By David Humphreys, Carson Law Group PLLC
Have You Been Wrongfully Denied Coverage for a Construction Defect Claim? The Answer May Be “Yes” Based on Your ISO Classification.
If you have ever been involved in a construction defect lawsuit, you know they can be costly, time-consuming quagmires, involving prime contractors, subcontractors, design professionals, and owners each pointing the finger of blame at each other to establish responsibility for huge repair bills. To make matters worse, your commercial general liability (CGL) insurance company, to whom you have paid thousands of dollars each year in premiums, will likely either outright refuse to defend you in the lawsuit or, if a defense is provided, “reserve rights” to later refuse to pay any judgment entered in the case.
Contractors in this situation should not accept their insurer’s denial of coverage, or reservation of rights, at face value. Instead, you should have a trusted attorney, with the necessary industry-specific knowledge and experience, review your insurer’s coverage decision and fight for your coverage if warranted.
In recent coverage battles for our clients, our firm discovered a new, game-changing argument for coverage in construction defect cases. The new argument challenges insurers’ reliance on certain CGL policy exclusions on which insurers routinely rely to deny coverage to contractors, including, most importantly, the “Your Work” exclusion.
A standard “Your Work” exclusion provides:
This insurance does not apply to:… “[p]roperty damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.
Thus, the “Your Work” exclusion purports to exclude coverage for damage to, or caused by, a contractor’s own defective work. Traditionally, CGL policies have included an exception to the “Your Work” exclusion for work performed by subcontractors, which states that the “Your Work” 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.” However, contractor CGL policies we have reviewed recently removed the “subcontractor exception” by inclusion of Endorsement CG 22 94 101 01, thereby removing from coverage claims arising from a subcontractors’ defective work.
However, with the new coverage argument, we have had several recent successes in convincing CGL insurers that the “Your Work” exclusion is inapplicable to construction defect claims when the insured contractor was assigned a certain classification during the insurer’s underwriting process. Specifically, when a contractor is assigned the classification “Executive Supervisor or Executive Superintendent,” as reflected on the insurer’s CGL Declarations page, we have argued the “Your Work” exclusion and similar exclusions are inapplicable to claims arising from completed projects. This new argument is game-changing because, of the more than twenty CGL policies we have reviewed for contractors in the past year since discovering the new argument, every one of the policies reviewed listed “Executive Supervisor or Executive Superintendent” as a classification. Accordingly, the “Your Work” exclusion was arguably nullified in every policy, and, based on this limited sample size, the new argument may apply almost universally to CGL policies written for the construction industry.
The specifics of the new argument are complicated, relying on the interplay between the “Your Work” exclusion and several definitions spread throughout the standard CGL policy forms. The argument also relies on rules and definitions in the Insurance Services Office’s (ISO’s) Commercial Lines Manual, which are incorporated only by reference in a CGL policy, and which are not even available for review by most insurance agents, much less their contractor customers.
To summarize the new ISO classification-based argument, claims arising from a contractor’s operations under the ISO classification “Executive Supervisor or Executive Superintendent” are excluded from the definition of “products-completed operations hazard,” and are therefore not subject to the “Your Work” exclusion. Remember that the “Your Work” exclusion applies to “property damage” to “your work”… AND INCLUDED in the “products-completed operations hazard;” thus, if the claimed property damage is not in the “products-completed operations hazard,” the “Your Work” exclusion doesn’t apply.
The new argument also applies to other exclusions and exclusionary endorsements that insurance companies routinely cite in denying coverage to contractors. For example, we recently used the new argument to successfully challenge a “prior work” exclusionary endorsement, which read:
“This insurance does not apply to ‘your products’ or ‘your work’ completed prior to” a certain date listed in the endorsement.… “Specifically, this insurance does not apply to… “property damage”… included in the ‘products-completed operations hazard’ and arising out of… ‘your work’ performed by or on behalf of you prior to the date shown above.”
Again, this endorsement incorporates the “products-completed operations hazard” definition, which we successfully argued did not apply to a claim arising under our client’s “Executive Supervisor or Executive Superintendent” ISO classification.
As a word of caution, this new ISO classification-based argument has not, to our knowledge, been addressed by a court. Our recent successes have concluded with favorable settlements for our clients. However, we strongly believe that these settlements have been driven in part by the insurance companies’ desire to avoid a court ruling, especially given courts’ tendencies to construe exclusions against insurers and in favor of coverage. Accordingly, for now, the new ISO classification-based argument is a powerful new tool in the toolbox for challenging an insurer’s denial of coverage or “reservations of rights” for contractors facing construction defect claims.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, please consult an attorney.
About the Author
With more than two decades’ experience as a commercial litigator and business transaction lawyer, David Humphreys has extensive experience representing contractors, owners, and design professionals in construction disputes, construction defect litigation, and insurance coverage matters. David’s experience also includes assisting clients with complex commercial transactions, regulatory compliance and government relations, and election law. Prior to joining Carson Law Group in 2016, David was a partner at another litigation and business transaction firm, a C.O.O. and General Counsel at a regional energy and transportation company, and, prior to law school, a Certified Public Accountant with KPMG. This article is published with the permission of Carson Law Group PLLC, which represents clients in Mississippi, Texas, Georgia, Arkansas, and throughout the Southeast.
