Expert Commentary

Back to the Exclusions—The "Subcontractor" Exception

The "your work" exclusion of the CGL policy, together with its "subcontractor" exception, are the source of great contention in construction defect cases. This article looks at the question of whether coverage exists for property damage arising out of work or materials supplied by other than a traditional subcontractor.


Construction Defect Coverage
May 2001

Previous commentaries in this space have focused on the insuring agreement and the occurrence requirement as applied to defective work claims under commercial general liability (CGL) insurance policies. While these issues have garnered much attention recently, coverage for many claims is still determined pursuant to the exclusions in the CGL policy, some of which are tailored to the construction industry.

The "Your Work" Exclusion

Such an exclusion is Exclusion (l), the "your work" exclusion, together with its "subcontractor" exception. Exclusion (l) states that the insurance does not apply to:

"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

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.

The operation of the "your work" exclusion can be fairly straightforward. For example, in one of the more in-depth treatments of the exclusion, O'Shaughnessy v Smuckler Corp., 543 NW2d 99 (Minn App 1996), pet. for rev. denied (Minn 1996), the court upheld coverage for an insured general contractor for property damage arising out of defective work performed by subcontractors on a home. The court noted that the subcontractor exception narrowed the scope of the "business risk doctrine" to allow an insured coverage for property damage to its own work where that property damage arises out of work performed by the insured's subcontractor. In that way, an insured general contractor still retains the risk for the exposure it controls, property damage for its own defective work.

What Is a Subcontractor?

Nevertheless, despite this apparently straightforward application, issues can arise as to the scope of the subcontractor exception. Particularly, courts have addressed questions as to whether a particular party on a construction project constitutes a "subcontractor" for purposes of a general contractor's coverage for defective work arising out of that party's work. For example, is the supplier of a component of the construction work to be considered a subcontractor? What about a design professional? Not unexpectedly, insurers tend to define the term "subcontractor" more narrowly than do insured contractors.

The leading case on this issue is National Union Ins. Co. of Pittsburgh, Pa. v Structural Systems Technology, Inc., 964 F2d 759 (8th Cir 1992), affirming 756 F Supp 1232 (ED Mo 1991). In that case, a tower collapsed due to defects in prefabricated steel rods. The insured general contractor argued that the manufacturer and supplier of the rod was a subcontractor so as to fall within the exception to the "your work" exclusion of its CGL policy. The court reviewed the contract between the insured and the supplier, which required it to provide, fabricate, galvanize, and deliver to the site all materials per certain design and manufacturing specifications. The court held that since the insured contracted with the supplier to fabricate specially designed steel rods for the transmission tower, the exception to the exclusion applied, adopting a construction most favorable to the insured.

The court's conclusion that a supplier is essentially equivalent to a subcontractor for purposes of the exception to Exclusion (l) is in line with the definition of "your work" contained in the policy which includes "work or operations performed by you [the named insured] or on your behalf; and materials, parts or equipment furnished in connection with such work or operations." Since the named insured's work includes materials, parts or equipment furnished in connection with that work, defective materials, parts, or equipment furnished to the named insured by a supplier should be indistinguishable from defective work or operations performed for the named insured by a subcontractor. This is especially true when it is recalled that the subcontractor exception amounts to a limitation on the business risk doctrine for work or materials not actually performed or supplied by the named insured, but by its subcontractors.

A more recent case is Transportes Ferreos de Venezuela II C.A. v NKK Corp., 239 F3d 555 (3rd Cir 2001). In that case, a boom collapsed, damaging an ore tanker. In denying coverage for the claim, the insurer relied on a professional services exclusion and the "your work" exclusion, contending that both the design and the manufacture of the "rod-eye" component of the boom cylinder was defective. That component was manufactured by a third party for the named insured.

Under the "your work" exclusion, the court stated that the policy provided coverage if the accident arose from a defect caused by the third party's manufacture of the rod-eye. On the other hand, if the failure arose out of a design defect, coverage would be excluded under the professional liability exclusion. Finding the record unclear as to whether the collapse was due to a design or manufacturing defect, the court remanded the case to the trial court, specifically stating that if the failure arose out of a manufacturing defect, coverage would be provided under the policy.

In the eyes of the Third Circuit in the Transportes Ferreos v NKK Corp. case, the key distinction was whether the defective rod-eye was supplied by a third party, not whether that third party was a subcontractor or a supplier. It made no effort to distinguish between suppliers and subcontractors for purposes of application of the exception to the "your work" exclusion.

Similar reasoning was employed by the court in First Texas Homes, Inc. v Mid-Continent Cas. Co., 2001 U.S. Dist. LEXIS 2397 (ND Tex March 7, 2001), a case in which the insured homebuilder sought coverage for property damage to a home arising out of a defective foundation. One of the exclusions relied on by the insurer was the "your work" exclusion. The petition in the underlying lawsuit alleged that an engineer negligently designed or was involved in the design of the foundation of the house. Moreover, an affidavit of the insured established that the engineer was hired to design the foundation of the home. Since the design was alleged to be defective and was performed by a third party hired to design the foundation, the court held that the subcontractor exception applied so that, consequently, the "your work" exclusion was inapplicable.

Is the Subcontractor's Work Defective?

The cases discussed above demonstrate that as long as a third party, whether subcontractor or supplier, is responsible for the defect out of which the property damage arises, the subcontractor exception to the "your work" exclusion will be applied. This was not the case in Collett v Insurance Co. of the West, 64 Cal App 4th 338, 75 Cal Rptr 2d 165 (1998). In that case, the insured general contractor brought suit against its CGL insurer seeking coverage for the cost of repairing the retaining wall in a residential development. Per the requirements of the contract with the developer, the insured hired a special inspector to verify and report to the project structural engineer that the walls were being constructed according to strict specifications. Unfortunately, the retaining wall failed subsequent to completion.

In denying coverage to the insured contractor, the CGL insurer relied on the "your work" exclusion. In response, the insured contractor contended that the term "subcontractor" should be interpreted in its broadest sense so as to include the inspector hired by the contractor, citing National Union Fire Ins. v Structural Systems Technology, discussed above.

The California Court of Appeals recognized National Union v Structural Systems as a "broad interpretation of subcontractor," but stated that even under that broad view, an "inspector" was not a "subcontractor." The court said that while the inspector may have failed to catch defects in the retaining walls, he did not put them there. Rather, the defective retaining walls were the insured's own work. Under this view, the rationale behind the subcontractor exception to the "your work" exclusion simply does not apply since the insured's own work constitutes its own business risk.

Suppliers as Subcontractors under the Law

The cases that have addressed this issue all seem to agree that so long as the defect arises out of either work or materials supplied by a third party which contracted with the insured, the "your work" exclusion will not apply. This result, in addition to being supported as an exception to the business risk doctrine for the work or materials of the third parties, is also in keeping with traditional construction law, which makes little differentiation between a supplier and a subcontractor.

In that connection, see Crow-Williams, I v Federal Pacific Electric Co., 683 SW2d 523 (Tex App—Dallas 1984, no writ). In that case, a contractual waiver of subrogation as to builders risk insurance coverage extended to "subcontractors and sub-subcontractors." After a fire caused by a defective bus duct system supplied to the electrical subcontractor, the builders risk insurer claimed that the supplier was not a "subcontractor" or "sub-subcontractor" as set out in the waiver of subrogation. The court rejected this argument, holding that the word "subcontractor" was not ambiguous and that it had an ordinary meaning. In the ordinary sense of the word, a subcontractor includes an entity in the position of an electrical supplier, a materialman.

Arguments for Coverage

Based on the above, coverage for property damage arising out of work or materials supplied by other than a traditional subcontractor is supported by the following arguments:

  1. The definition of "your work" in the policy includes materials, parts, or equipment furnished as part of it.
  2. The fact that the defective materials are furnished by a third party supplier and were not fabricated by the named insured supports the limited exception to the business risk doctrine for labor and materials provided by third parties and not the insured itself.
  3. In terms of defective work, there is little distinction between a subcontractor and a supplier under traditional construction law.

So long as the property damage arises out of a lower tier's work, materials, or design, an insured contractor has a strong argument for application of the subcontractor exception to the "your work" exclusion.


This commentary updates and supplements the discussion contained in Chapter 11 of Insurance for Defective Construction: Beyond Broad Form Property Damage Coverage, published by IRMI and authored by Mr. Wielinski.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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