General Liability Insurance Policy Coverage for Faulty Construction
PLEASE NOTE: This article only applies to North Carolina. This article is designed for general information only. The information presented in this article should not be construed to be formal legal advice nor the formation of an attorney/client relationship. This article addresses only one aspect of the insurance with regards to construction. Please contact your attorney if you need further information.
In addition to insurance policies such as those covering workman’s compensation, premises liability, and vehicle liability, many business owners have also purchased a comprehensive general liability (CGL) policy. The idea is to provide insurance for liability that may not be covered by other policies. But, what does the policy actually cover?
The only way to determine the coverage is to read the policy very carefully. Unfortunately, most policy holders never read the policy until they get sued or they have a loss and the insurance company denies their claim. CGL policies are vague and confusing because they are drafted in the language of insurance and edited by insurance company lawyers. It could be argued that the insurance companies are trying to leave the actual coverage in doubt so that the same language can be used to justify opposing positions to either pay or deny a claim. If you wait until you have a claim to read the policy, it will be too late. You should read the policy so that you know what, when, where and how you are covered in the event of a claim for defective construction. While most CGL policies are similar, the insurance company can make changes at any time, and you have to read the policy to know what it contains.
There are many aspects to CGL policy coverage, and this article tries to help you understand what CGL policies generally cover. Because of the complexity of the subject, the scope of this article is limited to a discussion of when the claim occurred and what is usually covered by a CGL policy.
First, in order to determine if a claim will be covered, you must first determine when the incident causing the claim occurred. Before any policy will cover a claim, the claim must have occurred during a time that the policy covers. Insurance policies are primarily two different types with respect to time - “claims made” and “occurrence.”
“Claims made” policies cover only claims that are made during the policy period. If you made a claim before or after the policy period or forget to inform your insurance company of the claim during the policy period, you are out of luck. However, most CGL policies are the other type, which are known as “occurrence” policies.
Under an “occurrence” policy, claims based on events that occurred during the policy period are covered, assuming that the claims are made in a timely manner. The policy will define what this means, but, as a general rule, you should notify the insurance company as soon as you know of the claim and in the manner provided by the insurance policy. In order to make sure that you are covered, pay your premiums on time and avoid lapses in insurance. If Murphy's Law holds true, the day that the insurance policy lapses will be the day that you have a big claim.
Second, in order to determine what the policy covers, you must carefully read the policy inclusions and exclusions. This might seem rather simplistic, but it is key to understanding the policy coverage. Most CGL policies use vague language that initially seems to cover almost anything, but then uses exclusions to take most of that coverage back. For example, one policy states that it will cover “all damages, up to the policy limit, for all property damage or bodily injury that occurs during the policy period and within the coverage territory and for which the policy holder becomes liable.” This is a rather generous definition, but the next section of that policy, which is entitled “exclusions,” takes most of it away, by stating that there is no coverage for contractual liability or for most property damage. At first reading, these exclusions may seem to defeat the purpose of the policy. However, a careful reading will show that there is some coverage left after the exclusions are taken into account.
With respect to contractors, the key exclusion in most policies is that the insurance will not cover damage to your work or product. This means that, if your workers perform their work improperly and the work is damaged, your insurance company will not pay to repair that work. In contrast, with respect to subcontractors, many policies will cover the cost of repair of their faulty work. Therefore, if your employees improperly perform their work, the faulty construction is not covered. However, if your subcontractors make the same mistake, the defect could very well be covered.
What about damage caused to the work of others by your defective work? Most policies will cover damage done to the work of others caused by your defective work, as opposed to damage to your own work or product. For example, if an electrical contractor’s workers installed wiring improperly and a fire resulted, the electrical contractor’s CGL policy would cover the damage from the fire, except for the burned wiring itself.
If you have a claim for faulty construction that may be covered by insurance, what should you do? Any time that you have a claim for faulty construction, you should always notify your CGL carrier in a timely manner. Failure to notify the insurance company will violate the terms of the insurance contract and may cause the insurance company to deny coverage. A claim that may seem to be minor on the surface may turn out to be substantial. Therefore, even for seemingly minor faulty construction claims, always notify your insurance company. After being notified, the insurance company will make a determination of whether to cover the loss or deny coverage. If the loss is paid, then the problem is solved. If the loss is not paid, the insurance company may decide to deny coverage and throw you to the wolves, or may decide to hire an attorney to defend you while reserving its rights to deny coverage at a later date. Under most policies, the insurance company has a right and duty to defend you for a covered claim. Therefore, if you notify the insurance company in a proper manner of a covered claim, the insurance company will hire an attorney to defend you. Unfortunately, this does not always mean that the insurance company will pay the claim. Frequently, the insurance carrier will issue what is known as a “reservation of rights” letter. By issuing the letter, the insurance company is trying to preserve their right to deny coverage at a later time while at the same time defending the claim. This means that the insurance company may hire an attorney to defend you, and then will later decide whether to pay any judgment that may be rendered against you.
As with any insurance policy, you should take the time to carefully read the policy before you have a claim so that you can determine what is actually covered. Once you have a claim, it is too late to take action to correct the lack of coverage. If you do not understand all of the legalese, ask your attorney to explain it to you.