Once again I am moved to blog (see #31, #37, #91) on Commercial General Liability (“CGL”) insurance coverage for defective workmanship. I’ve previously said that at best, only consequential damage to other property, not for repairing or replacing the defective work itself, would be covered. A recent case counsels an update.
In general, CGL insurance coverage calls for a three-step inquiry. First, do the damages qualify as “property damage” caused by an “occurrence”? Second, if so, do any exclusions apply? Third, are there any exceptions to those exclusions?
One of the exclusions from coverage found in the standard ISO form CGL policy, the so-called (j)(6) exclusion, eliminates coverage for “That particular part of any property that must be restored, repaired or replaced because ‘Your work’ was incorrectly performed on it.” (“Your work” is defined as “Work or operations performed by you or on your behalf” – so it includes work done by your subcontractors.) Does such a “particular part” include non-defective work damaged by the consequences of defective work – such as perfectly good drywall ruined by a leaky roof? New Hampshire’s Supreme Court has said that it does not, Cogswell Farm Condo. Ass’n v. Tower Group, Inc., 167 N.H. 245, 252 (2015). Hence, in New Hampshire at least, non- defective work damaged by defective work may be covered.
But even if non-defective work damaged by defective work were not otherwise covered, (j)(6) is subject to an exception which restores coverage for “property damage included in the ‘products-completed operations hazard’” – a phrase that embraces property damage “arising out of ‘your product’ or ‘your work’ except . . . Work that has not yet been completed or abandoned.” In other words, the (j)(6) coverage exclusion only applies to work in progress, not to work that has been completed or abandoned. How does this figure into the mix?
Earlier this month a First Circuit case decided under Massachusetts law weighed in. Admiral Insurance Company v. Tocci Building Corporation was a suit over “defective work by Tocci’s subcontractors resulting in various instances of property damage to non-defective work.” The parties arm-wrestled over whether these damages were covered, with Tocci trumpeting the New Hampshire approach and Admiral arguing against it. The court sidestepped the issue, concluding that even if non-defective work damaged by defective work were covered as Tocci claimed, the (j)(6) exclusion still won the day for Admiral because the products-completed operations hazard exception didn’t apply. The court framed the question as “whether the project was ‘completed or abandoned’ prior to the damage, such that it would fall under the ‘products-completed operations hazard’ and thus be covered.” Because Tocci’s contract was terminated before it finished its work, the court answered in the negative.
To understand what would have happened if Tocci had completed its contract before the damage occurred, a separate exclusion must be considered. Exclusion (l) eliminates coverage for damage to completed work, but has an exception “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, if the work that causes the damage or the work that is damaged was performed by the insured’s subcontractor, coverage exists.
Back to the Admiral case. Focusing on this subcontractor exception, the court considered the argument that if the definition of “property damage” and “occurrence” already excluded coverage for the damage, it “would make this exclusion/exception pair meaningless surplusage.” Admiral naturally had a different view: that “this language was added as a backstop for use in jurisdictions that had found there was coverage for this type of claim.” The court said “our reading of the (j)(6) exclusion does not make that exclusion/exception pair a nullity because of the (j)(6) exclusion’s exception for completed work.”
The upshot of this view is that subcontractor work causing damage should be covered as long as it arises after the construction project is completed. To quote Acuity v. M/I Homes of Chicago, LLC, 234 N.E.3d 97, 108 (Ill. 2023), “a subcontractor’s defective work that results in property damage to the completed project may be covered."
In general, CGL insurance coverage calls for a three-step inquiry. First, do the damages qualify as “property damage” caused by an “occurrence”? Second, if so, do any exclusions apply? Third, are there any exceptions to those exclusions?
One of the exclusions from coverage found in the standard ISO form CGL policy, the so-called (j)(6) exclusion, eliminates coverage for “That particular part of any property that must be restored, repaired or replaced because ‘Your work’ was incorrectly performed on it.” (“Your work” is defined as “Work or operations performed by you or on your behalf” – so it includes work done by your subcontractors.) Does such a “particular part” include non-defective work damaged by the consequences of defective work – such as perfectly good drywall ruined by a leaky roof? New Hampshire’s Supreme Court has said that it does not, Cogswell Farm Condo. Ass’n v. Tower Group, Inc., 167 N.H. 245, 252 (2015). Hence, in New Hampshire at least, non- defective work damaged by defective work may be covered.
But even if non-defective work damaged by defective work were not otherwise covered, (j)(6) is subject to an exception which restores coverage for “property damage included in the ‘products-completed operations hazard’” – a phrase that embraces property damage “arising out of ‘your product’ or ‘your work’ except . . . Work that has not yet been completed or abandoned.” In other words, the (j)(6) coverage exclusion only applies to work in progress, not to work that has been completed or abandoned. How does this figure into the mix?
Earlier this month a First Circuit case decided under Massachusetts law weighed in. Admiral Insurance Company v. Tocci Building Corporation was a suit over “defective work by Tocci’s subcontractors resulting in various instances of property damage to non-defective work.” The parties arm-wrestled over whether these damages were covered, with Tocci trumpeting the New Hampshire approach and Admiral arguing against it. The court sidestepped the issue, concluding that even if non-defective work damaged by defective work were covered as Tocci claimed, the (j)(6) exclusion still won the day for Admiral because the products-completed operations hazard exception didn’t apply. The court framed the question as “whether the project was ‘completed or abandoned’ prior to the damage, such that it would fall under the ‘products-completed operations hazard’ and thus be covered.” Because Tocci’s contract was terminated before it finished its work, the court answered in the negative.
To understand what would have happened if Tocci had completed its contract before the damage occurred, a separate exclusion must be considered. Exclusion (l) eliminates coverage for damage to completed work, but has an exception “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, if the work that causes the damage or the work that is damaged was performed by the insured’s subcontractor, coverage exists.
Back to the Admiral case. Focusing on this subcontractor exception, the court considered the argument that if the definition of “property damage” and “occurrence” already excluded coverage for the damage, it “would make this exclusion/exception pair meaningless surplusage.” Admiral naturally had a different view: that “this language was added as a backstop for use in jurisdictions that had found there was coverage for this type of claim.” The court said “our reading of the (j)(6) exclusion does not make that exclusion/exception pair a nullity because of the (j)(6) exclusion’s exception for completed work.”
The upshot of this view is that subcontractor work causing damage should be covered as long as it arises after the construction project is completed. To quote Acuity v. M/I Homes of Chicago, LLC, 234 N.E.3d 97, 108 (Ill. 2023), “a subcontractor’s defective work that results in property damage to the completed project may be covered."
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