Understanding the “Your Work” Exclusion in the Commercial General Liability Insurance Policy

Insurance policies are an important part of contractor’s risk management. Some insurance policies are required by law, such as worker’s compensation and automobile liability. Other policies are designed as a tool to finance and manage risk associated with the construction industry, such as builders risk and general liability policies. Home builders have faced escalating general liability premiums in recent years. During this same period, coverage under the commercial general liability (“CGL”) policy has been whittled away, and exclusions have been expanded.

The CGL policy obligates the insurer to pay for damages because of “bodily injury” or “property damage” to which the policy applies. Coverage applies to “bodily injury” and “property damage” only if they are caused by an “occurrence” and only if the injury or damage occurs during the policy period.

Property damage is defined within the CGL to mean, “physical injury to tangible property.” An “occurrence” is “an accident including continuous or repeated exposure to substantially the same general harmful condition.”

The standard CGL Policy excludes coverage for damage to the insured’s work that is performed by the insured. The purpose of this exclusion is to avoid coverage for the cost of correcting a contractor’s faulty workmanship that damages the contractor’s own work. This “work exclusion” is, however, subject to an exception when the damaged work or the work out of which the damage arises was performed by the insured’s subcontractor. Under Minnesota law, the exception to the “work exclusion” usually means that the general contractor has coverage for damage to all aspects of the structure caused by the defective work of a subcontractor. O’Shaughnessy v. Smuckler Corp., 543 N.W.2d 99 (Minn. App. 1996). From the subcontractor’s perspective, however, the subcontractor does not have liability coverage for damages caused by its own faulty workmanship. So, if a subcontractor’s poor workmanship causes physical damage to property, the General Contractor’s CGL policy may provide coverage for the damages, but the subcontractor’s CGL policy will not.

A good example showing the practical effect of the work exclusion and subcontractor exception is where the general contractor hires a subcontractor to install windows. The subcontractor’s faulty workmanship results in water penetration at the window area, causing the walls to rot (property damage). When the homeowner sues the general contractor for negligent construction, the general contractor’s CGL policy will provide coverage because the faulty workmanship was performed not by the general contractor, but by the subcontractor. If instead of hiring a subcontractor to install the windows the general contractor installed the windows itself, and property damage occurred, the general contractor’s CGL policy will not provide coverage due to the Your Work exclusion.

Contractors need to be aware of the growing trend to remove the subcontractor work exception to the “Your Work” exclusion of the standard CGL policy. When reviewing your next policy, you need to verify that you have coverage for your subcontractor’s faulty workmanship. In the standard CGL policy, the relevant place to make sure the subcontractor work exception to the Your Work exclusion is Exclusion I. Of Section A - Bodily Injury And Property Damage Liability; 2. Exclusions; j. Damage to Your Work. This exclusion, and exception, may be located elsewhere in a nonstandard policy. This section should contain language similar to the following:

“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.”

If this, or similar, language is not included in the policy, then you are essentially guaranteeing your subcontractor’s work, without the safety net of a liability insurance policy. The contractor then bears the risk of property damage caused by a subcontractor’s faulty workmanship; and if the subcontractor becomes insolvent, the contractual indemnification agreement with the subcontractor will not be able to provide relief from liability.