CGL COVERAGE FOR DEFECTIVE WORKMANSHIP: CURRENT (AND ONGOING) ISSUES

1. INTRODUCTION
1. The Contractor's Commercial General Liability Coverage and Construction Risks
2. CGL Policy Forms
2. BREACH OF CONSTRUCTION CONTRACT AS "LEGAL OBLIGATION"
1. Hypothetical Coverage Scenarios
2. The Insurance Coverage Issue
3. Historical Development: California Case Law as to Coverage for Breach of Contract
4. Other Cases Ascribing to the "Tort Versus Contract" Distinction
5. Texas Law on Coverage for Breach of Contract
6. Other Breach of Construction Contract Cases
7. Practical Applications?
3. BREACH OF CONTRACT AND THE OCCURRENCE REQUIREMENT
1. Accident and Fortuity Requirement
2. Breach of Contract as Occurrence: Texas Law
1. Negligence or Unintentional Act Line of Cases
2. Intentional Tort or Act Line of Cases
3. Collision of the Unintentional and Intentional Act Lines of Cases: Breach of Contract
1. Anomalous Results: The Recent Texas Experience
2. Split in Authority
3. Latest Resolution
4. Applying the Underwriting Intent
4. EXCLUSION (b) AND BREACH OF CONTRACT
5. DEFINITION OF "PROPERTY DAMAGE"
1. Defective Work as Physical Injury to Tangible Property
2. Loss of Use of Tangible Property that is not Physically Injured
6. BUSINESS RISK: EXCLUSION OF THE INSURED'S WORK
1. Sources of The Business Risk Rationale
2. Misapplication of the Business Risk Rationale
3. Elimination of the Subcontractor Exception By Endorsement
7. THE PRODUCTS EXCLUSION END RUN
1. The 1973 Exclusion
2. The 1986 "Your Product" Definition
8. OPERATIONS EXCLUSION: PARTICULAR PART UPON WHICH OPERATIONS ARE BEING PERFORMED
1. Operation of the Exclusion
2. Determining the "Particular Part"
3. When Operations Are Being Performed
9. FAULTY WORKMANSHIP EXCLUSION
1. Confining the Exclusion to "That Particular Part"
10. THE IMPAIRED PROPERTY EXCLUSION AND ITS PREDECESSORS
1. Historical Perspective
2. 1986 Impaired Property Exclusion
3. Impaired Property Exclusion: The Theory
4. Impaired Property Exclusion: The Practical
5. Impaired Property Exclusion: The Ambiguity?

Abstract

When construction work proves to be defective, claims against the insured contractor can involve many facets – lost profits for the owner when the defect prevents a building from opening on schedule; damage to the interior when a roof fails, or even serious property damage in a catastrophic collapse. All of these claims usually involve breach of contract. Depending on the particular claim, only breach of contract might be alleged. Some insurers deny coverage for such claims on the basis that the insured is not "legally obligated" to pay damages arising out of a breach of contract. They may also assert that the CGL policy provides coverage only for tort damages. Coverage for other claims is questioned on a theory that a breach of contract does not constitute an occurrence under a CGL policy. Even where a claim is framed in terms of negligence, a litany of exclusions are also usually implicated by these losses.

Though an attempt has been made to provide as comprehensive an overview of the issues involved, this paper is at most a survey and the law on these issues is constantly developing and changing. Much of the discussion, and particularly the flowcharts, are an adaptation and update of the author's work, Insurance For Defective Construction: Beyond Broad Form Property Damage, published by International Risk Management Institute, Inc. (IRMI) in the spring of 2000. © International Risk Management Institute, Inc.

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