We all make them (even if we don't admit to them). Mistakes, that is. It's just a matter of what, when, and how. Lives can be defined by a mistake (without always having the benefit of errors or omissions insurance). Take Fred Merkle, for instance. Almost 100 years later, he is still remembered for one misjudgment, just one mistake that will be forever known as the Merkle Boner.
With two out in the last of the ninth, and the score tied against the Chicago Cubs, New York Giant's Fred Merkle stood on first base. His teammate, representing the winning run and the National League pennant, waited at third. The hitter promptly singled, driving in the winning run and clinching the pennant for the Giants! Or so Fred Merkle thought.
As the celebration began, he went from first base to the dugout, never touching second base. An alert Cub player fought through the crowd, retrieved the ball and jumped up and down on second, getting Merkle out by a force play and nullifying the run. The game was declared a tie and had to be replayed—and the Giants lost the replayed game and the pennant to the Cubs in 1908. At the ripe old age of 19, Fred Merkle had made a mistake—and cost his team a World Series berth. 1
What could the Merkle Boner possibly teach us about the commercial general liability (CGL) insurance policy? For starters, while it certainly was a lapse in judgment, Fred Merkle neither intended nor expected to be put out at second base (or lose the game and the pennant). It was an accident—the prime element of an "occurrence" as defined in the CGL policy. Are all mistakes (i.e., accidents) covered by the CGL?
An occurrence first must result in either property damage or bodily injury for the CGL to respond. While there reportedly was a great deal of mental anguish by many fans and players (including Fred Merkle), no one was physically harmed by the play. No bodily injury resulted.
The owners of the Giants certainly lost significant revenues because the Polo Grounds (the Giants' home field) would not host the World Series that year. However, property damage requires more than just the loss of revenue or unexpected additional costs. Property damage requires physical injury to tangible property and the consequential loss of use of the damaged property. Property damage also includes the loss of use of tangible property that is not physically injured.
The Polo Grounds was neither physically damaged (physical injury to tangible property) nor somehow unfit for playing baseball (loss of use of tangible property not physically injured) as the result of Fred Merkle's play. As no property damage had occurred, there is no coverage in the CGL, despite a mistake that was truly an accident.
What about mistakes that involve "faulty work"? Is "faulty work" covered by the CGL? It depends—but today there is a strong trend toward interpreting "occurrence" to include property damage resulting from faulty work.
Faulty work can be loosely defined as any type of operation performed, including materials, parts, or equipment that is part of the work, which is done incorrectly. It might be something that is installed, repaired, built, or maintained in a manner that falls below generally recognized standards of quality or fails to meet representations or warranties. Even failing to provide instructions or warnings can make it faulty work.
Background. Whether faulty work is an occurrence is a threshold matter as respects CGL coverage. If faulty work is not an occurrence, the CGL will not apply. The CGL Coverage A insuring agreement responds only to bodily injury or property damage caused by an occurrence. For several decades, insurers have contended that faulty work is not accidental in nature if the resulting property damage is to the work itself as such damage is a foreseeable business risk—and thus not property damage caused by an occurrence.
The seminal case on faulty workmanship was the New Jersey Supreme Court case of Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (NJ 1979)—opining "The consequences of not performing well is part of every business venture; the replacement or repair of faulty goods or works is a business expense to be borne by the insured-contractor.…" Id. at 239.
Although the Weedo court was actually addressing business risk in the context of the exclusions found in the Insurance Services Office, Inc. (ISO), 1973 comprehensive general liability policy, the Weedo principles 2 soon morphed into something far more expansive. Faulty work was never an occurrence because any resulting damage to the work was foreseeable and thus not accidental. 3 Further, any such damage could not be property damage as the CGL policy only provided coverage for damage to the property of third parties. Finally, coverage for property damage to completed work would turn the CGL into a performance bond.
Trending. The Weedo court's decision was based on an older CGL policy that did not include a subcontractor exception to the "your work" exclusion. Applying the "intent" of the parties regardless of the actual policy wording has begun to give way to a more complete analysis of the CGL policy wording—including consideration of the fact that the ISO 1986 CGL coverage form was quite different in scope when compared to the ISO 1973 CGL policy:
State supreme courts that have considered the issue since 2012 have reached "near unanimity" that construction defects can constitute occurrences and contractors have coverage under CGL policies for the unexpected damage caused by defective workmanship of subcontractors [citation omitted].
Black & Veatch v. Aspen Insurance (UK), LTD, 882 F.3d 952 (10th Cir. 2018)
Most of these state supreme court's opinions are based on today's CGL policy wording rather than relying on outdated notions of what is an occurrence in the CGL policy. This includes full consideration of the "your work" exclusion and the subcontractor exception to that exclusion as well as ISO's express intent found in a 1986 Circular 4 that "confirmed that the 1986 revisions to the standard CGL policy … specifically covered damage … caused by a subcontractor's work after the insured's operations are completed." 5 This change by ISO was apparently in response to "demands of the policyholder community and the view of insurers that the CGL [policy] was a more attractive product that could be better sold if it contained this coverage." 6 With focus on the entire CGL policy, taken as a whole, conclusions as to whether faulty work is an occurrence necessarily shifted:
The subcontractor exception does not create coverage. Only the basic insuring agreement can do that. But the subcontractor exception informs our understanding of an "occurrence" based on New York's rule that we should read the insurance policy as a whole and avoid interpretations that render provisions meaningless.
Black & Veatch v. Aspen Insurance (UK), LTD, 882 F.3d 952 (10th Cir. 2018)
As already noted, for the CGL (Coverage A) to be triggered, bodily injury or property damage must result from an occurrence. In addition, regardless of when the occurrence happens, the bodily injury or property damage resulting from the occurrence must take place during the policy period. The phrase found in the insuring agreement "to which this insurance applies" lets us know that coverage limitations and exclusions will follow.
Presuming a claim for faulty work is considered property damage caused by an occurrence (see the above discussion), we need to examine a series of property damage exclusions to determine the extent of coverage found in the ISO CGL policy for faulty work (1986 and later editions). Unfortunately, the wording of these exclusions is a little arcane, resulting in not only significant misunderstandings but also grounds for coverage disputes. How the exclusions apply to faulty work is best explained by some examples.
For the purposes of our examples, we have Great Big General Contractor, Inc. (we'll call it GBGC) and Not So Big Subcontractor, Inc. (we'll call it NSBS). Of course, we are talking about construction or contracting operations. At the outset, it is important to define a couple of terms to avoid confusion. (All definitions come from Black's Law Dictionary, 7th edition).
"Property damage" to:
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations;
GBGC is engaged by the owner to repair portions of a sprinkler system in an older industrial building. In its haste to finish the job, GBGC snaps a pipe when tightening it with the wrong type of equipment. The broken pipe falls and breaks other pipes already installed by GBGC, tripping the sprinkler system. Portions of the building are extensively damaged by the water.
The owner makes claim against GBGC for damage to the sprinkler system as well as water damage to the rest of the building. As GBGC has incorrectly performed its work, some may consider this to be faulty work.
Exclusion j. (5) eliminates from coverage property damage to that particular part of real property on which GBGC is performing operations if the damage arises out of the operations. In this example, the property damage did arise from GBGC's operations—the damage happened while GBGC was actually repairing the sprinkler system. But what is the meaning of "that particular part of real property"? Clearly, the portions of the building damaged by the water cannot be considered to be that particular part of the real property on which GBGC was working. Thus, property damage coverage would apply to all portions of the building damaged by the water.
Conversely, damage to the pipe that snapped is excluded—it was the negligent tightening of the pipe that caused it to snap. But what about the other portions of the sprinkler systems already repaired by GBGC that were damaged when the broken pipe fell. While not universally held, the other pipes of the sprinkler system are generally not considered to be "that particular part" upon which GBGC was actually performing operations when the property damage occurred. Therefore, GBGC would have coverage for the cost of replacing the pipes damaged by the falling pipe.
"Property damage" to:
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
The state hires GBGC to resurface portions of the highway. The work involves removing the existing surface and laying bituminous concrete (asphalt) over the "grooved" pavement. Unfortunately, GBGC scrapes away far too much, accidentally scraping way most of the compacted gravel that is the base of the highway. The resurfacing project quickly becomes a disaster—the new asphalt being applied by GBGC crumbles into small pieces only hours after the roller passes over it. The project is quickly halted, and the state brings a claim against GBGC for the cost of replacing the compacted gravel base.
Exclusion j. (6) expressly excludes damage to the highway base—the compacted gravel—as it is property that must be replaced or repaired because GBGC's work was incorrectly performed on it. GBGC has no CGL coverage for the claim by the state.
Here is another example of exclusion j. (6) that more clearly distinguishes it from exclusion j. (5). GBGC is engaged by the Steamship Authority to perform repair work on the ship's steam turbines, specifically to inspect and replace the turbine blades. After completing the inspection and replacing some blades on one of several turbines to be serviced, a marine contractor engaged by the Steamship Authority, NSBS tests the turbine. Because a few of the blades were not securely installed by GBGC, the testing causes some of these blades to break apart, rendering the turbine useless. The Steamship Authority makes claim against GBGC for the cost of replacing the damaged turbine blades.
As the turbine blades are not likely be considered real property, exclusion j.(5) would not apply. Exclusion j. (6) excludes property damage to "that particular part of any property," thus eliminating coverage for GBGC for the cost of replacing the blades. The damage to the blades was a result of work incorrectly performed by GBGC on the blades, necessitating their replacement.
It is important to note that exclusion j. (5) applies only if the damage occurs during the operation. Exclusion j. (6) eliminates coverage for damage during as well as after the some portions of the work are finished, provided the work does not fall into the "products-completed operations hazard." Further, the exclusions apply whether the work was done directly by GBGC's employees or was performed on behalf of GBGC by a subcontractor engaged by GBGC. (SeeBroad Form Property Damage—A Look Back.)
"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.
GBGC is hired by the state to put in the new ramp for the highway. The project involves site preparation, such as excavation, grading, and compaction, as well as laying down the compacted gravel base and the proper layers and thickness of bituminous concrete to meet state highway standards.
GBGC completes the project and it is put to its intended use—the ramp is open to all traffic. But 3 weeks after completion, the highway ramp begins to cave in and crumble. The state investigates and finds that the earth was not properly compacted and the depth of compacted gravel base put down was inadequate. The base and the earth under the base of the highway had collapsed, resulting in the crumbling of the bituminous concrete. In short, the work performed was faulty. The state subsequently sues GBGC for the cost of completely rebuilding the highway ramp.
Exclusion l. eliminates coverage for property damage to "your work" arising out of it or any part of it. In order for the exclusion to apply, the work has to be included in the "products-completed operations hazard." Does this exclusion apply to the cost of rebuilding the highway ramp?
There is no question that the highway ramp was the work of GBGC. And since the cause of the damage (the highway crumbling is property damage) resulted from the work itself (inadequate compaction of the earth and gravel base), the damage to the highway did "arise" out of the work.
But unlike the prior exclusions j. (5) and j. (6), this exclusion only applies if the work that caused the damage is included within the "products-completed operations" hazard.
The CGL policy contains three measures of when work is considered completed—and thus included within the products-completed operations hazard. One such measure is that the work at the jobsite has been put to its intended use by the owner. In the above example, the state has opened the highway to the public. GBGC's work has been put to its intended use, and thus its work now falls squarely within the products-completed operations hazard.
Based on the above, GBGC has no coverage for the cost to replace the highway ramp. The work is faulty, and insurance is not meant to pay for the cost of fixing work not properly done. The cost of fixing faulty work is seen as a business expense or business risk.
As is the tendency, the above "no coverage" conclusion has been reached without determining all the facts and, most importantly, without examining the entire exclusion. All too often, insurers cite exclusion (l) in either a denial letter or reservation of rights letter and completely leave out any mention of the exception to the exclusion.
This exclusion is limited—it does eliminate coverage for the cost of repairing "your work" ("your work" does include operations performed on your behalf), but does not apply if the following occurs.
A closer look at the facts of the above ramp work reveals that the GBGC, Inc., subcontracted to NSBS, Inc., the site preparation—the excavation, grading, compaction, and laying down the compacted gravel base. GBGC operations were to put down the layers of bituminous concrete.
As the damage to GBGC's work (bituminous concrete) arose out of work performed on behalf of GBGC by a subcontractor (the improperly compacted earth and gravel base), GBGC has coverage for the cost of replacing the bituminous concrete.
In addition, as the damaged work (the damaged work here is the collapsed base) was also performed on GBGC's behalf, GBGC has coverage for the cost of properly compacting the soil and properly installing the compacted gravel base.
In short, using the above fact scenario, exclusion (l) does not apply to GBGC at all—full coverage for the damage to all work performed is granted by the exception to the exclusion. As the cause of the damage to GBGC's work was due to a subcontractor's work, GBGC has coverage for its own work. Further, GBGC also has coverage for damage to the subcontractor's work.
What if the facts were reversed—GBGC performed the highway site work: excavation, grading, laying, and compaction of the gravel base—and subcontracted to NSBS the application of the layers of the bituminous concrete? Assume the same reason for the damage—GBGC did not properly compact the earth and the gravel base, which later collapsed.
The exception still applies—but a little differently. GBGC would not have coverage for the cost of replacing the gravel base as the damage to GBGC's work did not arise out of the work performed by a GBGC subcontractor. However, the damage to the bituminous concrete (the damaged work) was performed on GBGC's behalf by a subcontractor, and thus the cost of replacing the bituminous concrete is covered by GBGC's CGL policy.
"Property damage" to "impaired property" or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
Let's go back to our first example, but change the facts a little. GBGC installs a sprinkler system for the owner of a new office building. This time, no pipes snap or break—there is no physical injury to tangible property. However, it is discovered that the system has not been installed to building code—the owner can replace portions of the sprinkler system to bring it up to code, but only at considerable cost.
The owner makes claim against GBGC for the cost of replacing the incorrectly installed portions of the sprinkler system and also for the loss of use of the office building as the owner cannot obtain an occupancy permit until the sprinkler system is installed to building code.
From the viewpoint of GBGC, the owner's office building is "impaired property." That is, the office building is less useful because GBGC's work (the sprinkler system) is known to be inadequate (it does not meet building codes), and the property can be restored to use by replacing GBGC's work—bringing the sprinkler system up to code.
GBGC has no coverage for the cost of replacing or repairing the sprinkler system as the sprinkler system itself, which is tangible property, has not been damaged. Thus there is no property damage to GBGC's work—the sprinkler system.
The improper installation of the sprinkler systems has, however, caused loss of use of tangible property—the office building. The owner cannot collect rent until the sprinkler system is installed to code. Even though the definition of "property damage" in the CGL policy does include loss of use of tangible property (even if not physically injured), exclusion (m.) expressly eliminates coverage for any property damage to impaired property. As the office is impaired property, GBGC has no coverage for the loss of use claim made by the building owner.
There is an exception to this exclusion. Assume that GBGC goes ahead and replaces the appropriate parts of the sprinkler system, bringing it up to code. The landlord is able to rent space to his tenants and collect rental income. Unfortunately, 4 months after full occupancy, the main riser of the sprinkler system suddenly cracks and needs to be replaced (no damage is done to any other property). GBGC is found to have used defective piping materials—the reason the riser cracked.
Because the cracked riser renders the building unusable as an office building, the owner again makes claim against GBGC for loss of use—the tenants are not required to pay the rent if damage to the building prevents them from occupying their space.
Because the loss of use of the office building arose out of the sudden and accidental physical injury to GBGC's work (the cracked riser), the exception applies, and GBGC has coverage for this loss of use claim made by the owner.
Faulty work can be covered by the CGL policy. In most instances, it is no longer adequate for insurers to disregard the import of the "Damage to Your Work" exclusion and the subcontractor exception to that exclusion by asserting faulty work is never an occurrence in a CGL policy. Instead, properly determining coverage requires a detailed understanding of precisely what happened as well as a thorough understanding of how the property damage exclusions (and their exceptions) apply. Too often, coverage is denied without a good faith effort to ascertain the facts or by a less than careful reading of the CGL policy. While it may be easier and more expedient to deny coverage using buzz phrases, there has been a marked shift by a number of courts in how CGL policies are interpreted for the purpose of determining coverage arising out of a contractor's faulty workmanship. This trend is in favor of holding that such claims may arise from an occurrence: 8
The term "occurrence" is defined in the Owner's policy simply as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." If some portion of the Owners policy seeks to affect coverage by reference to the nature or location of the property damaged, it is not in the policy for coverage of occurrences. The policy simply does not defined "occurrence" by reference to such criteria.
Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 157 So.3d 148 (Ala. 2014) at 155
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