Expert Commentary

Do CGL Policies Cover "Rip and Tear" Expenses?

Commercial general liability (CGL) policies generally provide coverage for "property damage" caused by an "occurrence." "Occurrence" is typically defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" usually entails "physical injury to tangible property, including all resulting loss of use of that property" and "loss of use of tangible property that is not physically injured."


Liability Insurance
March 2011

Most jurisdictions have determined that defective workmanship, by itself, does not constitute "property damage" caused by an "occurrence." As a result, CGL policies generally do not cover the cost to repair and replace the defective work. However, jurisdictions differ on whether the removal and replacement of nondefective property required to repair the defective work, commonly referred to as "rip and tear" expenses, is covered. Some jurisdictions have determined that CGL policies do not cover such expenses because the expense of removing or repairing non-defective property is not "property damage" caused by an "occurrence." Other jurisdictions have concluded that CGL policies cover these expenses.

"Rip and Tear" Expenses Are Not Covered

An Arizona appellate court recently held that a CGL policy does not cover damage caused to nondefective property during the repair and replacement of defective work. See Desert Mountain Prop. Ltd. P'ship v. Liberty Mut. Fire Ins. Co., 236 P.3d 421 (Ariz. App. 2010). There, some of the homes that the insured, Desert Mountain, constructed experienced settlement and drainage problems as well as patio cracks. After paying to have the soil issues corrected and damages repaired to these homes, Desert Mountain sent a notice of claim to its insurer, Liberty Mutual.

After Liberty Mutual denied coverage, Desert Mountain sued Liberty Mutual. The superior court found that Desert Mountain could not recover the cost of repairing the poorly compacted soil but could recover amounts that Desert Mountain spent to repair property damage that resulted from the soil settlements.

On appeal, Desert Mountain argued that the superior court erred in ruling that the Liberty Mutual policies did not cover the expenses Desert Mountain incurred in repairing damage to nondefective property that occurred during the repair of the defective property. In rejecting Desert Mountain's argument, the court noted that defective work by itself does not constitute an "occurrence." The court acknowledged that CGL policies may cover damages to other property resulting from the defective construction. However, the court concluded that the expenses for removing and repairing the nondefective property required to repair poorly compacted soil was damage caused by the repair of the poorly compacted soil, not damage caused by the poorly compacted soil.

Decisions Relied on by the Desert Mountain Court

The Desert Mountain court cited decisions from courts in various jurisdictions that appear to highlight the weak casual connection between the defective workmanship and the rip and tear expenses. For example, in OneBeacon Insurance v. Metro Ready-Mix, Inc., 427 F. Supp. 2d 574 (D. Md. 2006), the court held that, under Maryland law, the demolition of pilings and columns necessitated by the defective grout was not "property damage." Instead, the court found that the demolition was merely the cost incurred in replacing and repairing the insured's defective product or work. To replace the defective grout, the pile caps and columns that were constructed on the grout had to be demolished and reconstructed in order to replace the defective grout. See also H.E. Davis & Sons, Inc. v. North Pacific Ins. Co., 248 F. Supp. 2d 1079, 108–85 (D. Utah 2002) (applying Utah law to find that the concrete footings poured by another company, which had to be removed to repair the insured's inadequate soil compaction, did not constitute "property damage" because the concrete footings were not damaged).

In another case, NAS Surety Grp. v. Precision Wood Prod., Inc., 271 F. Supp. 2d 776 (M.D.N.C. 2003), the court held that, under South Carolina law, CGL policies did not cover the repair and replacement of nondefective property because the repair and replacement did not constitute an "occurrence." The court explained that this is because such repair and replacement was a foreseeable consequence (i.e., not an "accident") of the replacement of the insured's defective work.

In the case Woodfin Equities v. Harford Mut. Ins. Co., 678 A.2d 116 (Md. Ct. Spec. App. 1996), overruled in part on procedural grounds, 687 A.2d 652 (Md. 1997), in order to access and repair the defective HVAC system, carpeting was pulled up, and drywall was broken through. The court held that the insured could not recover such costs associated with removing and replacing this nondefective property. The court stated that:

[v]oluntarily pulling up carpeting or breaking through drywall to access the HVAC units is not property damage; it is the cost incurred in replacing and repairing the [defective] HVAC systems.

Id. at 131, n. 8. The court also found that even if "property damage" included such damages, the damage was not caused by an "occurrence" because the damage was not accidental. Id.

"Rip and Tear" Expenses Are Covered

Some courts hold that CGL policies cover the removal and replacement of non-defective property because such "property damage" was caused by an "occurrence": the defective workmanship. For example, in Dewitt Constr. Co. v. Charter Oak Fire Ins. Co., 307 F.3d 1127 (9th Cir. 2002), the insured subcontractor drilled and placed concrete piles into the ground to serve as a primary component of a building's foundation. The insured's failure to properly construct the concrete piles resulted in the removal and reinstallation of other subcontractors' work.

The court found that, under Washington law, the damage to the work of other subcontractors which occurred when their work had to be removed and destroyed as a result of the insured's defective work constituted "property damage." The court also found that the initial defective workmanship was the "occurrence" that caused the "property damage.

Similarly, in Indian Harbor Ins. Co. v. Transform, LLC, 2010 WL 3584412 (W.D. Wash. 2010), the disputed damages included the repair and replacement of the insured's defective condominium units, damages to the materials supplied by East AHM, LLC, and Hansell Mitzel, LLC ("AHM"), and "rip and tear" damages to AHM's own construction as well as delay damages. The court held that AHM's "rip and tear" damages fell within the scope of the CGL policy because those damages were "third-party property damages" resulting from the insured's defective work. The court reasoned that, because the insured inadvertently provided defective products to AHM, there was an "occurrence."

"Rip and Tear" Expenses Not Subject to "Your Product" and "Impaired Property" Exclusions

Some courts have held that "rip and tear" expenses are not excluded by the "your product" or the "impaired property" exclusions.

In Clear, LLC v. American & Foreign Ins. Co., 2008 WL 818978 (D. Alaska 2008), the court addressed whether under Alaska law, the insurer must indemnify the successor in interest to the insured general contractor for damages to nondefective property that had to be removed and replaced to repair the defective work. The court reviewed the "impaired property" exclusion to determine whether the CGL policy covered the costs to repair and replace nondefective property to make repairs to property damaged by the defective work. The court noted the exception to the exclusion, which stated that the loss of use of property which results from a sudden or accidental physical injury to work done by the insured or its subcontractors is not excluded from coverage. The court concluded:

If property which is not physically injured has to be removed to repair damaged property, then the owner has lost the use of the uninjured property. To get that use back, the originally uninjured property must be replaced. Read that way, and harmonized with the other policy provisions already discussed, exclusion m would not eliminate coverage for the cost of removing and replacing uninjured property in order to remedy damage that is within the coverage provided by the Policy.

Id. Accordingly, the Clear, LLC, court found that the insurer must indemnify the insured for damages incurred as a result of removing and replacing nondefective property to the extent the removal and replacement is necessary to repair property damage caused by a subcontractor.

In Employers Mut. Cas. Co. v. Grayson, 2008 WL 2278593 (W.D. Okla. 2008), the court found that the damage to the bridge deck and to its structural components during the required removal of the defective concrete which the insured supplied was an unintended consequence of the insured "innocently supplying a nonconforming product." As a result, it was "property damage" caused by an "occurrence."

The court further found that the "your product" exclusion applied only to the insured's nonconforming concrete. As a result, the exclusion did not apply to "property damage to other property that occurs when a defective part necessitates the tearing out of nondefective parts to gain access to the defective part in order to replace it."

The court also found that the "impaired property" exclusion did not preclude coverage for the removal and replacement of the nondefective parts because the bridge was not "impaired property"; that is, it could not be restored to use by only replacing the defective concrete. See also DeWitt, 307 F.3d at 1135 (finding impaired property exclusion inapplicable because "[t]he destroyed work of other subcontractors was not merely impaired, nor was it restored to use").

Conclusion

Whether or not CGL policies cover "rip and tear" expenses varies among jurisdictions. Some jurisdictions hold that CGL policies do not cover "rip and tear" expenses because such expenses are considered a part of the uncovered cost to repair and replace the defective work, which is not an "occurrence." Other jurisdictions find that CGL policies cover "rip and tear" expenses because such expenses constitute "property damage" caused by an "occurrence": the initial defective workmanship. Finally, some jurisdictions have found that the "your product" and "impaired property" exclusions do not preclude coverage for "rip and tear" expenses.


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