Insurance has always been an expensive line item in the costs of business operation for contractors. With many companies facing additional economic strain continuing into 2021 due to COVID-19, seeking ways to reduce insurance costs is a place where many contractors find themselves. It is not uncommon for contractors to tell their broker: “I need $XX of insurance to get jobs and have to pay the same or less than last year.” Unfortunately, scenarios exist where a certificate with lots of zeros and commas looks nice, but the policy behind those limits contains exclusions of coverage, which reduce many of those limits shown on the certificate to an actual “zero.”
This lack or limitation of coverage is sometimes unknown to the contractor (and the owner they are working for) until it is too late. Knowing the exclusions and limitations on coverage, i.e., the back story to the certificate, is of critical importance. This article will touch upon some of the more common exclusions that lurk in policies that can affect the availability of coverage.
The purpose of a general liability policy is to cover the contractor for damages due to bodily injury or property damage caused by an occurrence. Unfortunately, there is widespread industry and jurisdictional disagreement about whether or not a construction defect (i.e., faulty work, defective workmanship) is a covered occurrence. States range from the handful whose courts have firmly stated that defective work is not an occurrence, to those which have firmly held it is, with states in the middle trending towards either end of the spectrum and states whose case law and legislation conflict. Annual analyses on a state-by-state basis are common but are beyond the scope of this article. The important takeaway is that states vary in their application of the definition of “occurrence” in the standard general liability policy and contractors should know their coverage and their risks in the particular jurisdiction.
How this exclusion applies is as follows:
Height Exclusion
In connection with the tragic collapse of a four story building in Philadelphia during demolition, the Court agreed with Colony Insurance Company’s denial of coverage because the demolition contractor’s policy contained a “demolition exclusion,” which provided that the Policy does not cover “‘bodily injury’ or ‘property damage’ arising directly or indirectly out of ... the demolition of any building or structure which has an original ground height in excess of three stories or 36 feet, whichever is less.” (Doc. No. 20 at H-21.). The Policy also included a “work height” exclusion, which provided that “[t]his insurance does not apply to ... ‘bodily injury’ or ‘property damage’ arising out of ongoing operations performed, by [the insured], on the exterior of any building or structure above a ground height of three stories or 36 feet, whichever is greater.” Colony Ins. Co. v. Campbell, No. CV 15-2013, 2015 WL 12838346, at *1 (E.D. Pa. Oct. 21, 2015). The difference of one story on the building being demolished voided coverage and defense.
Where the Defendant insured was a developer of a condominium consisting of fourteen detached two-story single-dwelling units, the Court held that there was no coverage for the homeowner’s association breach of contract, breach of warranty, negligence and nuisance claims, since the policy contained a designated work exclusion which excluded work on large single-building projects that had more than five single family units, regardless of the size of the individual buildings. Bridgetown Condo. Homeowner's Ass'n v. Ford Dev., Inc., No. 08-CV-195-BR, 2009 WL 1743759, at *4 (D. Or. June 18, 2009). The Court rejected the Plaintiff’s argument that the Granite State policy’s intent was to exclude coverage for “complicated, tall, multi-unit buildings”, finding that the plain meaning of the Designated Work Exclusion, together with its meaning within the context of the policy as whole, excluded coverage for the condominium project. Id. at 7.1
Very broad EIFS exclusions can also be a trap for the wary and cancel coverage for a claim that was related to the contractor’s work. In the case of U.S. District Court case of First Mercury Ins. Co. v. Miller Roofing Enter., No. C11-0105-JCC, 2013 WL 662970 (W.D. Wash. Feb. 22, 2013A), Miller Roofing was contracted to replace three roofs over the owner’s building’s showroom. The roofs eventually began to leak and the leaks caused damage to property in the showroom and the showroom floor. The building owner sued Miller Roofing for the damages caused by the leaks. Miller Roofing tendered to its commercial general liability (CGL) insurer, First Mercury. First Mercury filed a declaratory judgment action against Miller Roofing, seeking a ruling that it did not have to provide any coverage for the damage caused by the leaks based on the common EIFS exclusion in its policy that precluded coverage for “property damage” arising out of “[a]ny work or operation with respect to any exterior component, fixture or feature of any structure if any ‘exterior insulation and finish system’ [EIFS] is used on any part of that structure.” (emphasis added). The Court held that EIFS exclusion applied even though Miller Roofing had not performed any work on the showroom’s EIFS, because the Court found that:
“[t]he exclusion applies not only to property damage arising from EIFS-related work by the insured; it applies to property damage arising from “any” work by the insured on an exterior component, fixture, or feature of a structure, as long as ‘exterior insulation and finish system’ is used on any part of that structure.”
See First Mercury Ins. Co. v. Miller Roofing Enter., No. C11-0105-JCC, 2013 WL 662970 (W.D. Wash. Feb. 22, 2013). The Court’s application of the plain language of the policy required only two conditions for the exclusion to apply: that the building have an EIFS, and that the work be on an exterior component, fixture, or feature of the building. This case epitomizes how exclusions in the policy can affect coverage.
Anyone who has ever read an insurance policy of any type knows that the policy is likely chock-full of exceptions to coverage, exclusions to coverage and exceptions to exclusions. Trying to map out whether a type of claim is not a task for the meek. One exclusion that typifies this scenario is the Residential Exclusion.
An insurance company may choose to limit or exclude for coverage residential construction projects because of the perception of greater exposure due to increased likelihood and/or severity of claims. The Standard Residential Exclusion (ISO U527-0913) excludes coverage for new residential construction unless one of the “exceptions to residential construction work exclusion” is checked. Categories in the exclusion include, but are not limited to: Apartment Structures, Condominium Projects, Senior Housing Projects, Time Shares or a specific project listed on the policy exclusion exception. A contractor should be certain that the appropriate exception to the exclusions is included in the policy for the specific type of project the contractor is undertaking.
Where a child stepped through a sinking area of a patio floor on the subject property, the Court found that the Total Residential Exclusion clearly and explicitly excluded coverage for residential projects, and that the plain meaning of “residential” in the exclusion includes within it structures like the Subject Property. Atain Specialty Ins. Co. v. N. Bay Waterproofing, Inc., No. 12-CV-03339-JST, 2013 WL 1819609, (N.D. Cal. Apr. 30, 2013). The Total Residential Exclusion contained in the policy excluded coverage for “property damage”…”arising from” any work …in connection with any condominium, townhome, single family dwelling and other residential or tract housing project. While the subject property was sometimes referred to as “commercial”, “multi-family” or an “apartment complex”, the issue came down to whether the subject property fit into the designation of “other residential or tract housing” (the parties being in agreement that it was not a condominium, townhome or single-family dwelling). The terms “residential” or “tract housing” were not defined in the policies. The Court found that the plain meaning of residential in the exclusion would cover the subject property and that the Total Residential Exclusion appeared in identical form in the 2005, 2006 and 2007 policies. The subject property was an apartment complex containing 124 residential dwelling units and the Court found no basis that absence of the word “apartment” in the exclusion would grant coverage, stating that the apartments were clearly residences. Id. at 7.1
The adages: “You get what you pay for” and “Too good to be true”, hit close to home with these general liability policy exclusions, which is why it is imperative that contractors understand what their policy actually covers against before they have to make a claim, at which it will be too late. Saving a buck or two on premiums can have costly consequences.
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