It has long been a standard practice in construction projects for parties
who are additional insureds under other parties' liability policies to require
that the additional insured status extend to completed operations. A project
owner, for example, faces loss exposures both on account of its contractors'
operations in the course of construction (damage to adjacent premises, for example,
or injury to a visitor at the job site); and due to claims arising out of the
completed project (a dangerous condition in a finished building).
In 1993 Insurance Services Office, Inc. (ISO), revised several of its standard
additional insured endorsements, including the endorsement most commonly used
in connection with construction projects (endorsement CG 20 10), specifically
to rule out the additional insured's protection against completed operations
claims. Coverage under the revised endorsements applies only to liability arising
out of the named insured contractor's or subcontractor's "ongoing operations"
for the additional insured. In explaining its revision of the standard forms,
ISO commented that it was never the intention
of the insurance industry to provide additional insureds with completed operations
Encouraged by the 1993 change in standard additional insured language, or
by ISO's explanatory comment about the insurance industry's attitude toward
completed operations coverage for additional insureds—or quite possibly by both—a
number of insurers began reexamining their positions with respect to the coverage
that was available under pre-1993 versions
of endorsement CG 20 10. If there was never any intent to give additional insureds completed operations coverage (the insurers'
reasoning went), then perhaps there is nothing specific in the 1986 or 1988
editions of the additional insured endorsements that would afford such coverage
either. The language of those earlier editions, which were always widely assumed to provide completed operations
coverage, reads as follows.
WHO IS AN INSURED (Section II) is amended to include as an insured the
person or organization shown in the Schedule, but only with respect to liability
arising out of "your work" for that insured by or for you.
The difference between this language and that of the 1993 "no-completed-operations"
revised version is in the use of the phrase "your work" in the older version
and "your ongoing operations" in the newer. "Your ongoing operations" clearly
does not include completed operations. But does "your work"?
A California appellate district court was recently called on to answer that
very question—a question that had largely gone unasked and unanswered until
the issue of coverage intent was brought to life by ISO's revision of the standard
endorsement language. The court's decision, in Pardee
Construction Co. v Insurance Company of the West, Cal 4th App Dist Div
1 (D031946, 2000), addresses some interesting issues related to the time period
during which completed operations coverage applies, and the intent of parties
to construction contracts in requiring and providing additional insured status.
The case arose out of a multi-phase residential construction project that
lasted for a period of at least 3 years. In the course of the project, the developer-general
contractor (Pardee) contracted with a number of subcontractors, in each case
requiring the subcontractor to add Pardee to its commercial general liability
(CGL) policy as an insured.
Seven years after completion of the project, Pardee was sued by residents
for property damage arising out of alleged construction defects involving work
of the subcontractors. Pardee received partial funding of its defense against
these suits from some of the insurers under whose policies it was an additional
insured, but had to pay part of the cost of defense itself. It then brought
an action against four of its subcontractors' general liability insurers that
had declined to provide a defense, and that suit resulted in the appellate district
The subcontractors' insurers had declined to defend Pardee on a variety of
grounds. The most significant from a coverage standpoint was the argument that
the policies had been written after the allegedly defective construction was
completed, during later phases of the project, and were not intended, therefore,
to cover the operations out of which the claims arose—either course-of-construction
or completed operations claims. Pardee argued, on the other hand, that nothing
in the language of the policies or the attached additional insured endorsements
precluded coverage for completed operations claims against the additional insured.
Some of the additional insured endorsements in question were versions of
standard ISO endorsement CG 20 10, in pre-1993 editions, which provided additional
insured status to Pardee with respect to liability arising out of "your work"
[i.e., the subcontractor's work] for that insured by or for you [the subcontractor].
One of the additional insured endorsements was an insurer's independently filed
form, which provided Pardee with additional insured status "only to the extent
that [Pardee] is held liable for your [the subcontractor's] acts or omissions
arising out of and in the course of operations performed for [Pardee] by you
or your subcontractor."
The insurers asserted several arguments against their duty to defend Pardee
on the basis of the language of these endorsements. The most significant was
that the coverage being provided to Pardee for claims arising out of "your work"
(i.e., the subcontractor's work) did not include completed operations, but rather
only work in progress. The court ultimately dismissed this line of argument
on a number of grounds. It pointed out that the ISO CGL definition of "your
work" includes warranties and representations—liability exposures that do not
even exist until the work is completed.
The court quoted the analyses of a number of insurance commentators, all
of whom agreed that "your work" includes completed operations. One of the authorities
cited for this point was Contractual Risk
Transfer by IRMI. That manual's explanation of the phrase "operations
performed by you" as it appears in the policy definition of "your work" was
quoted by the court as follows.
"Performed by you" in this definition can reasonably be understood to
mean [work] "being performed by you" (i.e., work in progress) or [work]
"that has been performed by you" (i.e., completed operations).
The court also invoked the principle of contra
proferentem, the rule of policy interpretation holding that disputed
meanings in insurance contracts should be construed against the party that offered
the contract (i.e., the insurance company):
The insurers could have limited coverage by express policy language that
coverage was limited to claims arising from work performed during the policy
period. However, they did not . . . when an insurer elects not to use clearly
limiting language in an additional insured clause, but rather grants coverage
for liability arising out of the named insured's work, the additional insured
is covered under the circumstances here without regard to whether the work
is still in progress.
A final argument of the insurers in denying coverage to Pardee was their
assertion that it was never the intent of the contracting parties that Pardee
should have coverage for claims arising after the completion of the contracted
work. The court characterized this assertion as "myopic spin."
Damage resulting from a subcontractor's work often does not arise for
years. It is thus prudent for general contractors to obtain completed operations
coverage as additional insureds from their subcontractors' insurers. Why
would Pardee have required its subcontractors to maintain CGL coverage that
included completed operations coverage and to name it as an additional insured
on those policies unless it expected to be covered for the same completed
operations as its subcontractors? Certainly that expectation is reasonable
given that the additional insured coverage is intended by the insurance
industry to cover vicarious liability that an additional insured may incur
due to operations of the originally named insured.
Requirements of additional insured status that will respond to completed
operations claims are still the rule in construction contracts. Contractors
and subcontractors faced with the obligation to arrange such coverage frequently
attempt to have additional insured endorsements drafted with language that matches
that of the pre-1993 editions of CG 20 10. They do so in the belief that that
older language provides the required completed operations coverage. The Pardee decision should provide some security
for these contractors in the assumption that they are complying with the insurance
requirements of their contracts.