Trending Exception to the Exclusion: Finding a Subcontractor’s Defect Isn’t “Your Work”

Most contractors’ Commercial General Liability (CGL) policies are based on the post-1986 Insurance Services Office, Inc. (ISO) standard form policies that include a “Your Work” exclusion that precludes coverage for property damage to work or operations performed by a contractor or on the contractor’s behalf. However, the “Your Work” exclusion includes an express exception that states that the exclusion does not apply if the damages arise out of work performed on the contractor’s behalf by a subcontractor. Despite this express exception, most courts have historically interpreted these CGL policies to exclude coverage for property damage caused by defective work of subcontractors based on a determination that such defective subcontractor work did not constitute “property damage” arising from an “occurrence” under the policies and, accordingly, there was no initial grant of coverage. In determining that there was no initial grant of coverage, most courts did not perform a detailed analysis of the language of the “Your Work” exclusion or its exceptions.

However, there is a growing trend of state courts looking at CGL policies as a whole, taking into account the exception language of the “Your Work” exclusion to determine that defective subcontractor work can cause “property damage” from an “occurrence” under a CGL policy. Such a determination results in an initial grant of coverage that, coupled with the subcontractor exception to the “Your Work” exclusion, can be applied to provide coverage under these CGL policies for such damages.

The Growing Trend

Prior to the application of any exclusionary language in an insurance policy, there must be a threshold determination that the policy has provided an initial grant of coverage. CGL policies provide coverage if there exists “property damage” as a result of an “occurrence,” as those terms are defined within the policies; these are prerequisites to coverage. It is a widely held principle that insurance is not intended to protect parties from known business risks, but rather from fortuitous events that happen by chance. Based on this principle, courts had historically held that damage to an insured’s own work caused by its faulty workmanship – including faulty workmanship of its subcontractors – did not constitute an “occurrence” that triggered coverage under CGL policies.

Recently, though, courts in Iowa and New Jersey, among others, have found CGL insurance coverage for damage caused by a subcontractor’s faulty workmanship. See Nat’l Sur. Corp. v. Westlake Invs., LLC, 880 N.W.2d 724 (Iowa 2016) and Cypress Point Condo. Ass’n v. Adria Towers, L.L.C., 143 A.3d 273 (N.J. 2016). In these cases, the analyses are heavily dependent on the definitions of the terms “property damage” and “occurrence” in the policies. In post-1986 ISO standard forms, “occurrence” is defined in part as “an accident,” but “accident” is undefined and requires an analysis to determine reasonable interpretations of what constitutes an “accident.” The recent trend has been to look at the policies as a whole, including exclusionary language, in determining what may constitute an “accident.” After such analyses, courts have determined that, in certain instances, faulty or defective workmanship can meet the definition of “accident” and, accordingly, can constitute an “occurrence” under the policy and thus trigger an initial grant of coverage. The basis for such a determination is that “it would be nonsensical for the policy to include” an exclusion for property damage to the insured’s own work and that of its subcontractors if this kind of damage cause by accidental defective workmanship could never be caused by an “occurrence” in the first place. See Lee Builders, Inc. v. Farm Bur. Mut. Ins. Co., 137 P.3d 486, 494 (Kan. 2006). These courts have also determined that the definition of “property damage,” which includes “resulting loss of use of that property,” can allow for coverage for damages resulting from a subcontractor’s faulty work.

After determining that there existed “property damage” resulting from an “occurrence” and an initial grant of coverage, the courts then analyzed the “Your Work” exclusionary language. While the “Your Work” exclusion expressly excludes coverage for property damage resulting from the contractor’s work, it includes the exception for damages arising out of work performed by a subcontractor. Accordingly, these recent decisions have held that coverage exists for property damage caused by a subcontractor’s defective performance.

The Status of Coverage for Subcontractor’s Work Remains Unclear in Many Jurisdictions

Despite the current trend, it is unclear whether other jurisdictions will follow similar analyses if presented with the question. For example, the Ohio Supreme Court has previously followed the majority view “that claims of defective construction or workmanship are not claims for ‘property damage’ caused by an ‘occurrence’ under a CGL policy.” Westfield Ins. Co. v. Custom Agri Sys., 979 N.E.2d 269 (Ohio 2012). In Westfield, the Ohio Supreme Court did not analyze the “Your Work” exclusionary language; instead, it determined that the faulty workmanship at issue did not constitute an “accident” and, therefore, there was no initial grant of coverage and no need for an analysis of exclusionary language. Based on that determination, the Westfield court provided no analysis of the “Your Work” exclusion or the exception to the exclusion.

However, despite the apparently broad holding in Westfield, a recent decision by Ohio’s Third Appellate District has signaled that the issue of CGL coverage for faulty subcontractor work remains open. In Ohio N. Univ. v. Charles Constr. Servs, Inc., 2017-Ohio-258, the Third Appellate District reversed and remanded the judgment of the trial court, which had relied on Westfield to deny coverage for damages caused by a subcontractor. In doing so, the Third Appellate District looked to exclusionary language to analyze the policy as a whole and disagreed with the insurer’s position that Westfield stood “for the expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a CGL Policy because such claims can never constitute an ‘occurrence.’” Accordingly, the issue of how Ohio will interpret CGL policies with respect to faulty subcontractor work appears to remain unsettled.

It should also be noted that Iowa and New Jersey each had their own versions of Westfield-type precedent prior to the recent decisions in the Westlake and Cypress Point cases. Accordingly, it remains unknown how other jurisdictions will approach the issue of CGL coverage for faulty subcontractor work in light of such recent decisions and trends.

Conclusion

CGL policy claims by contractors are often denied on the grounds that the damages are not “property damage” resulting from a covered “occurrence.” The majority view has long been that CGL policies do not cover defective workmanship performed by the contractor or a subcontractor because such faulty workmanship was not an accident and, accordingly, not an “occurrence” under the policy. The current trend, however, reveals that many jurisdictions are re-examining what constitutes an “occurrence” in light of the policy language as a whole and are concluding that there is an initial grant of coverage for defective work. The result is that, in these jurisdictions, insureds may have more extensive coverage than previously thought.

Compliments of Thompson Hine – a member of the EACCNY