Construction Insurance Bulletin

As concerns grow about the potential effects of global warming and people pay more attention to reducing their carbon footprints, green construction is becoming a larger part of the solution. A McGraw Hill study found that in 2008 the value of green construction starts might have been as high as $49 billion, and it could reach $140 billion by 2013. Building owners are attracted by energy cost savings, tax incentives, and the good publicity that comes from using an environmentally-friendly facility. Although green construction has become a lucrative business for contractors, it carries some risks that conventional construction methods do not have or have to a lesser extent.

Much of the difference between green construction and conventional methods is in areas of emphasis and materials. Green construction, because it is relatively new, uses new materials that might not have a proven long-term track record. The focus of a green building is energy conservation; objectives such as moisture control to prevent mold growth receive less attention. Also, compared with conventional buildings, green buildings allow more air in from the outside, with potential impacts on building occupants’ health. Before construction begins, contractors must work with the project owner to identify the specific green objectives the owner wants to accomplish. With that knowledge, the contractor can determine how much additional risk the objectives present and create risk management plans to deal with it.

Price pressures can also be an issue. Green construction can be more expensive than conventional construction, yet project owners might be unwilling to pay a large premium for it. Contractors will be under pressure to hold costs down. This might cause them to take shortcuts that could increase the risk of creating defects in the building. The owner and contractor must work together to create a plan that balances cost savings with sound construction practices.

Green buildings carry a risk that their components might not perform as well over time as do those of conventional buildings. Because they stress innovative techniques and materials, green buildings use materials that have not undergone the years of testing that conventional materials have. Green construction favors using renewable resources and emphasizes insulation to reduce energy use. Conventional buildings use materials with a history of good performance and emphasize keeping water and other elements out. To reduce performance risks, contractors should arrange for peer reviews that predict how materials will interact with other materials and building systems, predict how the building will hold up in actual use, and analyze waterproofing and humidity control capability.

Although green buildings are a relatively new concept, building owners expect them to perform at least as well as conventional buildings over the long term. Contractors who erect them might be vulnerable to lawsuits if a building fails to meet the U.S. Green Building Council standards. The USGBC offers its LEED certification to buildings that meet standards; the council can also revoke certification if it finds that a building is not performing as expected. Losing certification can harm a contractor’s reputation. The peer reviews of materials and systems should help to reduce this risk.

The green construction business is almost certain to grow rapidly during the next several years, and contractors will naturally want to take advantage of that. To reduce their risks, they should work with organizations such as the USGBC to get education and training on materials, construction techniques, and risk management. Together with peer review of materials and collaboration with project owners, these measures should help contractors complete quality and environmentally sound buildings.

In the current economic environment, businesses everywhere are trying to cut expenses anywhere they can. The survival of many businesses will depend on figuring out where and how to save money.

One big expense comes from finding, interviewing and vetting, and training new employees. However, the repercussions of not knowing who you’re hiring can be even more costly. One of the most important elements to hiring a new employee is performing a background check. Just one poor hiring decision can be very costly to most businesses. In fact, hiring decisions can often make the difference between a business failing or thriving. Thirty percent of small business failures are directly caused from employee theft, according to the U.S. Chamber of Commerce.

Pre-screening potential employees thorough a background check is one of the most cost effective tools to protect your business, lessen the risk of hiring unacceptable employees, and make sure that you’re making smart hiring decisions. Here are some key points about background checks:

Liability Protection. Small businesses usually skip performing a background check on a potential employee either because they’ve developed a false sense of trust and ease from working so closely with their employees or because they don’t understand what the legal liabilities can be from not screening and performing background checks. Either way, skipping background checks can open the door to costly legal liability. All businesses that have employees interacting or providing a service directly to customers have a liability if one of their employees harms a customer or has a previous history of wrongdoing. Businesses, especially small to medium ones, often can’t survive after the resulting lawsuit. Aside from the negative aspects, business owners might also find that their insurance provider will offer a discount for performing new hire background checks.

Reputable Vendors. Buying instant public records from a database doesn’t constitute a background check and can still leave you liable. These databases usually don’t do any fact checking or update their existing information with any regularity, if at all.

To best protect yourself, your employees, and your customers, you should find a reputable and trustworthy background screening company. This is the best way to make sure that the data on the potential employee is up-to-date and accurate.

Do keep in mind that since background check vendors come in various shapes and sizes and offer a range of different services, it’s also important to find a vendor that offers the right services for the size and needs of your business. When choosing a vendor, you might want to make sure that a human-manned toll-free number is available to assist you around the clock. You might also want to do a background check of sorts on the vendor by asking for customer reviews and searching for any negative information about the vendor on the web.

The Fair Credit Reporting Act. Sometimes inaccurate data might be found on a background check or an employer might violate a job applicant’s privacy rights; The Fair Credit Reporting Act (FCRA) was set up to guard against such from happening. Compliance involves employers obtaining written consent from the applicant prior to running a background check and notifying the applicant of the source of any background check information used during the hiring process. The latter of the two is where employers get into trouble using databases.

Only Purchase Needed Information. Some vendors will encourage you to purchase anything and everything they find on the potential employee, at a hefty price none the less. If your business niche requires such an extensive background check this is fine, but more often than not a basic background check will suffice.

A Web Search Can Supplement Background Checks. Employers should keep in mind that anyone can put anything that they want to, true or not, on their social network profile, blog, or personal website. So, this type of information should never replace an appropriate background check. That said, many employers are using these portals as a supplement to the background check. A lot can be learned about a person just by reading the types of things they blog or write about on social network sites. You might find a person exhibits just the traits you’re looking for and is passionate about their occupation. On the other hand, someone that updates their blog with a post about how they hate old people might make you think twice before hiring them in your assisted living facility.

An accounting firm on a building’s top floor accused the roofing contractor of ruining its computer network equipment, even though the contractor wasn’t working on the building at the time. The contractor had finished replacing the roof in September. Heavy snows fell that winter, and it started melting rapidly when March brought above-normal temperatures. The accounting firm’s systems support analyst came in to work on a Monday morning to find pools of water in the server room and the servers inoperable. Given that the first four months of the year are a somewhat busy time for accountants, the firm could not remain without its computer network for long. It rush-ordered new servers, paid a premium for express shipping, then paid even more to have technicians remove the ruined servers, install the new ones, load the data from backup records kept off site, and perform network testing, all within a period of a few days. The cost to the firm was high, both in terms of repair and replacement costs and extra expenses for its accountants to access an alternative network. The firm sued the building owner and the roofing contractor to recover thousands of dollars in losses.

This is where the contractor’s Completed Operations Liability insurance coverage came in handy. This insurance covers the contractor’s legal liability for bodily injuries or property damage that his work causes after he has finished it. Before the insurance applies, however, the incident must meet several conditions:

• The incident must be an “occurrence.” The policy defines this as an accident, but it can also be damage that happens over time because of harmful conditions. The roof suddenly letting melting snow gush all over the servers is an occurrence. So is the roof allowing melted snow to seep into the walls over a period of months, causing plywood and insulation to rot?
• It must occur during the policy term. It is not necessary for the contractor’s mistake to happen during the policy term, but the injury or damage must occur then. The contractor finished the roof in September, his liability insurance policy renewed in January, and the damage to the servers occurred in March. The policy that took effect in January applied, not the one in effect in September.
• It must occur away from the contractor’s own premises. Liability insurance does not apply to damage to premises the contractor owns or rents.
• The injury or damage must arise from the contractor’s work. This means that the contractor’s portion of the job led to the injury or damage. The roof was supposed to keep water out of the building; water entering the building implicates the work done.
• The contractor’s work must be completed or abandoned. It’s complete at the earliest of: When all the contract work is complete; when all the work at that job site is complete; or when the customer puts the work to its intended use. The contractor finished the roof in September and the building owner put it to immediate use, so the insurance company will consider it to be complete.
• The insurance will not apply to bad work that did not cause damage to something else unless a subcontractor did the job for the contractor. If the building owner discovered the problem with the roof before the accountant’s servers took a shower, the insurance would not apply to fixing the roof. It also doesn’t cover liability for the building becoming unusable or less usable because it contains the contractor’s defective work. Work with one of our insurance agents to ensure that you have the proper coverage. Completed operations losses can be catastrophic; financial protection is essential!

Employers should always make it a top priority to provide workers with a safe working environment. That said, accidents can still happen, even when employers strictly enforce safety practices and employees strictly adhere to them. Incidents happen due to a breakdown, departure, or failure in the acceptable method of performance. When an accident does occur, the incident investigation report will serve in several important objectives. So, it’s vital that a timely and thorough incident investigation takes place.

The Purpose of Incident Investigation. The main purpose of an incident investigation is for the employer to learn why the breakdown happened and determine procedures that could be put into place to prevent it from reoccurring. The employer should gather and examine the data they collect to figure out where and why the departure from acceptable behavior happened. Employers can learn from errors and increase future productivity from knowing if there was any indication of the breakdown prior to it occurring, or if there was any possible point that the breakdown could have been interrupted and stopped.

Legal liability is another purpose of investigating the incident. During the investigation, the employer will gather information that could be paramount in mounting a possible defense against any resulting lawsuit(s). The defense team in such lawsuits will build their strategy based on the what, when, who, where, why, and how of the incident, data that’s often revealed during the incident investigation.

How Should the Investigative Process Take Place? The investigative process will begin as the scene of the incident is reviewed and examined. This can provide an exact reason, or possible scenarios, as to why the incident happened. Pictures should be taken of the incident scene. The pictures can later be compared to blueprints, diagrams, or drawings of the area to help determine what chain of events led up to the incident occurring.

Now, it’s time to question all witnesses that might have information leading up to, during, or just after the incident. You can use forms created by regulatory agencies or internally created forms to guide the questioning process. Either way, using the completion of the form as a format for the questions asked will help to maintain objective questioning of witnesses, no matter who is asking or being asked the questions. It’s human nature for most people to immediately form assumptions and theories following the incident. Keep in mind that this type of non-factual information is useless and adds nothing to the validity of the investigation.

All the gathered information will be carefully analyzed by the investigator to determine what elements are explainable and what elements still need an explanation. The chronology of the chain of events will be explored. Then, the actions of those involved are examined alongside concurrently occurring actions to see if any of the concurrently occurring actions had any bearing on the incident.

Following the analysis, the investigator will make a written report that contains a description of the incident, the circumstances and elements that led to the incident occurring, why the incident occurred, and any recommendations to prevent it from reoccurring. The report should accompany the physical documentation collected by the investigator.

Although an incident investigation is initially about investigating, it makes little sense to know the what, how, and such of the incident if nothing is done to prevent it from reoccurring. So, the last stage of the incident investigation is about implementing the recommended changes suggested in the final report. For optimal success during the implementation stage, the employer should assign a task force to ensure that the recommendations are put into place, supported from the top down, and are subsequently followed by everyone.

In October 2010, a construction worker in Pennsylvania was crushed to death by a section of a steel plate. The month before, a worker in Houston died when a pallet carrying a one-ton load struck him. In Maryland, two bar joists fell off a stack of joists on a flatbed truck, killing a worker. The U.S. Occupational Safety and Health Administration reports that material handling accidents account for hundreds of thousands of injuries each year on construction sites. Safe material handling practices can prevent much needless suffering and also save contractors and their insurance companies millions of dollars in medical and disability benefit costs. These practices involve three distinct areas: Safe handling, safe storage and disposal. Safe handling of construction materials involves several measures, including:

• Properly securing all materials that are stored in tiers. Pipes, steel beams, poles and other heavy materials can slide or tilt if they are not stacked and blocked adequately, allowing them to potentially fall on workers.
• Keeping combustible and flammable materials in fire-resistant containers.
• Determining and prominently posting the maximum safe load limits of floors where materials are stored, and taking care not to exceed those limits.
• Maintaining clear and sound aisles and passageways for moving materials.
• Constructing ramps or graded walkways between work areas on different levels to make accidents and spills less likely.

Improperly stored material can shift or topple over, causing potentially serious injuries. Sound storage practices required by OSHA include:

• Stacking bricks in piles no more than seven feet high, with every layer above four feet tapered back two inches for every foot. While masonry blocks can be stacked in taller piles, but contractors should also taper the piles above the six foot mark.
• Limiting stacks of lumber to 20 feet high (16 feet if workers will handle lumber without machines) in stable piles on level sills that provide good support. Prior to stacking, remove all used nails.
• Keeping materials more than six feet from hoistways.
• Not storing materials in floor openings.
• Storing materials more than 10 feet from an exterior wall that is shorter than the top of the pile.
• Not storing materials on scaffolds or runways unless the contractor is about to use them.

In the hurry to get the job done, workers often dispose of construction debris in unsafe ways, such as tossing pieces of lumber off the side of the building. This risks injury to anyone standing below. Contractors should follow these guidelines for proper waste disposal:

• Remove all scrap, especially combustible materials, as it accumulates instead of letting it pile up. However, do not remove it until workers are certain that the people working over their heads are finished tossing it to the ground.
• Use an enclosed chute to drop debris from the higher points of the building.
• Barricade areas where workers will drop debris without using a chute.
• Use separate containers for materials covered with oil or flammable liquids.

An insurance company’s loss control department may have resources available to assist contractors with improving material handling. Those who want this help should check with their agents to arrange a meeting. Sound material handling practices help prevent injuries, fines and penalties, and reduce workers’ compensation costs. They will also enhance the employer’s reputation with potential employees. Putting these safeguards into place makes both moral and practical sense.

Construction work, by its very nature, is a high-risk type of business. It usually isn’t a matter of if a loss occurs, but when and how much. When a loss does occur, such as an electrical wiring fire, all the parties involved with the project quickly point the finger at the other parties. In the construction industry, having a hold harmless clause in a contract is one way that a specific party can ensure that another party involved shares or pays the cost of an incurred loss. General contractors and owners commonly use hold harmless clauses to reduce their exposure to risk, thereby helping them maintain lower insurance premiums.

Hold harmless clauses can be like a cat and mouse game. The owner applies pressure to the general contractor, the general contractor then pressures the subcontractors, and the subcontractors then pressure their subs, with each attempting to get their share of express indemnification into the contract during the process.

Express indemnification is a written agreement in the contract that will secure or protect a person from the legal responsibility of a loss. Essentially, it holds a person harmless and a person responsible. The indemnitor is the named person taking responsibility for a potential loss or risk. The indemnitee is the named person to be protected. There are generally three types of these clauses used in construction contracts. Be cautious, as some of these clauses can even be found within the fine print of a purchase order.

A Type Three, also called a comparative fault clause, will hold the indemnitor liable for the loss or extent of loss he/she causes. For example, a contractor could agree an owner will be harmless in any claims related to the project, but only to the degree the claim was partly or entirely caused by the omissions or negligent acts of the contractor.

A Type Two, also called an intermediate form clause, is the most commonly used. The indemnitor assumes all the risk unless the indemnitee is attributed as the lone cause of risk. For example, a contractor could agree an owner will be harmless from any claims related to the project if the claim is caused partly or entirely by an omission or negligent act by the contractor and without regard to if the claim was caused in part by an omission or negligent act by the owner.

A Type One, also called a broad form indemnity clause, involves the indemnitor holding the indemnitee harmless from risk, even if the indemnitee is the cause of the entire loss. For example, a contractor might agree to hold an owner harmless for any and all claims related to the project, without regard to whether or not the owner’s negligence was the sole cause of the claim.

Due to the fact that construction is such a highly competitive business, many subcontractors and contractors often feel forced to assume total liability on a construction project, regardless of fault, in order to win the bid for the project. The contractor can easily go bankrupt if an accident happens with losses more than the contractor can cover. Many states have sought to protect the construction industry by passing laws that limit the types of clauses allowed in contracts. In most cases, the state where the work is being performed will be the applicable state law. For example, a company in Michigan wrote a construction contract with an intermediate form clause for work to be done in Delaware. A loss occurred and the Michigan company attempted to hold the contractor responsible through the clause. Even though Michigan recognized such clauses, Delaware didn’t and threw it out.

Overall, those at the top of the ladder, such as the owner and general contractor, favor hold harmless clauses. After all, they only benefit by leveraging blame downward. For the subcontractors at the bottom of the ladder, these clauses are much less appealing. Although a common part of the doing business in the construction industry, having a hold harmless clause with a general contractor or owner that has a reputation for unsafe operations or excessive demands might not be the best idea.

Consider the following chain of events:

• An engineer designs the site and grading plan for a construction project.
• After the project’s completion, the developer finds that the parking lot is not draining.
• In March, the developer writes to the engineer, accuses him of failing to follow recommendations in a geotechnical report, and orders him to create a plan to correct the drainage problem.
• The engineer responds by saying that his design was sound but the contractor’s work was defective.
• The engineer and developer hold several meetings to determine what caused the problem. The engineer sticks with his version of events.
• In May, the developer writes again to the engineer, accusing him of committing design errors and shirking responsibility for the problem.
• In August, the engineer notifies his liability insurance company that the developer is making a claim against him.
• Sometime later, the developer sues the engineer, architect and contractor.

Question: When exactly did the claim occur, and when should the engineer have reported it to the insurance company? In this case, the company said it did not have to provide defense or coverage because the engineer violated the policy conditions by reporting the claim late. In the company’s opinion, the developer’s March letter was a claim that the engineer should have reported. A court said that the case would have to go to trial, as the report’s lateness was unclear. The policy insured against claims occurring during the policy period and made within 60 days after the end. When, however, does a dispute become a claim, triggering the obligation to report it to the company? The answer turns on the policy’s definition of “claim”:

“ … a demand for money or professional services received by the Insured for damages, including but not limited to, the service of a lawsuit or the institution of arbitration proceedings or other alternative dispute resolution proceedings, alleging a wrongful act arising out of the performance of professional services.”

The court applied this definition to the March letter, asking whether a reasonable person would have considered the circumstances known to the engineer as a possible claim. In the court’s opinion, the answer was no. Until the developer’s May letter, the court said, a reasonable person could have concluded that the developer was unsure as to who was responsible for the drainage problem. The letter ordered the engineer to develop a plan to correct the problem. The engineer believed he would be paid for creating this plan, an assumption the court found to be reasonable. Because one reasonable view of the letter was of a request and not a demand for services as compensation for damages, the court said that the case must go to trial to resolve the question of facts.

This case illustrates a dilemma for all sorts of organizations. If they fail to report incidents that eventually turns into lawsuits, their insurance companies might try to deny defense and coverage because of late reporting. Conversely, if they report every incident, no matter how minor, their companies could eventually decide to drop their coverage because of frequent losses, even if most of the reports amount to nothing. To deal with this problem, some policies permit circumstance reporting. The policy that ultimately covers the claim is the one in effect when the insured reports the circumstance to the company, if a claim results from that circumstance.

Check with one of our insurance agents to find out what the reporting requirements are in your professional liability policies. Know what’s in your policy and what it requires you to do so that you don’t jeopardize your coverage.

The contractor managing the construction of a new 20-story hotel had a well-planned schedule for the project. The schedule contemplated every scenario the contractor could think of that might sidetrack the project — natural disasters, material shortages, workplace accidents, even strikes. Unfortunately, he didn’t think of everything: Vandals hopped the fence at the excavation contractor’s storage yard and disabled four $200,000 excavators. This delayed digging by three weeks. Shortly after work began, the general contractor had to suspend the project because the municipal employee responsible for approving the plans and issuing work permits became ill and checked into a hospital. Due to severe budget cutbacks, the municipality had no one on staff to perform her work while she was out.

All these events threw the contractor’s schedule out the window and caused delays that cost the owner thousands of dollars in lost revenue. Had the contractor been able to accurately factor these risks into the plan and cost estimate, dealing with them would have been easier and less costly. Some contractors are using Event Chain Methodology to do just that. Event Chain Methodology is a way of creating models of uncertainties in time-related business processes so that businesses can accurately measure them. This method is based on six principles.

1. External events affect work tasks during the performance of the tasks. These effects can be both positive (14 straight days of sunny weather, allowing for the completion of exterior work ahead of schedule) or negative (an unexpected downpour occurs before the roofing contractor can cover roof openings, flooding the top floor).
2. Events can cause other events, creating chains that affect the project. Municipal authorities question something in the architect’s plans. The architect answers, but the authorities question the answers. Construction halts while the questions are being settled; when it finally resumes, subcontractors accelerate the work to make up for lost time. As a result, three employees suffer injuries on the job.
3. If a contractor can define events and event chains, he can analyze them to measure how uncertain they are and calculate how event chains will impact the project.
4. Critical chains of events are those that have the greatest potential to affect a project. If contractors can identify these critical chains in advance, they can plan for them and keep their impact to a minimum. They do this by analyzing each chain and determining its potential to affect a major project parameter, such as its length or total cost. If a contractor knows that a squabble with the authorities over plans can set a project back two months, he can build that into the schedule and budget.
5. Contractors can use data from similar past projects to determine how likely a chain of events is and what its impact will be on the project.
6. To aid in the analysis of risks, contractors can create Event Chain Diagrams. These display the relationships between events and tasks and how one affects the other.

Using event chain methodology can lead a contractor to alter the original plan in a number of ways. Certain events (fires, flooding, vandalism) can make unplanned activities (clean-up, repair, replacement) necessary. Other events (contractor or designer errors) can force subcontractors to repeat already completed tasks (wiring, plumbing, installation of air quality systems). As deadlines approach, a task might require additional resources (personnel, materials, tools,) requiring the contractor to re-allocate these from other planned activities.

Event chain methodology allows project managers to assign mathematical values to risks, helping them decide how to prioritize loss prevention efforts. Ideally, this will enable the project to come off with few surprises, resulting in a safe, on-time and profitable project.

There will always be a risk that something will go awry during construction projects. When something does go wrong, the result is usually costly time delays and mild to devastating additional material, labor, and damage costs. As far as risk goes, most construction business owners view insurance as their first line of defense. Not that insurance isn’t an appropriate risk prevention tool, but it’s not always economically feasible or efficient to try and cover each and every possible risk with insurance. There are actually many risks that can be dealt with thorough the concepts of risk transfer, risk sharing, risk retention, risk control, risk prevention, and risk avoidance. Let’s look at some key points about each:

1. Transfer of Risk. There are parties, aside from your own insurance, to which you might transfer the risk. The two most common risk transfers are through being named as an insured person on an alternative insurance contract, and through express indemnification clauses. When you’re named on another party’s insurance, their coverage extends to you. If you’re a general contractor, for example, then you might require the electrical contractor to name you on their liability policy. As long as the other party’s insurance covers the loss, your portion of any loss would be paid by the other party’s insurance policy.

   The second common method of transferring risk is through an express indemnification clause in a contract. This is also referred to as a hold harmless clause. There are three varying degrees of risk transfer. The type one indemnity clause, also called a broad form, states that the indemnitor (party that will be responsible for the loss) will hold the indemnitee (party that will be protected) harmless regardless of whether the loss was caused by the indemnitee. A type three clause, also called comparative fault, holds the indemnitor responsible for only the loss that they caused. The most common type of indemnification clause is the type two, also called the intermediate form. The indemnitor assumes all the risk unless the sole cause of the loss is fully attributable to the indemnitee. An example of a type two clause would be a general contractor agreeing to hold an owner harmless (regardless of whether the loss was partly caused by the owner) if the loss was caused in part or entirely by the contractor.

2. Risk Sharing. There are often opportunities to share the risk with the other parties involved with the construction project. The contract should have a clause that stipulates each of the involved parties would be liable for those losses caused by his/her actions or inaction.
3. Risk Retention. Whether they want to or not, all construction businesses are going to retain some of the more minor risks. It’s simply not monetarily feasible to cover every single risk with insurance. These minor retained risks, such as errors that cause a couple of days of redoing work, are funded from the operating budget. Insurance deductibles are another way that risk is retained. Just be sure that whatever risk is retained has a value and can be funded should a loss actually occur.
4. Risk Avoidance. Although risks are often tempting, such as a supplier offering a cheaper material, most risks are best avoided. If you suspect that the cheaper material could be defective, then it simply makes better sense for you to put the longevity and reputation of your business first and avoid the risk.
5. Risk Prevention. Risk prevention is a very broad topic with many elements, but the premise of the concept is taking action to avoid negative events from occurring in the first place. It’s usually very simple carelessness that causes accidents. So, risk prevention may include simple things like keeping passages free of debris and idle tools secure. Risk prevention should be an ongoing training program for employees, supervisors, and managers.
6. Risk Control. Like risk prevention, risk control is a very broad topic with many elements, but the premise of the concept is reducing the amount of loss incurred during a negative event. A good example would be posting emergency response phone numbers so that immediate help can be called during an accident. Risk control should also be an ongoing training program for employees, supervisors, and managers.

When a contractor works on several parts of a structure, and a mistake they make on one part causes damage to other parts they worked on, does their Liability insurance cover all of the damage, some of it, or none of it? This is the question a Texas court answered in a 2009 decision interpreting the Commercial General Liability policy’s “that particular part” clause. This phrase has been the subject of many court cases because, to some extent, its meaning is in the eye of the beholder.

In the Texas case, the contractor worked on a condominium project. They performed the water-sealing on exterior finishes and retaining walls improperly, permitting large quantities of water to enter the structure through multiple points, including ceilings and walls and under doors. The water damaged other areas of the project on which the contractor had worked, including stud framing and interior drywall. The contractor notified their insurance company, but the company denied the claim because of two policy provisions that exclude coverage.

First, the policy said that the insurance did not apply to “property damage to … that particular part of real property on which (the insured contractor) or any contractors or subcontractors working directly or indirectly on the (insured contractor’s) behalf are performing operations, if the property damage arises out of those operations.” A second exclusion stated that the insurance did not apply to “property damage to … that particular part of any property that must be restored, repaired or replaced because (the contractor’s) work was incorrectly performed on it.” The insurance company’s intention was to not insure a contractor’s own shoddy workmanship. The contractor sued the company for breach of contract.

The court found that the first exclusion did not apply to this loss because the contractor was not working actively on the project at the time. The contractor had finished the exterior work, and the owner had suspended interior work on most of the condominium units while their sales were pending. The court noted that the exclusion eliminates coverage for damage to property on which the contractor is performing operations. Since the contractor was not performing operations at the time of the water damage, the exclusion did not apply.

The court also found that the second exclusion applied only to the contractor’s exterior work and not to the parts of the interior that suffered damage. It arrived at this conclusion by breaking the exclusion into its components: No coverage for damage to: 1) Property; 2) that must be restored, repaired or replaced; 3) because the contractors performed work on it incorrectly. According to the court, this wording differentiates between property on which the contractor performed work incorrectly, and other property on which the contractor did not perform work incorrectly. Since the owner did not claim that the contractor performed faulty work on the interior components, the court said that the exclusion did not apply to damage to those areas. According to the opinion, the exclusion “ … bars coverage only for property damage to parts of a property that were themselves the subjects of defective work, and not for damage to part of a property that were the subjects of only non-defective work by the insured … ”

Courts have interpreted these exclusions in various ways, depending on the circumstances of the individual cases. Contractors should be aware that, when they have liability for property damage, their insurance coverage might not be clear-cut. Our insurance agents can give you an idea of how companies providing coverage have handled similar claims in the past.