGL policy is intended to protect the insured contractor or subcontractor against liability for damages arising out of unintended, unexpected or accidental events which are neither expected nor intended from the standpoint of the insured. However, the coverage afforded by the policy (i.e., for an “occurrence” causing “property damage” during the policy period), may be taken away (excluded) by one or more of the policy’s exclusionary clauses. Thus, exclusions restrict and shape the coverage otherwise afforded.

Within the context of construction defect claims, there are typical exclusions of a CGL policy which apply such as paragraph 2(j)(5) (known as the “j5” exclusion), paragraph 2(j)(6) (known as the “j6” exclusion), and paragraph 2(l) (known as the “your work” exclusion). These exclusions are designed to exclude coverage for the insured’s “business risks.” In other words, these exclusions are intended to prevent recovery from an insurer for the insured’s own failure to properly carry out its contractual obligations.

For example, the j5 exclusion excludes coverage for “property damage” to “that particular part of the real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” In other words, “property damage” caused by the work of the contractor or its subcontractors while still performing work is excluded from coverage if the damage arises out of the work. Similarly, the j6 exclusion excludes coverage for “property damage” to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” However, pursuant to the policy, this exclusion “does not apply to ‘property damage’ included in the ‘products completed operations hazard.’” In other words, coverage will be excluded under j6 for what amounts to repairing or replacing any portion of property on which the contractor was working unless the “property damage” expressly falls under the completed operations coverage of the policy. Like j5, the j6 exclusion applies to bar coverage for “property damage” occurring during the on-going operations of the contractor while the work is in progress. The “l” (“your work”) exclusion excludes “property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.” However, pursuant to the policy, this exclusion does not apply “if the damaged work or the work out of which the damage arises was performed on (the insured contractor’s) behalf by a subcontractor.” In other words, coverage is excluded for any part of the contractor’s work where the damage arises out of that work unless it is covered under the completed operations coverage and the work was performed by a subcontractor.

Essentially, these three exclusions work in tandem to exclude coverage for property damage to any part of a project on which the contractor is performing or has performed its operations if the damage is caused by the contractor’s failure to properly perform its contractual obligations, unless the damage is expressly covered in the completed operations coverage and the work was performed for the contractor by a subcontractor. This is so because CGL policies are intended to insure tort risks, but not business risks of the insured. Faulty workmanship does not possess any element of fortuity. Instead, the resulting damages are a natural and ordinary consequence of the faulty work, and therefore, not accidental. Stated another way, these exclusions function to restrict coverage for business risks assumed by the insured (e.g., defective workmanship).

As stated, the business risk exclusions apply only to prevent an insured from recovering for its own failure to properly perform the work required by its contract, but those exclusions do not preclude coverage for liability for damages to “other property.” Thus, where there is no allegation that the insured improperly performed its contract work, these exclusions should not apply. Understanding the insured’s scope of work is critical. Where the insured is a general contractor, it is responsible for the entire scope of the work, and absent an applicable “exception” to the exclusions, coverage will be excluded for damage to its work caused by its own deficient performance.

On the other hand, where the insured is a subcontractor and its work damages another portion of the work, there may be coverage for the subcontractor. The narrow focus should be on whether the damaged area is within the subcontractor’s limited scope of work. Is “that particular part” (of the real property or any property) an area upon which the subcontractor was working or incorrectly performed its work? If the subcontractor’s work is not physically connected to the damaged area, then on their face exclusions j5 and j6 do not apply. However, what if the damaged area was physically connected or immediately adjacent to the subcontractor’s work? Should these exclusions bar coverage? Again, the determining factor will be whether these damaged areas were specifically part of the insured’s negotiated scope of work.. However, any ambiguity on whether the exclusions apply should be resolved in favor of coverage. Moreover, if an exclusion is capable of being fairly and reasonably read both for and against coverage, the exclusion should be construed in favor of coverage.

To learn more about occurrences under CGL policies, contact Florida construction mediator and lawyer Gary L. Brown at (954) 370-9970 or (954) 448-1133.