DIFFERING COVERAGES AND EXCLUSIONS OF YOUR GCL POLICY, EXCESS POLICY AND UMBRELLA POLICY
THINK YOU’RE COVERED?
UNDERSTANDING THE DIFFERING COVERAGES AND
EXCLUSIONS OF YOUR GCL POLICY, EXCESS POLICY AND UMBRELLA POLICY
A PRIMER
After
almost two decades in the construction industry I have found that most of my
contractor and subcontractor clients do not understand the coverage provided by
their Commercial General Liability Polices, Excess Policies and/or Umbrella
Policies.
In most
instances, it is more important to understand what types of claims are excluded
from coverage under these insurance products to better understand the limited
coverage that is provided by each.
In
evaluating policies and coverage, the starting point is your Commercial General
Liability Policy.
I.
COMMERCIAL GENERAL LIABILITY
POLICY [CGL]
The
typical post-1986 CGL policy is comprised of standardized
forms and thus is primarily uniform from policy to
policy. These polices have identical
built-in exclusions to coverage. However, the policies can and do differ with
respect to exclusions added to the policies via endorsements. These
endorsements should be reviewed carefully.
Under the
CGL policy you [the insured] are entitled to:
1.
Coverage [payment] for covered claims
up to the coverage amount provided by the policy; and
2.
A defense of lawsuits filed against
your company [provided the lawsuit alleges damages for items that are or may be
covered under the policy].
I could
write 20 pages on the subject of “covered claims and the insurer’s duty to
defend its insured and the difference between a claims made policy vs an
occurrence policy.” For brevity purposes
[and keeping the reader awake], this article is focused on the coverages and
primary exclusions provided within CGL and the purposes and coverages of Excess
and Umbrella policies.
A. COVERED
AND EXCLUDED CLAIMS
Covered
Claims
The CGL
policy provides coverage for damage to “other property”. “Other property” as defined under the policy
does not include the specific part of the construction project that the insured
is performing its work.
Thus,
coverage will be provided if your work damages “other property”, such as a
building across the street from the construction project you are working
on.
For
example, one of your forklift operators strikes
the building across the street with its load damaging the building. The damage to that building [other property]
would be covered under your CGL policy up to the limits of insurance [barring
any exclusions to the contrary].
Example 2,
your sheet pile installation at the construction project causes vibrations and
the vibrations damage the foundation of a property adjacent to the construction
project. The damage to the foundation of
the adjacent property is covered under the policy, as it is damage to “other
property”.
Excluded
Claims
One of the
most important exclusions under the CGL policy that all
contractors/subcontractors should understand is the “your work” exclusion.
The CGL policy does not provide coverage
for a contractor or a subcontractor’s defect work. The policies contain a “your work” exclusion.
For
example, you install a roof with defects [i.e.-leaks
or improper construction] and the roof was must be replaced due to the defects.
There is no coverage for the cost to replace the roof. This is considered “your work” and the
exclusion applies to bar coverage.
Limited exceptions
to this exclusion exist so long as the policy contains “completed operations
coverage”.
The
exception to the exclusion for “your work” in CGL policy with “completed
operations coverage”: in Florida
In Florida, coverage under the post-1986 CGL
policy for defective work exists in limited circumstances. Most contractors [and some subcontractors] do
not self-perform their work, they hire subcontractors to perform the work. The limited exception for coverage of
construction defects favors the non-performing contractor or subcontractor in
some instances.
The
exclusion for “your work” contains an exception if a subcontractor performed
“your work” and that subcontractor’s work caused damage to other property.
For
example, the contractor hires subcontractor,
ABC Roofing to perform the roof work at the project and hires subcontractor,
XYZ Drywall to perform the drywall work at the project. ABC Roofing’s work is
defective and the roof leaks and the leaks cause damage to the drywall
installed by XYZ Drywall. Coverage will
be provided for the damage to the drywall under the policy, as the damaged
drywall is “other property” under the exception to the exclusion for “your
work”.
However,
there will be no coverage if ABC Roofing performed both the roof work and the
drywall work. Damage to “other work”
under this exception must be damage to work performed by a different
subcontractor than the subcontractor that performed the defective work causing
damage.
Additionally,
there is still no coverage for the defective work itself-the
defective roof. Thus, coverage exists
for the damage to the drywall [other work] but not the roof itself [the
defective work].
The “your
work” exclusion and the exception to the exclusion has caused much confusion
and litigation in the construction industry.
In most instances, the confusion can by crystalized by remembering that
in almost all[1]
circumstances your CGL policy does not provide coverage for the cost to correct
your defective work or your subcontractors defect work. Coverage is provided to a contractor for the
cost to correct damage to “other work” caused by a subcontractor’s defective
work.
There are
many more exclusions under the CGL policies that are not covered in this
article.
B. THE
DUTY TO DEFEND UNDER THE CGL POLICY
The duty
of the insurer to defend you against a lawsuit under these policies is very
broad. The insurer must provide you a
“defense” [pay for a lawyer to represent you] if the claims in the lawsuit are
covered claims under the policy or may potentially be covered under the
policy. Any indication that the claims
in the lawsuit may be covered requires the insurer to provide you a
defense.
The duty
to defend is very broad and often times the insurer will provide a defense to a
lawsuit even though the insurer denies coverage for the claims.
Plaintiff’s
in construction litigation have become sophisticated and often plead their
claims [within the lawsuit] to trigger coverage under the policy. Insurers often complain that plaintiffs
“write their way into coverage.” Writing
into coverage in this sense is often done by claiming damage to ‘other work”
caused by defective work performed.
II.
EXCESS AND UMBRELLA POLICIES
ARE NOT EQUAL
Excess and
Umbrella polices are often mentioned interchangeably by most laymen, even
though there is a difference between the policy forms.
Both
are designed to provide coverage above the underlying insurance. The underlying insurance is the CGL
policy.
The
Excess policies provide coverage beyond the limits of the underlying
coverage. For example, if your CGL
policy provides $1 million in coverage and you are found liable for $1.5
million, you can make a claim on your excess policy for the remaining $500,000. However, excess policies are often more
restrictive than the underlying policy.
In other words, your CGL policy may provide coverage for a specific
claim while your excess policy may not provide coverage for the same
claim.
In
addition, the excess policy does not provide coverage that is unavailable in
the underlying policy. Thus, if the claim is not covered under the CGL policy
it is not covered under the excess policy.
Further,
an excess policy can only be applied to one underlying policy.
The Umbrella
policies are a type of excess insurance that not only provides additional
limits [as does the excess policy] but also provides broader coverage not
available in the underlying policy.
For
instance, if there is a coverage denial in the underlying policy, Umbrella
policy can "drop down" and provide defense and indemnity.
Another
distinction between excess and umbrella is that the umbrella policy can be
applied to multiple underlying policies.
Most
Excess and Umbrella policies are not written on standardized forms. Thus, coverage and exclusions vary from
policy to policy. It is very important
to read your policies to see what each cover and consult with an attorney
versed in insurance policies and coverage matters.
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[1] In Florida, at least one court
has ruled that coverage does exist for defective work in the rare instances
where the defective work must be corrected to prevent ongoing damage to other
work.
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