The "No Occurrence" CGL Claim Denial Revisited

Bill Wilson

Abstract The CGL policy has several exclusions that apply to faulty workmanship. However, a number of courts have ruled that these exclusions are meaningless because damage to your own work (even if caused by a subcontractor) is not an "occurrence," so the insuring agreement isn't even triggered. We are now seeing legislation and CGL endorsements in response to these rulings.

"We have a prospect in Indiana who is a 100% paper contractor constructing commercial buildings. We quoted a general liability policy (CG 00 01 12 07) without the CG 22 94 exclusion and our pricing was the most competitive. On the advice of their attorney they paid more to purchase coverage from another agent whose carrier was providing CG 71 68 02 08 Damage Arising Out Of Your Work endorsement (copy to follow via email).

"The endorsement states in part 'We will pay for damages you are legally obligated to pay because of "property damage" to "your work" resulting from work performed on your behalf by any subcontractor which shall be deemed an "occurrence".' Our advice to the client is this endorsement does not provide them with any additional coverage because 100% of the work is done by subcontractors so they have no exposure since they, themselves, are not doing any of the work. The attorney's advice was to pay the higher premium because they have an exposure. Who is correct, us or the attorney? Please explain why."

They certainly have an exposure. Just because they allegedly subcontract out all the work doesn't mean that they cannot be sued for a sub's negligence. Theoretically, the principal is insulated from claims against a true independent contractor, but there are all kinds of ways to get to a contractor. There are also other issues at play here, as discussed by the VU faculty below. Note: Before you continue, you might want to read this VU article which explains the background detailed in some of the responses below: 

• The "No Occurrence" CGL Claim Denial

Without getting into the specifics, it's always a bad idea to tell a client they have "no exposure." First of all, such a statement would require that you have perfect knowledge of what they are doing now. Second, it would require the ability to see into the future and have perfect knowledge of what they might do in the future. And finally, it would require you to know that some wild-eyed plaintiff wouldn't accuse them of doing something that they didn't do.

In Indiana, among some other states, construction defects are not considered to be an occurrence, regardless of who does the work. This means that even if CG 22 94 is not issued, a claim involving construction defects committed by a subcontractor will not be covered by the general contractor's or developer's CGL in light of court decisions in Indiana that hold construction defects as not being an occurrence.
 
So, what the insurer is saying is that if the named insured purchases the Damage Arising Out of Your Work endorsement CG 71 68, which is not an ISO endorsement by the way, the insurer's ability to go to court and argue that defective work is not an occurrence is eliminated. When this endorsement is purchased, it may be effective in Indiana but it will be mere fluff in those states where defective work performed on behalf of the named insured can still be considered an occurrence.
 
Whatever the case may be, this endorsement is troublesome. Some people could view the endorsement as a way of saying that if the insured pays a premium for it, the insurer promises not to raise the occurrence issue. But if the endorsement is not issued, the insurer will likely raise that issue. Coverage, however, is not guaranteed because there are other terms and conditions of the policy to contend with.
 
The attorney is right insofar as Indiana is concerned. But this situation does not apply in all states. Ask the attorney to tell you what states are like Indiana or take a look at this chart on the VU.

The wording in the endorsement is troubling. It APPEARS that the endorsement attempts to overcome the “no occurrence” CGL claim denial (I suggested ASKING the purpose of the endorsement), but this is the language that gives me pause (amending the CGL Insuring Agreement by adding the following as paragraph f.):

We will pay for damages you are legally obligated to pay because of “property damage” to “your work” resulting from work performed on your behalf by any subcontractor which shall be deemed an “occurrence”, but only if:

(1) the work performed by the subcontractor is
    within the “products-completed operations
    hazard”; and
(2) the “property damage” is unexpected and
    unintended by you.

We will not be obligated to pay any sums to repair or replace the defective work performed on your behalf by a subcontractor.

The “which shall be deemed an ‘occurrence’” language would read better if it said “which shall be deemed BY US TO BE an ‘occurrence’.” The reference to “deemed an ‘occurrence’” and “you are legally obligated to pay” would appear to uphold a court’s determination that damage isn’t covered because it isn’t an occurrence. I think the carrier would be on thin ice denying a claim on this basis because that interpretation makes the endorsement less than worthless.

The other point I made is that it appears that, aside from the apparent attempt by the endorsement to override judicial interpretation of what constitutes an “occurrence,” the endorsement provides LESS coverage than the unendorsed CGL. Here is what Exclusion L. in the CGL says:

l. Damage To Your Work 
   "Property damage" to "your work" arising out
   of it or any part of it and included in the
   "products-completed operations hazard". 
   This exclusion does not apply if the damaged
   work or the work out of which the damage
   arises was performed on your behalf by a
   subcontractor.

Here’s what Exclusion L. in the endorsement says (replacing Exclusion L. in the CGL):

l. Damage To Your Work 
   "Property damage" to "your work" arising out
   of it or any part of it and included in the
   "products-completed operations hazard".
   This exclusion does not apply to “property
   damage” to “your work” resulting from work
   performed on your behalf by a subcontractor
   and included in the “products-completed
   operations hazard”.

The endorsement appears to redefine Exclusion L. so that it ONLY covers damage to the named insured’s work caused by a subcontractor’s work. The unendorsed CGL covers far more…it covers:

The endorsement only appears to cover #1 above, not #2 or #3. Neither cover damage to the named insured’s work caused by the named insured’s work.

So, the big advantage of the endorsement is that it appears to be designed to cover damage to the named insured’s work caused by a subcontractor on the basis that damage to the insured’s own work IS considered an “occurrence” (something that should be the case everywhere except for some poorly informed judicial decisions, particularly as regards a subcontractor’s work causing damage to the named insured’s work).

Without this, in states where courts have ruled that damage to your own work (from any cause) is not an “occurrence,” the unendorsed CGL without the CG 22 94 doesn’t do any good for these types of claims. However, this endorsement would not be desirable in other states since it appears to reduce coverage to/from subcontractors’ work.

If it was not for the fact that some courts have ruled that these types of losses are not occurrences, I would agree that your policy provides the same coverage. The exception to the Damage to Your Work exclusion already has an exception for subcontractor's work. I do not know the position of the Kentucky courts on this issue. I do know that this has been a problem that seems to be existing in many legal jurisdictions. So I would say the conservative approach is to go with the endorsed policy. 

It looks like we have a creative carrier’s proprietary form to consider today.

The General Liability policy, CG 00 01, defines “Your work” as follows:

22. "Your work":
    a. Means:
       (1) Work or operations performed by you
           or on your behalf; and
       (2) Materials, parts or equipment
           furnished in connection with such
           work or operations.
    b. Includes:
       (1) Warranties or representations made
           at any time with respect to the
           fitness, quality, durability,
           performance or use of "your work",
           and
       (2) The providing of or failure to
           provide warnings or instructions.

Since “Your work” includes work or operations performed on your behalf, that covers all the work done by subcontractors.

It looks to me that the endorsement CG 71 68 just restates the coverage that is already in the CG 00 01. The addition to the Insuring Agreement just restates what happens when the exception to exclusion l. Damage To Your Work is applied, and the re-written Exclusion l. doesn’t add anything to the coverage.

Unless this form was drafted to respond to a court decision in Indiana, I’d say there is no effect on coverage by adding the CG 71 68. I think the attorney is wrong to suggest that this form does anything that the basic policy doesn’t already do, and the agency is wrong to say there is no exposure to their insured because they don’t do any of the work “themselves.” The exposure comes from the subcontractors’ work. That work, though, is handled the same way either with, or without, this endorsement. 

As with so many such questions, it depends, but you are not focusing on the proper issue. The question is: What is Kentucky law regarding whether construction defect constitutes an occurrence? If it is deemed to be an occurrence, you are correct. If not, or if questionable, the attorney is. 

I would suggest that endorsement is potentially very valuable to the general contractor and that the coverage provided by CG 71 68 potentially does provide substantial additional coverage for the general contractor. The attorney’s recommendation to add the endorsement is based on the current trend among courts to allow insurers to deny any coverage in the CGL for faulty work, even faulty work done by subcontractors, based on the notion that faulty work can never be an “occurrence” and that it is never “property damage.”

Put another way, there is a good chance that your insurer would completely deny coverage to the general contractor for any property damage to the project because of any faulty work done by a subcontractor, despite the exception for subcontractors to the CGL exclusion for damage to your work. To further understand this issue, it is important to become familiar with the coverage issues regarding construction defect claims. A good start is this VU article.

Case law in Indiana – R.N. Thompson & Associates, Inc., v. Monroe Guaranty Ins. Co. (App. Ct. 1997) – says that damage to your own work is not an “occurrence.” The purpose of the endorsement appears to be to override case law and consider it an occurrence if due to a sub’s work. IMO the endorsement isn’t written very well, so I’d confirm that with the other party. If that’s the case, then the endorsement provides coverage not provided by your unendorsed CGL policy in any state with similar case law. I would STRONGLY urge you to carefully review the following VU article which includes a downloadable chart of state case law dealing with this issue:

• The "No Occurrence" CGL Claim Denial 

Check out the “CGL No Occurrence” article and the downloadable chart. Close to half of the states where there is case law say that damage to your own work is not covered by the CGL policy because it is not considered an “occurrence.” Thus, the CGL insuring agreement isn’t triggered, so Exclusion L. is of no importance. That’s the case in Indiana. The chart shows what it is in surrounding states like Kentucky and Ohio.

If the insured is working in a state that has ruled that damage to its own work isn’t an occurrence or if the law in that state is silent, then the endorsement could be of value. If the work is done in a state where the courts have ruled that this is an occurrence, then the unendorsed CGL appears to provide superior coverage than the endorsement. 

Indiana is one of a number of states where some very poorly thought out judicial decisions have been made. In those states, CGL coverage for faulty workmanship by subcontractors (the exception to Exclusion L.) is gutted in those states. The industry response to these decisions has been that several carriers have developed proprietary endorsements that effectively define faulty workmanship to be an "occurrence" (unless engaged in deliberately), as it should be.

HOWEVER, none of the three endorsements I've reviewed stop there. Rather than relying on the existing sub exception to Exclusion L., these endorsements seek to provide some coverage but not nearly to the extent you would get under an unendorsed CGL policy in states that have ruled that faulty workmanship can be an "occurrence." So, I would review these types of endorsements very carefully. If you are told by the carrier that an endorsement provides the same coverage that the unendorsed CGL provides in other states, ask for that in writing. I know in one instance where the underwriter simply did not understand her own endorsement.

One other point. In at least one state -- Colorado -- the response to one of these adverse judicial decisions was legislation. Among other things, a new statute defines faulty workmanship to be an "occurrence," thus relying on the CGL exclusions and permitting the Exclusion L. exception. One fear is that this would cause insurers to exit the construction industry marketplace. However, the reality is that they are free to plug this coverage exception using the CG 22 94 or CG 22 95.

Last Updated:  September 9, 2010

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