ARE YOU AWARE OF THE BIGGEST HOLE IN YOUR LIABILITY INSURANCE COVERAGE? 
By Benjamin B. Bohnsack

April 2008

Commercial liability insurance coverage is one of the most complicated topics that contractors encounter.  When a premium is paid for liability insurance coverage, it is easy to assume that the contractor is covered for all or most claims that might be asserted by someone else.  That assumption, however, is not always accurate.  Many insured businesses in the construction industry are unaware of the potential gaps in insurance coverage in a liability situation.  One of the biggest “holes” in coverage is referred to as the “your work” exclusion in a liability policy. 

There is not a simple way to summarize this coverage exclusion, but the best way to put it is that there is no insurance coverage for damage to the work actually performed by the contractor.   The next question is what is the contractor’s “work.”  By definitions contained in the policy, the contractor’s work is the entire scope of work undertaken with the owner.  If you are a general contractor building a house for a homeowner, your “work” is the entire house.  That said, if there is no coverage for the contractor’s “work,” then it would appear that there is no coverage at all for a liability claim related to construction of the house.  If that is the case, then what is the benefit to buying insurance?  In order to eliminate this apparent total loss of coverage, the policy goes on to create an “exception to the exception.”  The policy goes on to state that this exclusion is not applicable (i.e. there IS coverage) if the work in question was performed by a subcontractor. [1]

This can be shown through an example.  Assume a general contractor builds a house to completion.  The house subsequently burns down because of faulty electrical wiring.  If the general did the wiring itself, there is no coverage for that portion of the loss.  If the general hired a subcontractor to do the wiring, then there is coverage for the loss.  The rationale behind this rule is that insurance is supposed to cover risks that are outside the control of the insured contractor.  It is not supposed to act as a warranty for the contractor’s work.  For any work on the project done by the general contractor, the general has control over the quality of that work.  If it is done well, there should be no problem.  If it is done poorly, problems may result.  The point is that the general can choose whether to do good work or sloppy work on any given project.  If the general cuts corners or allows employees to do haphazard work, that is a conscious choice and the liability insurer should not be expected to step in and cover the work. There is little incentive to do a job well if the liability insurer suffers the consequences of the bad work instead of the builder actually performing it. 

Rarely will a contractor intentionally cut corners on any particular job.  The point, however, is that the contractor has the ability to control its own work.  Insurance coverage rightfully steps in to cover any mistakes made by other people (subcontractors) working for the general.  While this article speaks primarily to the situation of a general contractor working with a subcontractor, the same logic applies to work done by a subcontractor - do not expect insurance coverage for the quality of work you actually perform on a job site.  In light of this insurance exclusion, there can be significant risks of uninsured exposure for construction defect claims, particularly when the allegedly defective work is done by the insured contractor.     

 Benjamin Bohnsack practices in the areas of construction litigation, employment litigation and general civil litigation.

 © 2008 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.