General contractors typically have commercial general liability policies (“CGLs”). (CGL policies are not the same as performance bonds, which might also be in place for a particular construction job.) In my experience, the key provisions of most CGL policies are identical or are substantially similar. In fact, one task of a consortium of insurance companies known as the Insurance Services Offices is to develop standardized CGL policy forms.
CGL policies are meant to cover damages for personal injuries and property damage caused by the general contractor or by its subcontractors. For example, if a worker drops a hammer on a passerby and causes personal injuries, a CGL policy will typically provide coverage. Similarly, if a wall collapses during construction and causes property damage to a third party, a CGL policy will typically provide coverage.
CGL policies do not provide coverage for the repair or replacement of defective work. For example, if a project owner sues a general contractor because the owner has had to incur the cost associated with repairing defective work of the contractor, a CGL policy will not provide coverage to the contractor. If, however, the defective work has caused damages other than the damages to repair or to replace the work, it is very likely that the contractor’s CGL policy might provide coverage to the contractor for those damages.
In 2007, the Supreme Court of Tennessee decided an important case involving defective construction work and a commercial general liability policy. Although the case involved a claim by the contractor that the insurance company which issued the CGL should have to provide a legal defense to it, the holdings in the case are still very much applicable to an insurance company’s obligation, not only to provide a defense, but also, to pay a claim.
Here are the key facts of the case, The Travelers Indemnity Co. of America v. Moore & Associates., Inc.:
- The general contractor (“General Contractor”) had a CGL policy
- General Contractor entered into a contract with an owner (“Owner”) to build a hotel
- General Contractor hired a subcontractor to install the windows
- The project was completed
- The Owner thereafter filed an arbitration demand against the General Contractor on the grounds that the windows had been installed defectively which had resulted in water penetration which had caused damages and loss other than just the cost of repairing and replacing the defective work, e.g., damage to the wall structures, mold, and loss of revenue because rooms could not be rented
The central issue in the case was whether the insurance company which issued the CGL policy had the duty to defend the General Contractor in the arbitration proceeding which had been filed against it. If a lawsuit, or demand for arbitration, alleges any damages for which a policy provides coverage, an insurance company has to provide a defense to its insured.
The CGL policy at issue provided that the insurance company would pay any amounts the General Contractor became obligated to pay because of “bodily injury” or “property damage.” It also provided that the “bodily injury” or “property damage” had to be caused by an “occurrence.” An “occurrence” was defined in the commercial general liability policy at issue as being an “accident.”
The CGL policy at issue also contained an exclusion which provided that, even if the damages were otherwise covered, there was no coverage for “property damage arising out of your work.” The policy provided that “your work” meant “work or operations performed by you or on your behalf.” However, and very importantly, the “your work” exclusion contained an exception which provided that that exclusion did not apply if the work out of which the damage arose was performed by a subcontractor.
The insurance company relied on a prior Tennessee case to argue that the loss at issue was not the result of an occurrence. In that previous case, the Supreme Court had held that a CGL policy did not provide coverage for damages consisting solely of the cost to repair and replace defective work. The Supreme Court stated that that case was entirely different as the damages for which the General Contractor was alleged to be liable in the case presently before it consisted of more than just the repair and replacement cost of the defective work itself. Thus, it held that the damages at issue arose out of an “occurrence.”
Lastly, the Supreme Court held that the “your work” exclusion had no application because the work in question was performed by a subcontractor of the General Contractor.
For any Tennessee lawyer handling defective construction cases or insurance cases, this case is very important. Many times, especially with smaller general contractors with little financial wherewithal, obtaining insurance coverage is critical. Likewise, it can be critical for a general contractor (which has paid insurance premiums) to obtain a defense of a claim caused by the defective work of one of its subcontractors rather than paying for the attorney’s fees associated with the defense from its own funds. While a CGL policy will not cover the damages which are the costs of repair and replacement of the defective work, it may well cover damages resulting from the defective work.