I previously discussed the importance of the subcontractor exception to the “your work” exclusion in CGL policies (exclusion l) for contractors and subcontractors that subcontract out scopes of work. Without this exception, the CGL policy provides minimal (and I mean minimal) coverage for property damage associated with construction defects. If you are involved in construction, you categorically need to make sure there is a subcontractor exception to the “your work” exclusion in your CGL policy. The subcontractor exception to the “your work” exclusion is the language bolded below that negates the application of the exclusion:
This insurance does not apply to:
l. Damage to Your Work
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
The Middle District in Auto-Owners Ins. Co. v. Elite Homes, Inc., 2016 WL 409577 (M.D.Fla. 2016) recently issued an opinion involving the application of the “your work” exclusion in a homebuilder’s CGL policy that did not have the subcontractor exception (the language bolded above). Ouch!!!! Without this exception, the policy excluded from coverage “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” Elite Homes, supra, at *2. But again,there was no subcontractor exception that negated the application of this provision to work performed by a subcontractor.
What is the impact of not having the subcontractor exception to the “your work” exclusion? This case explains. The owners sued the homebuilder for water intrusion and damage from window defects. The complaint alleged that the leaky window(s) caused damage to drywall, insulation, interior finishes, wood frame, and sheathing. The homebuilder’s CGL insurer denied the homebuilder a defense and coverage based on the “your work” exclusion—the owner alleged damage to the homebuilder’s work (the structure of the home) but nothing else. The Middle District concurred that the water damage alleged in the owner’s complaint arose out of the homebuilder’s work and was damage to the homebuilder’s work (the home). Hence, the “your work” exclusion barred coverage for the owner’s construction defect lawsuit against the homebuilder.
This opinion is painful because it illustrates the non-value the CGL policy provided to the homebuilder for property damage associated with defective windows. This outcome was the result of a CGL policy that eliminated the subcontractor exception to the “your work” exclusion. If the policy had this subcontractor exception, then there would have been coverage for the water damage caused by the defective windows and the homebuilder’s CGL insurer would have been obligated to defend the homebuilder in the owner’s lawsuit. The homebuilder would have been able to say that it hired a glazer (subcontractor) that performed the window installation and the glazer’s defective window installation caused damage to other subcontractors’ work.
Make sure to review your CGL policy. If you do not have the subcontractor exception to the “your work” exclusion, the outcome in this case could likely be the outcome in your case dealing with property damage caused by defective construction. Consult with your insurance broker because this subcontractor exception to the “your work” exclusion is a must in construction!
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.