Construction Insurance Bulletin

Construction workers are exposed to a number of hazards, from falling objects to chemical substances. However, as summer arrives with its scorching temperatures, workers face a risk that is not only difficult to escape, but often overlooked altogether – heat stress. The main components in preventing heat stress are recognizing the risk and taking action long before it becomes an issue.

Begin by making sure all your workers, including subcontractors, foremen, site supervisors, and hourly employees, are properly aware of the risk from the day they’re hired on. Information on the various types of heat stress, such as heat cramps, heat exhaustion, and heat stroke, should be part of your orientation process for all new hires. Be sure to educate employees on the warning signs of heat stress, such as headache; weakness; mood changes; nausea and vomiting; dizziness; queasiness; fainting; and pale, clammy skin. Encourage workers to periodically assess themselves and their co-workers for any of the signs of heat stress. You might even create a formal buddy system to encourage awareness and the addressing of any incident of heat stress. Workers should be informed how and where they should seek help for themselves or a co-worker suffering from a heat illness.

Of course, such heat stress education must continue beyond orientation. Unless periodically readdressed, workers could forget the signs or what to do in response to heat illnesses. It’s also important that workers are reminded by their supervisors on a daily basis to protect themselves from the heat, as a lot of construction workers seem to think they are impervious to the serious impact heat has on the body.

Whenever possible, it may be prudent to schedule working hours to avoid the hot peaks of the sun. For example, the work day can start early in the morning, break while the sun peaks, and resume in the afternoon. If flexible work schedules aren’t a possibility, then be sure to encourage frequent breaks and hydration. You might also provide your workers with sunscreen.

Personal protective equipment (PPE) can help your outdoor workers tolerate the heat better. For example, you might replace front-brimmed hardhats with full-brimmed hardhats; light-colored glasses with darker safety glasses; and heavy and dark clothes with clothes that have a sleeve, collar, and are of a light weight and color.

Don’t let the sun come down on you and your employees before you take action. Remember, workers being aware of the serious risks that the sun presents and how to protect themselves will be the keys to a successful heat stress prevention policy.

Some construction firms may view safety programs as just another cost center, something to cut back on during tough economic times. This belief is mistaken for two reasons. First, by helping to lower Workers Compensation costs and uninsured costs, and by helping to attract good employees, effective safety programs actually increase profits. Second, safety efforts do not have to be expensive. With some simple management adjustments, contractors can make their job sites safer without spending a great deal of money.

Perhaps the most effective low-cost way to improve safety is to involve the people who could get hurt. If managers are not tapping the intelligence and creativity of their employees when solving work problems, they are wasting valuable resources. If a supervisor orders an employee to do something, the worker may do it, but his commitment may be superficial. Conversely, if the supervisor asks for and uses the employee’s suggestions, the employee may be more likely to adopt them enthusiastically. There may be several valid reasons why an employee fails to use protective equipment, including:

• He might not know how to use it correctly.
• He might believe that the equipment doesn’t work correctly.
• He might see co-workers disregarding safety rules without consequences.
• He might be rewarded for not using it. For example, supervisors might praise workers for getting tasks done quickly, even if the workers disregard safety rules.
• He might be punished for using it. For example, obeying safety rules might slow him up so much that he has to work through breaks to finish on time.

Some of these reasons relate to supervisors’ attitudes; if supervisors give workers incentives to obey safety rules, the workers are more likely to follow them. However, some can be corrected with employee input. The employee may report that a safety harness, while effective at keeping him from falling off a roof, makes it difficult for him to move building materials around the roof. In collaboration, the worker and the supervisor may be able to think of ways to work around the problem. Because he played a role in developing the solution, the worker is more likely to apply it and may even suggest to his co-workers that they do the same.

One very effective way to increase employee acceptance of safety measures is to create a safety committee made up only of non-supervisory employees. The committee should meet at regular intervals to review injury reports and reports of incidents that almost resulted in injuries, identify the causes of these incidents, and recommend corrective measures. Members should suggest recommendations based on their own personal experiences on job sites. Managers should review all recommendations to see how they fit within existing procedures; it may be necessary to change procedures.

During meetings where the supervisor distributes assignments for the day’s work, he should ask the workers whether they have found safety issues that need attention. He should also review the procedures for safe completion of the task. For this to be effective, workers must feel free to speak up and managers must acknowledge their opinions.

Although it is important that managers take workers’ safety recommendations seriously, workers must also remember the company’s bottom line. Unreasonably expensive tools and changes will hurt workers’ credibility and do nothing to improve working conditions. Conversely, if workers make thoughtful suggestions, managers have an obligation to take them seriously. If they do not, workers will lose trust in them. By working together and communicating well, both workers and managers can achieve the ultimate goal: A profitable company where all can work in safe conditions.

Is everything possible being done to protect your company from the costly impacts of Workers Compensation claims? As an employer, you know that injuries will happen. However, this doesn’t mean you shouldn’t try to prevent them by knowing the dynamics and some of the solutions recommended by the experts.

Minor Injury, Major Claim. It’s the small injuries that often result in big claims. Some statistics show that 80% of workplace injuries are inconsequential, meaning they just require first aid or a trip to a physician. Eight percent of such claims are sprains and strains to the neck, back and various joints. However, these types of injuries account for an estimated 80%-90% of the system’s costs. Major claims are likely to follow if the frequency of such seemingly inconsequential injuries isn’t addressed.

Falsified/Exaggerated Claims. Claims that didn’t actually occur or that occurred outside the workplace are only representative of a small fraction of claims. However, employers can implement tip lines, video surveillance, drug screenings both before employment and after accidents, and so forth to reduce false claims.

The larger problem is from exaggerated injuries. Employers can take these steps to address exaggerated claims:

• Get injured employees immediate and appropriate treatment.
• Even if duties need to be temporarily modified, get injured employees back to work as quick as possible.
• Ensure supervisors communicate with injured employees and convey their concern and support.
• Do as much as possible to reduce the disruption employees may face post-injury.
• Assess and address behavioral issues that could be driving an injured employee’s disability.

Observing Patterns. Experts have recognized that there are patterns of reoccurring claims within groups, such as among certain industries or particular groups of employees. For example, more injuries may be seen in equipment operators that don’t receive proper eye screenings. Overweight employees tend to have more injuries than those of an average weight. The healing of injuries may be longer and more difficult among diabetic employees. Overexertion, meaning doing too much; too fast; and/or too frequently, is one of the primary causes of sprain and strain injuries. This often comes from an employee demanding more of their body than it’s capable of doing. The challenge is that this is a human behavior. Studies have shown that the majority of workplace injuries are from unsafe acts, not unsafe conditions. In other words, even in the absence of workplace hazards, injuries will happen. Additionally, there are also patterns of reoccurring fraudulent and exaggerated claims, such as an employee that seems to repeatedly have accidents.

Claim Reduction. Begin at the hiring process, ensuring that potential employees are capable of doing the physical and mental demands you’ve listed in the applicable job description. It’s important to understand that injury prevention must be embraced at the leadership level to be effective. Statistics show employees are most likely to have injuries when they feel their management doesn’t care. You might also consider:

• Excellent workplace safety programs.
• Efficient communication programs that allow you, injured employees, and insurance adjusters to easily communicate.
• A post-injury protocol, specifying the immediate reporting of an injury to appropriate personnel.
• Routing injured employees to seek medical care from a provider specializing in occupational injuries.
• Staying in touch with both the injured employee and their medical provider, making sure that you communicate your concern and care to the employee as they recover and accommodate any physical restriction recommended by the provider upon their return.

Cost Mitigation. Employers can take several routes to reduce the financial impact of claims. Transitional duty programs that enable an injured employee to continue some capacity of working as they recover would be one example. Research shows that around 40% of employers don’t currently have a transitional duty program. Another example would be referencing treatment guidelines to determine typical recovery times for various injuries. This information can be used to approximate how long it should take an injured employee to be treated and recover. Employers may consider having an on-site clinic for employees to go for both acute injuries and everyday health issues. Partnering with a physical therapy network may be a consideration. Research has shown that companies affiliated with physical therapy networks see injured employees returning to full-duty work 30% faster.

Wellness, Don’t Be Afraid. Lastly, some employers are apprehensive about implementing wellness programs because they’re concerned that participation itself may cause injuries. However, the risk of such is far outweighed by the many benefits of a wellness program, including claim-related benefits like healing faster and being able to resume work sooner. Remember, the success of any program comes from it being accepted from the top down.

No matter what type of business you operate, all employers should be ready, willing, and able to conduct their own injury investigation immediately following an incident. Early intervention on your part will be essential in cases where there’s been a serious injury or an injury of questionable nature. Such a proactive approach will allow you to keep the incident from spiraling out of control and reduce your liability exposure. After all, the last thing any employer wants to do is engage in costly court actions, some of which could spell the demise of the business. The following are the three main reasons you must immediately investigate an incident:

1. This time will be your only opportunity to look into the legitimacy and cause of the injury while it’s fresh, not possibly tainted by elapsed time.
2. It will be the best opportunity to make an informed managerial decision based on the most thorough understanding of the underlying cause of the incident.
3. It will be the best chance to obtain witness accounts of the incident. Time elapsing could allow witnesses to forget vital details, collude with others, or be intimidated into a false statement.

Now that it’s clear why you need to investigate, you’ll want to understand how to do so. An investigation is basically an objective, logical process that’s conducted step-by-step. It’s vital that assumptions aren’t made and that conclusions aren’t jumped to without completing the process.

It’s best to designate specific individuals to carry out investigations. Of course, this designated investigator should understand both federal and state laws thoroughly. They should also understand the importance of keeping the results and details of the investigation confidential. It will also be of vital importance to the investigation process that your immediate supervisors have been trained to provide as much detail as they can about incidents.

The investigator will determine if a worker’s alleged workplace injury had any casual connection with their employment. For example, it needs to be determined whether or not the worker was exposed to a particular risk or danger at the time of the incident. Keep these three essential steps in mind as you begin any investigative process:

1. Protect the incident site. Make every effort to preserve the incident site until either it’s no longer viable, legislative requirements have been met, or the investigation has been completed. If this isn’t possible, then at least do what you can to make a thoroughly detailed representation of the site. You might use plastic containers or bags to help preserve the integrity of the evidence collected and prevent it from becoming contaminated. You might find it necessary to gather, remove, and store physical evidence in an alternative, secure area.
2. Document the incident site. If possible, don’t remove any physical evidence from the incident site until you’ve documented it with video, pictures, and drawings. The distance and physical location of evidence can be shown with a diagram. If any equipment was involved in the incident, then you should document the machine’s serial number, manufacturing information, and maintenance and service records.
3. Take witness statements. Of course, you should in no way jeopardize or interfere with an injured worker receiving medical treatment. However, if the severity of the injury allows, you should obtain an immediate statement from the injured worker. Then, you should make a list of all potential witnesses and interview them as soon as possible. If feasible, you can sequester the witnesses and interview them separately to help avoid any possible collaboration, collusion, or intimidation from taking place. Make it perfectly clear to all the witnesses that they aren’t to have discussions about the incident with other co-witnesses or co-workers. Make sure that the written statements from the witnesses are in their own words, even if grammatically incorrect, and doesn’t contain any blank spaces. Ask the witnesses to sign and date their final statement.

It will be significantly easier for you to determine the validity of disability and compensation claims when you’ve used the above investigative process to determine the cause of the injury. You’ll have the detailed documentation to address any questionable issues and possibly even thwart unfounded litigation claims.

Risk management is one of the most important tools available to keep your business’s financial bottom line looking good. But, for risk management to be successful, you must be able to identify all cases of risk retention whereby you’d be responsible for any portion of a loss.

If you can’t transfer a risk to another party, then you retain the risk by default. There are both known and unidentified risk retentions. An example of a known risk retention would be your insurance policy deductible. This type is considered known since you already know the predetermined deductible amount that you’d be responsible to pay before the policy provides its preset amount of coverage. On the other hand, any amount of loss over what your insurance policy’s limits are would also be considered a retained risk, but categorized as unidentified since you wouldn’t know the amount of loss beforehand.

General contractors need to be able to identify all their known and unidentified risk retentions in order to protect their business adequately. If you’re like most, then the most likely area for problems will be identifying unidentified retentions. Subcontractor negligence is of particular concern. Of course, you can always buy additional insurance coverage to cover subcontractors. However, it’s usually more financially feasible to require that your subcontractors carry their own Liability insurance with a coverage amount that could potentially replace the entire project if a problem were to occur.

Make sure that you’ve taken the following five key actions to proactively handle potential subcontractor negligence:

• Engage one of our professionals review your contracts to ensure that your insurance policy continues to meet your needs adequately.
• Either purchase additional insurance coverage yourself, or require all subcontractors to purchase a sufficient amount of insurance on their own. Gauge the minimum acceptable policy limit for a subcontractor according to the scope and size of the project. Do be sure to specify the minimum acceptable policy limit in the subcontractor’s contract.
• You should also take precautions to ensure continued compliance with minimum acceptable policy limits by periodically asking your subcontractors for their certificates of insurance and checking that the coverage hasn’t elapsed.
• Your subcontractor contracts should specify that the primary coverage for the project will be the subcontractor’s General Liability coverage, not yours. Stated as such, your insurance coverage will be excess coverage and only be relevant if the subcontractor’s insurance coverage isn’t enough to cover the damages.
• Check whether or not a subcontractor indemnity agreement is allowable by law in your area. This agreement would make a negligent subcontractor reimburse you any money that you were made to pay the owner of the project due to the negligence of the subcontractor.

Employee terminations and layoffs are stressful, sometimes complicated, and certainly an action that no employer looks forward to taking. The repercussions and disruptions from an employee being fired, laid off, or opting to leave of their own free will can be far reaching. It not only impacts the employee leaving, but also their co-workers and you, the employer.

You can decrease the impact employee terminations have on your business and remaining employees, as well as the potential resulting legal issues, by taking the time to manage the situation carefully. Having an employee termination strategy is a good starting point. As you develop your strategy, you should remember that most terminations will fall under one of these three categories:

1. Employment that’s terminated by the employer due to the employee’s behavior or performance issues.
2. Employment that’s terminated by the employer solely due to economic reasons.
3. Employment that’s voluntarily ended by the employee.

You will find that there are some one-size-fits all guidelines on how to respond to terminations in general. However, each termination category may also call for a response that’s more tailored to the circumstances of the termination. Here are some general tips for all of the above:

Any Type of Termination

• Set up a process to follow. Following the same set procedure, including a checklist for each termination step, will help ensure that you treat all your employees equally.
• Consult an attorney to ensure you understand how the employer-employee relationship is regulated legally and all the applicable guidelines.
• Communicate effectively with your employees so that they understand exactly what’s expected of them and all possible disciplinary actions. This will help you avoid misunderstandings.

Employer Terminates Due to an Employee’s Behavior/Performance

• It’s vital that all employees understand what you expect and require of them. It’s equally vital to document warnings and counseling thoroughly. This will not only help you protect your business should you ultimately need to terminate an employee, but it will also give you the opportunity to allow some deserving poor performers a second chance to do better.
• In certain circumstances, an immediate termination will be the most prudent course of action to protect yourself and your other employees. For example, the immediate termination of an employee that steals or poses a danger could be warranted. However, it’s still critical that you understand your legal responsibilities.

Employer Terminates Based Solely on Economic Reasons

• Layoffs can be very difficult for you, the employees being laid off, the employees staying, and your management team. You can help control anxiety and tension by keeping the lines of communication open and ensuring that all employees are kept in the loop about what’s taking place. The layoff process can be somewhat less traumatic if you remember to let your employees know they’re still valued, appreciated, and respected. It can also help if you’re able to help them secure alternative employment and/or provide a severance package.

Employee Voluntarily Ends Their Employment

• You’ll want to clearly understand why an employee is ending their employment. An exit interview policy is a great tool to understand why an employee is leaving, how well your company is competing in areas like wages and benefits, and if you have any operational or management problems to be rectified.
• You might want to make a counter-offer if a valuable employee is leaving and you’d like to retain them; after all, turnover can be very expensive for employers. Discuss the reasons your employee has decided to leave. If the departure is based on wages, then you might find that it would be cheaper to agree to a raise than it would be to recruit and train a new employee.

In closing, most all employers will be faced with employee terminations at some point. If you plan ahead and have the proper procedures in place, you can both minimize the effects and protect your business against any legal ramifications.

In any industry, there will always be certain costs associated with doing business. However, construction firms should never consider construction deficits as part of these unavoidable costs. Construction deficits are an ever-growing problem in the construction industry, but are definitely not unsolvable. No problem can be solved without understanding why it’s occurring in the first place. Here are three of the main contributing factors:

1. Poor Site Selection. Many contractors, especially those in urban areas, have witnessed rapid growth spurts claim the majority of the highly-desirable sites. This leaves contractors choosing from what’s left and possibly choosing sites that aren’t exactly optimal for the construction.

2. Poor Soil Analysis. An adequate soil analysis should include collecting and testing soil samples for the presence of sinkholes, the presence of sand, and the degree of compaction. The overall purpose of soil analysis of a site is to make sure that the soil present will be able to support and bear the load of the expected construction project. Construction firms not doing such verifications are leaving themselves wide open for a number of legal issues.

3. Defects. Structural and material defects are also major contributors to deficits. For example, an improperly set foundation can result in the weight of the building not being supported correctly and can make the walls more likely to crack. A firm might also find trouble when they cut corners on materials, as this can lead to faulty construction.

The above three factors are the basis for construction lawsuits alleging negligence. The legal definition of negligence is a failure to use reasonable care or meet the recognized standard of care. To a construction firm, the reasonable care is in building a structure at the performance level expected of this type of work by the community and doing so in a professional manner. This doesn’t mean that a construction firm must warranty or guarantee that a construction project will be exactly perfect, but it does mean that a contractor must take the appropriate steps to ensure the absence of defects.

Taking reasonable care to ensure against defects sounds straightforward. However, contractors often find that the pressure to get a job done faster and cheaper leaves them in a vulnerable position as they might try to meet these goals by cutting corners, skipping vital checks, using cheaper and inferior materials, or using cheaper contractors with a questionable work ethic or history of inferior work.

Even if a General Contractors Liability policy is in place, contractors shouldn’t dismiss the seriousness of negligent claims. Depending on the particular project, a contractor proven negligent could face serious financial repercussions. Yes, the liability policy will cover physical damage to the property and any resulting loss of function, but insurers are minimizing their risk by adding exclusions for areas like mold damage, multi-layered wall systems, earth movement, and so on. Another problem is the delay between when the defect occurs and the resulting injury/damage, which leads insurers to question coverage. A liability policy written on a claims made basis will not provide coverage unless the claim is reported or made during the set policy period.

To counteract the above risks, contractors should set their standards and make sure that everyone involved with the project understands and agrees to the standards before ever starting a job. A quality control system should be used throughout the project to continuously monitor and inspect every aspect of the project – from whether or not standards are being met and fines for such deliberate failures -to- finding and correcting defects in a timely manner. Remember, defects should be handled as soon as possible and not be put off until they become a lawsuit. Contractors without a quality control system in place don’t have any reliable way to regulate exactly how workers are performing on the site. From a legal standpoint, showing that a formal quality control system was in place is also very beneficial if a lawsuit should happen to occur.

Weather forecasters say a hurricane is coming that will threaten the half-completed multi-million dollar industrial building a contractor is erecting. After completion of a new 20-story hotel, the media reports that executives for the general contractor rigged bids so that subcontractors in which they had financial interests got the jobs. A scaffold collapses with five men on it, killing one and severely injuring the others. These are all examples of crises that could strike a construction business. If not managed properly, a crisis can cause a firm great damage and even put it out of business.

Good crisis management involves six stages:

1. Defining what a crisis is for the contractor. It could be a catastrophic injury, a loss of financing for a project, a major fire, the loss of a key employee, the failure of a vendor in the supply chain, or a strike. Whatever form it takes, it is an event that can cause significant harm for the contractor.
2. Assuming that a crisis will occur and anticipating it. Managers look at worst-case scenarios and predict how likely they are to occur. They can then take steps to prevent them from happening. These steps might include safety measures, arranging for backup suppliers, protecting the structure against the elements, and financial controls.
3. Recognizing a crisis as it is occurring. If managers have planned for the possibility of crises during the previous phase, they will be more apt to spot them when they happen. Since a number of people with different roles in the project might be able to identify things that are going wrong, managers should seek updates from a variety of participants.
4. Managing the crisis. The key to crisis management is advance planning. A sound plan will include: Who will participate in managing the crisis and what their responsibilities will be? How individuals will communicate with each other and how the contractor will communicate with others, such as customers, vendors, regulators and the media. The resources that will be available to confront the crisis. What the organization will do to get back to its normal operating state.
5. Resolving the crisis. This involves implementing the plan, gathering information about the situation, analyzing it, weighing options, choosing one or more options and putting them into effect. Managers and other leaders must effectively deal with the emotions involved, including confusion, fear, anxiety and frustration. Because crisis situations evolve rapidly, leaders will have to make quick decisions and be ready to change course if need be.
6. Learning from the crisis. After the situation has reached a resolution, the participants reflect on what they learned during the crisis, what worked and what the firm should do differently the next time it faces an emergency. Questions they should ask include:

How effective was the pre-crisis planning? Did it anticipate the problems actually faced or was the firm left unprepared? Were there sufficient financial, material and human resources to handle the crisis? How effective was the communications process? Did team members get the information they needed when they needed it? Did the firm keep other organizations and entities fully informed? How can the process be improved? Were the decisions made the right ones? If not, why not? What can the contractor do next time to improve decision-making?

Check with one of our insurance agents to see if your insurance companies have consultants available to help put together a crisis plan. Because a solid plan will help limit the size of an insured loss, companies are usually eager to help. With preparation, you can survive and even thrive after a crisis.

Pollution and environmental exposure risks on site and during transfer and disposal, such as toxic mold, the disposal of contaminated soil, and broken pipelines releasing toxic materials, are major construction concerns. When such incidents happen, a contractor’s reputation and livelihood can be irreversibly impacted.

Contractors Pollution Liability (CPL) is a type of insurance designed to protect contractors against the liability issues and financial losses that result from such environmental incidents. This insurance covers an array of environmental and pollution risks that are common to construction projects and is considered an appropriate coverage whether a firm is a trade contractor, such as those specializing in paving or HVAC; a general contractor; remediation contractor; or a contractor doing specialized work, such as tank installation or drilling. Contractors Pollution Liability insurance is available to cover areas like pollution incidences that result in bodily injury, third-party property damage, or remediation costs. Comprehensive policies can even be customized to provide pollution risk coverage to an entire project, which would include off-site transportation and all contractors involved in the project. Most Contractors Pollution Liability policies are written on a claims-made basis. This basis limits the insurer’s risk for unknown future liabilities since it means the policy only pays claims occurring and being filed during the period covered by the policy.

Clearly, Contractors Pollution Liability insurance can provide invaluable protection against environmental-related financial losses. That said, such a policy doesn’t prevent environmental incidents from occurring in the first place. To help prevent environmental incidences and protect hard-earned reputations, contractors should additionally adopt effective environmental risk management practices.

Creating an environmental risk profile will be one of the most important factors when taking steps toward risk management. This allows the firm to identify possible loss exposures and risk areas by thoroughly reviewing their administrative control documents. While some firms opt to conduct the profile in-house, many prefer the expertise and outsider’s perspective offered by a professional environmental consultant. In any event, documents related to the following areas should be reviewed during the development of an environmental risk profile:

• Contractors Pollution Liability policies
• Standard client agreements
• All mold prevention programs
• All environmental management programs
• Subcontractor’s environmental/mold management/prevention systems
• Language of subcontractor agreements
• Environmental data searches of job sites
• Hazard communication programs
• Quality assurance programs
• Internal health and safety programs, incident response protocols, and training protocols
• Trends, history, corrective measures, and employee communications related to environmental losses
• Environmental assessments for all leased and owned properties

Once the above documentation is assessed, the firm can identify strategies to reduce, if not eliminate, their exposures to environmental risks. Combining risk management with a Contractors Pollution Liability policy can help contractors reduce their risk, but still be covered in case the unexpected happens.

An electrical contractor runs miles of wiring through what will be a three-story office building. Following completion, the contractor tests the wiring, finds it satisfactory and leaves the job. After other subcontractors hang and paint the walls and do other finishing work, the general contractor tests all systems. This time, the electrical system fails. The GC summons the electrical contractor back; after more testing and diagnosis, the contractor concludes that there are faults in two segments of the system on different floors and adjacent sides of the structure. Fixing the problem will require tearing out the finished walls and a few appliances attached to them (a dishwasher in an office kitchen area, computer network equipment, etc.). Tearing these things out, repairing the faulty wiring, and reinstalling the walls and finishing them so they look flawless will cost much more than simply fixing the electrical problem. The cost is far beyond what the contractor can afford to pay out of pocket. Will its Commercial General Liability insurance help? The answer depends on the state where the building is located.

The ISO CGL policy covers the insured contractor’s legal liability for physical damage:

• To tangible property, including all resulting loss of its use, or loss of use of tangible property that is not physically injured; and
• Caused by an occurrence, which is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
• In addition, the policy states that it does not cover the insured’s liability for property damage:
• To work or operations the insured performed or which a subcontractor performed on the insured’s behalf, if the damage arises out of any part of the work and it occurs after the work’s completion; and
• To other tangible property that is unusable or less useful to the owner because it includes the insured’s work that is known or thought to be defective, deficient, inadequate or dangerous, if fixing the insured’s work will restore the property to usefulness.

Some courts have ruled that the CGL policy covers the cost of tearing out and reinstalling undamaged property when that is necessary to fix the defective work. A 2002 federal appeals court ruling in a Washington state case said that the removal and destruction of other subcontractors’ work due to the insured’s defective work is property damage, as the CGL defines the term. The court also said that the insured’s performance of defective work met the policy’s definition of “occurrence.” A 2010 decision from Washington state reached a similar conclusion — unintentionally providing defective products to an installer was an “occurrence,” and removal and replacement of other suppliers’ products and work was “property damage.” Courts in Alaska and Oklahoma have ruled that the policy provision that excludes coverage for unusable tangible property did not apply because of a second provision that gives coverage back for loss of use resulting from sudden or accidental injury to the insured’s work. The courts felt that installing defective components was done accidentally. Conversely, courts in Arizona, Maryland and South Carolina have held that tearing out and replacing undamaged property is not physical damage caused by an “occurrence” because it is not an accident. Rather, the courts saw it as a cost associated with a project. Since the courts differ so much from one state to another, it might be helpful for a contractor to know in advance what a particular state requires. The contractor’s insurance agent might also know which insurance companies have a history of paying for these types of claims. The contractor could find that it is worthwhile to buy coverage from these companies even if they charge higher premiums