Product Update

Contractual Liability Exclusion and Status of Defective Construction as an Occurrence Updates in Commercial Liability Insurance

This Commercial Liability Insurance release adds new analytical material on the scope of the commercial general liability (CGL) contractual liability exclusion and the status of defective construction as an "occurrence."

One common basis on which insurers deny property damage claims against contractor insureds in connection with defective construction is that such claims constitute breach of contract rather than tort liability. Underlying such claim denials in some instances is the argument that a contractual obligation to perform construction work in compliance with a certain standard of quality is in fact an "assumption of liability in a contract or agreement" and thus is subject to the CGL contractual liability exclusion. This argument has not met with much success in court, as described and illustrated with case law examples in the expanded annotation of the exclusion.

Another argument frequently advanced by insurers in denying construction defect claims is the contention that property damage resulting from defective construction is not caused by an "occurrence," as required by the standard CGL policy. This argument has been accepted by courts in some jurisdictions and rejected in others. The result is that, in some states, defective construction is regarded as a form of covered property damage to the defective work itself; in others, defective work itself is not covered, but damage to other property caused by the defective work is covered; and in a few states, contractors have no CGL coverage either for defective work itself or for other property damage caused by the defective work. A reorganized and expanded annotation of the CGL "occurrence" definition provides examples of the approaches that various courts have taken to the question.