CGL Insurance – Pay More, Get Less?
Author: KARL A. BERG, JR.
As the advertisements go: “It keeps growing and growing....” Unfortunately, when it comes to Builders, we are not speaking about the lottery but about their Commercial General Liability (CGL) insurance premiums which already exceed some Builders’ reasonable ability to pay. However, since the CGL policy is the primary insurance Builders’ carry to protect themselves against claims, and maintaining such insurance is a prerequisite to being licensed in El Paso County, there is little that can be done but continue to write the checks. While the recent amendments to Colorado’s Construction Defects Act might slow the cost increases and encourage some CGL carriers to reenter the market, any positive effects of the Act are likely to be a few years away. Regardless, it is important that Builders have a good understanding of what they are getting when they obtain CGL insurance. This article will generally discuss the scope of coverage under CGL policies and some of the exclusions which limit that coverage. A subsequent article will address what Builders should do in the event they receive notice of a claim.
Like all insurance, CGL policies only cover certain losses. A common misperception is that CGL insurance is the equivalent of a guarantee. This is not the case. CGL policies primarily provide protection against “property damage” and “bodily injury.” However, as most construction claims are for property damage, the focus of the discussion below is on it rather than bodily injury. Property damage is typically defined as “physical injury to tangible property, including all resulting loss of use.” What does this mean? It means property which can be handled, touched or possessed as opposed to purely economic losses. For example, if a roof leaks and causes damage to insulation, drywall and finishes, this is property damage.
However, even if there is property damage, there isn’t coverage unless the damage occurs during the policy period. This is because CGL polices are written on an “occurrence” rather than a “claims made” basis. “Occurrence” means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” It is for this reason that skilled plaintiffs’ lawyers always allege the property damage was continuous and progressive so that as many CGL polices as possible are implicated. Therefore, Builders should not immediately conclude that they have coverage only under their current CGL policy. This is based on the fact that when damage is alleged to have occurred over a period of time they may have coverage under two or more polices.
Assuming there is an occurrence during the policy period which causes property damage, is there coverage? The answer is largely dependent upon the exclusions to the policy and whether the project is complete when the loss occurs. If complete, the “products-completed operations hazard” coverage probably applies. This is crucial for Builders since, there is likely coverage for the cost of replacing defective work completed by any subcontractors. If the project is not complete, any defective work by subcontractors is probably excluded by the “damage to your work” exclusion in the policy.
Insurance companies attempt to limit the scope of coverage by incorporating exclusions into their policies. Exclusions are interpreted narrowly and against the insurers. Although space constraints do not allow for a discussion of the most frequently used exclusions cited to defeat coverage, several exclusions of relatively recent origin warrant comment. They are the mold exclusion and the earth movement exclusion. As the number of mold and structural claims have increased, insurance companies have attempted to limit their exposure to losses through these exclusions. Therefore, Builders should carefully review these exclusions so that they understand what is and is not covered. It is probable that there will be much litigation regarding the scope of these exclusions as insurers attempt to avoid paying these types of losses.
In conclusion, all Builders should be familiar with their CGL policies. If they are, they will likely conclude they are paying more and getting less.
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