Understanding common construction coverage concerns

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Wisconsin court decisions show changing standards

As a construction company or contractor, it is important to insulate yourself from potential liability for injuries and damage that are inevitable in the construction profession.

One such safeguard is to purchase insurance; most likely a commercial general liability policy. A policy doesn’t ensure coverage, however, as there are often disputes between insurers and policy holders about interpretations, losses covered and the applicability of a policy. While many of those disputes are generally best left for the courts, there are several issues that can be cleared up long before it gets to that stage.

When is coverage triggered?

The first important question is whether a policy was in effect during an applicable loss, which seems like an easy question to answer. However, Wisconsin has adopted the “continuous trigger theory,” which can make coverage more difficult to determine, especially if multiple policies and policy periods are involved.

Under this theory, property damage or injury that occurs over more than one applicable policy period is deemed to be a covered “occurrence” from initial exposure until manifestation, which then could be covered by multiple policies, including ones that were not in effect at the time of the initial “occurrence.” Ultimately, the theory works to interpret an “occurrence” under a commercial general liability policy as including continuous damage as well as instantaneous damage.

An example of a continuous trigger situation would be if the soil under a building is not properly prepared, causing the building to sink over a number of years. The damage, although caused by a single act, continuously causes damage to the building as it sinks. This will be considered a continuous “occurrence” for purposes of coverage under a CGL policy.

The lesson for contractors is to be aware of each policy that may afford coverage over an entire loss period to make the most of available coverage. Insurers must then be aware that this theory could trigger coverage under a CGL policy if there is a continuing loss when the origin predates its initial coverage period.

Is faulty workmanship covered?

The most general question asked by contractors is: What conduct is covered? Obviously the policy defines what occurrences are covered.

In the past, Wisconsin courts have specifically held that a contractor’s faulty workmanship is not a covered “occurrence” under CGL policies.

However, contractors and insurance providers alike should be aware that there have been several recent Wisconsin cases that, while recognizing faulty workmanship may not be an occurrence, have held that the resulting injury or damage is a covered “occurrence.” This has resulted in insurers being liable for hundreds of thousands of dollars of property damage resulting from faulty workmanship.

Tort vs. contract

Another frequent concern is whether a plaintiff under a contractor’s CGL policy can recover for purely economic losses as opposed to losses resulting from negligence. Several courts have held that a CGL policy only covers “bodily injury” or “property damage, i.e. injuries resulting from negligence, and therefore damages from a breach of contract are not covered.

However, recent court decisions have held the opposite, finding that because CGL policies do not differentiate between tort and contract claims, they will cover purely economic losses stemming from breach of contract in addition to damages resulting from negligence.

This is important because if a CGL policy only covers tort claims then the insured is on the hook for any damages resulting from contract claims as the insurer will not be required to cover contract damages. But following the recent trend, a CGL policy will cover damages resulting from both tort and contract claims.

Business risks

CGL policies predominantly include “business risk” exclusions, which include sections covering “your work” and “your product.” These provisions work to exclude coverage for property damage caused to the particular part of property on which a contractor performed work or that required repair because the contractor’s work was performed incorrectly.

However, general contractors should be aware that CGL policies can include exceptions for the work performed or products furnished by a subcontractor, in which case the general contractor’s CGL policy will cover damage caused by a subcontractor.

One Wisconsin court recently interpreted the specific language found in these exclusions, namely “that particular part of property.” The court held that the exclusions should be narrowly interpreted to cover only damage to the specific part of the property on which the contractor worked, as opposed to the property in general.

To help illustrate, imagine a contractor installs new windows that leak and damage an adjacent wall. The insurance company would argue the damage is not covered because it was the result of the contractor’s work being incorrectly performed. However, the plaintiff or contractor would argue the damage to the wall is covered because the “particular part of the property” on which the contractor worked was the window, not the wall. Only property damage to the window, the specific part worked on, would be excluded under the CGL policy.

Duty to defend

Many agreements between general contractors and subcontractors include indemnity provisions, which provide that if a subcontractor is sued the general contractor has a duty to defend and indemnify the subcontractor.

An indemnity agreement could trigger a duty to defend by the general contractor’s insurer, depending on the policy language. So it is important for the general contractor and its insurer to understand just what subcontractor conduct it is potentially responsible for defending and indemnifying.

Of particular concern is whether a general contractor has a duty to defend/indemnify a subcontractor for its own negligence. Wisconsin courts generally hold that in order for a duty to exist, the agreement must include a specific and express statement to that effect.

The general rule is that the agreement must conspicuously state that a general contractor has a duty to defend/indemnify the subcontractor for the subcontractor’s own negligence. Consequently, it is important for general contractors to review the agreement and for a general contractor’s insurer to be aware of the agreement, as well.

Ryan M. Wiesner is an associate at McCoy Leavitt Laskey LLC. He represents insurance companies, businesses and individuals in all types of civil litigation, with an emphasis on assisting in the defense of catastrophic fire and explosion litigation, products liability actions and commercial disputes.