Hurwitz Fine Insurance Coverage Co-Chair Steven E. Peiper recently presented a webinar as part of the firm's Coverage Pointers University series, examining the complexities of construction defect claims under commercial general liability (CGL) policies. The program explored the scope of coverage, the distinction between defective workmanship and consequential property damage, and the important differences among common work product exclusions.
Here are 10 key takeaways for insurance claims professionals and coverage counsel:
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CGL Policies Are Not Warranties for Defective Workmanship
A CGL policy is designed to insure against certain accidental risks, not guarantee the quality of a contractor's work. Costs associated with correcting defective workmanship generally represent business risks rather than insured losses. Understanding this distinction is essential when determining whether a construction defect claim falls within the intended scope of coverage.
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Start with the Coverage Grant Before Examining Exclusions
A proper coverage analysis begins by determining whether the claim satisfies the policy's initial coverage requirements. Key questions include whether there is an insured, an applicable policy, an occurrence, qualifying property damage, and a loss within the relevant policy period. Only after evaluating these elements should the analysis turn to exclusions that may limit or eliminate coverage.
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The Definition of an "Occurrence" Varies by Jurisdiction
New York generally follows a narrower approach, requiring damage beyond the insured's own work product to establish an occurrence in construction defect claims. Other jurisdictions, including Illinois, have adopted broader interpretations that may recognize unintended defective workmanship as an occurrence, leaving exclusions to determine the ultimate scope of coverage. These differences can significantly affect coverage determinations.
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The Timing of Property Damage Can Determine Which Policy Responds
Construction defects may arise during one policy period but cause damage that is not discovered until years later. Courts apply different trigger theories, including exposure, manifestation, hybrid, and injury-in-fact approaches. New York generally follows the injury-in-fact approach, focusing on when actual property damage occurred rather than when defective work was performed or the damage was discovered. Expert analysis may be necessary to establish the timing of the loss.
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Defective Workmanship and Property Damage Are Not Necessarily the Same Coverage Question
A construction defect may involve physical injury to tangible property, but that does not automatically establish a covered occurrence. Conversely, a defect that has not caused physical injury or qualifying loss of use may fail to satisfy the policy's property damage requirement. Claims professionals should separately evaluate whether property damage occurred and whether that damage resulted from a covered occurrence.
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Exclusions J(5) and J(6) Address Different Aspects of Ongoing Operations
Although these exclusions contain similar language, they serve different purposes. Exclusion J(5) addresses damage to the particular part of real property on which the insured or those acting on its behalf are performing operations. Exclusion J(6) addresses property requiring restoration, repair, or replacement because work was incorrectly performed on it. J(5) implies a kinetic loss that happened instantaneously, whereas J(6) generally involves unsatisfactory work that, upon review/reflection, is deficient. Importantly, though, J(6) does not apply to property damage included in the products-completed operations hazard.
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The Meaning of "That Particular Part" Can Significantly Affect Coverage
A critical issue under exclusions J(5) and J(6) is determining the scope of the property on which work was being performed. Most courts interpret "that particular part" narrowly, limiting the exclusion to the specific area or component involved. Others apply a broader interpretation encompassing a larger portion of the project. The distinction can substantially affect the amount of damage subject to exclusion. In general, though, courts will generally be more conservative when construing how broad of an expansion to give to “that particular part”.
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Completed Operations Coverage Changes the Exclusion Analysis
Determining whether work qualifies as completed operations is essential to selecting the appropriate exclusion. Exclusion J(6) and the "your work" exclusion, commonly identified as Exclusion L, address different stages of construction activity and do not apply simultaneously to the same damage. Understanding when work is considered completed, including the policy's specific definitions, is critical to evaluating these provisions. Importantly, J(6) applies work which is in some state of completed, but which has not been turned over the purchaser. Exclusion L, on the other hand, requires the property damage to have not occurred until the work at the jobsite has been completed or has been turned over the purchaser for ultimate use as designed.
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The Subcontractor Exception Is a Critical Distinction
The "your work" exclusion generally applies to damage arising from the insured's work within the products-completed operations hazard. However, it contains an important exception when the damaged work or the work causing the damage was performed by a subcontractor on the insured's behalf. This is key difference from the J(5) and J(6) exclusions which apply more broadly to all contractors working at a jobsite.
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Consequential Damage and "Rip-and-Tear" Costs Require Careful Evaluation
Damage to property beyond the insured's defective work may qualify as consequential damage, and thus covered. Where those damages are intentionally inflicted to reach defective or deficient work, those “rip and tear” damages are generally subsumed into the costs to repair/replace the defective work product.
In Conclusion
Construction defect coverage requires more than identifying faulty workmanship and citing policy exclusions. A thorough analysis must consider the nature and timing of the damage, the applicable jurisdiction's definition of an occurrence, the status of the work, and the precise language of each exclusion. As courts continue to interpret these provisions differently, understanding the distinctions between ongoing and completed operations, subcontractor exceptions, and consequential damages is essential. A systematic, jurisdiction-specific approach can help insurers and claims professionals make informed coverage decisions, preserve available defenses, and navigate complex construction defect claims.
