Policy Exclusions Narrow Coverage But Still Protect Builders
While the insuring agreement initially provides broad coverage, policy exclusions — several of which apply specifically to the construction industry — narrow the coverage. Generally, the policy’s insuring agreement imposes three main requirements for coverage on builders:
- The claim against the builder must be for damages because of “property damage.”
- The property damage must take place while the policy is in effect.
- The property damage must be caused by an “occurrence,” which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” To be caused by an “occurrence,” the property damage must be fortuitous, that is, neither expected nor intended by the insured party.
A standard CGL policy excludes from coverage certain losses that are viewed as “business risks.” The principal “business risk” exclusion is called the “your work” exclusion, which generally puts the cost of repairing the builder's work — where the work performed by the builder does not cause injury or damage to other property — on the builder rather than on the builder’s insurer.
Builders Are Covered for Subcontractors' Work, But Not Their Own
There is a significant exception to the "your work" exclusion that benefits builders. The "your work" exclusion does not apply — and the CGL policy provides coverage — if the construction defect was caused by a subcontractor.
The rationale for coverage of claims growing out of a subcontractor’s work is that the subcontractor’s performance is not within the builder’s effective control and, therefore, presents an insurable risk rather than a business risk.
Some Insurance Companies Are Trying to Eliminate Coverage of Work by Subcontractors
A number of insurance companies, however, are seeking to eliminate from their insurance policies coverage for such property damage. They are denying coverage by arguing that property damage resulting from a construction defect can never be caused by an “occurrence” within the meaning of the policy’s insuring agreement.
The insurers are arguing that, as a matter of law, a builder expects or intends any property damage to the house resulting from a construction defect — and hence such damage can never result from an “occurrence” and can never be covered by insurance.
NAHB Is Challenging This Attempt to Eliminate Coverage
NAHB has filed amicus (friend of the court) briefs in several cases challenging the insurers’ rigid interpretation of the “occurrence” requirement on the grounds that it is overly broad and not supported by any language in the insurance policy.
In addition, the insurers’ position on the “occurrence” issue violates basic insurance principles by rendering meaningless the “your work” exclusion and by nullifying the exception in this exclusion for property damage caused by the work of subcontractors.
The attempt by insurers to avoid insurance coverage in all construction defect cases by expanding the policy’s “occurrence” requirement would disrupt the traditional relationship between builders and their insurers and deprive builders of valuable insurance for which they have paid substantial premiums.
If you are aware of an ongoing case with facts similar to those described above, and you think it might be of interest to NAHB, please contact NAHB’s Construction Liability & Legal Research Department at 800-368-5242 x8317.