What to Look for in Subcontractor Warranty Endorsements

David McLain | Colorado Construction Litigation

With increasing frequency in the construction defect cases we defend, we are seeing commercial general liability insurance policies with “subcontractor warranty” endorsements.  Also known as contractor or subcontractor special conditions, these endorsements could have severe and negative consequences for builders that do not comply with their requirements.  In researching for this article, I reviewed six different endorsements used by six different carriers, all of which contained some or all of the following requirements:

  • The builder must have signed subcontract agreements with its subcontractors that require subcontractors to hold harmless, i.e., defend and indemnify, the builder for “bodily injury” or “property damage” claims caused by their negligence.
  • The subcontractors must maintain their own insurance with limits equal to or greater than the limits in the builder’s own policy, with limits of at least $1 million per occurrence.
  • The subcontractors’ insurance must not exclude the work being performed for the builder, e.g., the excavator’s policy cannot exclude earth movement claims, the subcontractor’s policy cannot exclude residential construction.
  • The subcontractors must maintain their own workers’ compensation and/or employer’s liability insurance.
  • The subcontractors must provide the builder with an endorsement or a certificate of insurance indicating that the builder has been added to the subcontractors’ insurance as an additional insured.
  • The subcontractors must provide the builder with an endorsement or a certificate of insurance indicating that their insurance carriers have agreed to provide waivers of subrogation in favor of the builder.
  • The builder must maintain records evidencing compliance with these requirements through the applicable statute of repose.
  • The builder must obtain proof that the subcontractors have all licenses as required by local or state statute, regulation or ordinance, and that such licenses are up to date.

Failure to comply with one or more of these requirements can have disastrous implications for the builder.  Depending on the wording of the actual endorsement, these consequences could include complete nullification of coverage relative to a loss caused by the subcontractors’ work, the imposition of a higher deductible or retained limit being applied to a loss caused by subcontractors, a lower limit of liability being applied to a loss caused by subcontractors, or the carrier increasing the premium for insurance after an audit of the records provided by the builder.
While the severity of the consequences may be lessened for builders using wrap insurance programs for their projects, this should be of serious concern for builders insuring themselves through annual renewable insurance programs.  My recommendation is for builders to work with their insurance agents or brokers to determine if it is possible to obtain insurance without the subcontractor warranty endorsement.  If not, it is imperative that builders understand the requirements of the subcontractor warranty endorsements and that they comply with those requirements.  This absolutely a situation in which an ounce of prevention is worth a pound of cure, assuming that any cure is even possible.     

No Coverage to Builder for Beetle-Infested Logs

Larry P. Schiffer | Squire Patton Boggs

Nearly all construction jobs require that the contractor purchase insurance. Commercial general liability insurance (“CGL”) is often what is purchased. CGL policies also typically have an exclusion for property damage to “your work.” In a recent case, the Ninth Circuit Court of Appeals addressed this exclusion in a case of damage caused by beetle-infested logs used to build a log home. What would Abe Lincoln say?

In Northland Casualty Co. v. Mulroy, No. 19-35085 (9th Cir. Dec. 27, 2019) (Not for Publication), the appellate court affirmed the district court’s grant of summary judgment in favor of the insurance company and against the policyholder (actually the property owner as assignee of the contractor’s rights after settlement) based on the exclusion for property damage to “your work.” The coverage dispute started after a property owner contracted with a builder to build a log home and renovate a guest log home. The contractor purchased logs from a log broker, but did not treat the logs for insects. Several years later, the owner noticed signs of a beetle infestation (powderpost beetles), which caused substantial damage to both homes.

The owner asserted a claim against the builder and the builder tendered the claim to its insurer. The insurer notified the builder that the CGL insurance policy did not cover the damages. The owner sued the builder in state court and, without the insurance company’s consent, the owner and builder settled. The builder assigned all rights under the CGL insurance policy to the owner.

The insurance company brought a coverage action and the parties moved for summary judgment. The district court granted summary judgment to the insurance company.

In affirming the district court, the appellate court held that the district court correctly applied the exclusion because there was property damage to the builder’s work. By failing to treat the logs, the builder installed untreated, beetle-infested logs. According the court, the damage arose from those acts, even if the damage also arose partly because the log supplier selected beetle-infested longs.

The exclusion barred coverage for “`property damage’ to `your work’ arising out of it or any part of it and included in the `products-completed operations hazard.” It “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a sub-contractor.” The court held that the subcontractor exemption did not apply because under any reasonable interpretation of the term, the log supplier was merely a materials supplier and not a subcontractor.

Finally, the court rejected the “reasonable expectations” doctrine argument, holding that the policy clearly excluded coverage and no other factor suggested that the policyholder reasonably expected coverage. As simply put by the court, “[c]overage is unavailable in this case only because the damages were to the work itself (rather than to a bystander), the project had been completed, and the log supplier was not a subcontractor.

PA Superior Court Provides Clarification on Definition of CGL “Occurrence” When Property Damage Is Caused by Faulty Building Conditions

Anthony L. Miscioscia and Konrad R. Krebs | White and Williams | July 25, 2019

The standard for an “occurrence” under a commercial general liability (CGL) insurance policy has been addressed on several occasions by Pennsylvania courts when an insured has allegedly performed faulty workmanship on a construction project. Specifically, in Pennsylvania, a claim for damages arising from an insured’s performance of faulty workmanship pursuant to a construction contract, where the only damage is to property supplied by the insured or worked on by the insured, does not constitute an “occurrence” under the standard commercial general liability insurance policy definition. But what about the circumstance when the insured has failed to perform contractual duties where the claim is for property damage to property not supplied by the insured or unrelated to the service the insured contracted to provide? The Pennsylvania Superior Court recently addressed this question in Pennsylvania Manufacturers Indemnity Co. v. Pottstown Industrial Complex LP, No. 3489 EDA 2018, 2019 Pa. Super. 223, 2019 Pa. Super. LEXIS 729* (Pa. Super. 2019).

Pottstown Industrial Complex arose out of an underlying dispute between a landlord and a commercial tenant who had leased space to store its product inventory. The tenant alleged that the landlord was responsible under the lease for keeping the roof “in serviceable condition in repair.” Notwithstanding this responsibility, the tenant alleged that the landlord failed to properly maintain and repair the roof, resulting in leaks and flooding during four separate rainstorms, destroying over $700,000 in inventory. The tenant specifically alleged that the floods were caused by poor caulking of the roof, gaps and separations in the roofing membrane, undersized drain openings, and accumulated debris and clogged drains.

The insurer filed a declaratory judgment action, seeking a determination that there was no coverage under a commercial general liability policy issued to the landlord. Following a motion for judgment on the pleadings, the trial court entered an order in favor of the insurer, holding that allegations of inadequate roof repairs were claims for faulty workmanship and were not covered under Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006) and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007).

In its opinion, the Superior Court reversed the decision of the trial court, holding that the tenant had alleged a covered “occurrence” under the commercial general liability policy.[1] The Superior Court noted that Kvaerner and Gambone only precluded the finding of an “occurrence” where a claim is for damage to property supplied by the insured, where the only property damage is the product or property that the insured supplied or on which it worked, or where the damages sought are for the insured’s failure to deliver the product or perform the service it contracted to provide. The Superior Court distinguished Pottstown Industrial Complex from Kvaerner and Gambone on the grounds that those cases only alleged damage to the property that the insured had worked on or supplied, while the Pottstown Industrial Complex underlying plaintiffs sought to recover for damage to their own property, stored on the ground of the insured’s facility, rather than damage to the insured’s faulty roof. The Superior Court held that this interpretation of the term “occurrence” was consistent with Kvaerner’s rationale that the term “occurrence” was not to be construed to “convert [a commercial and general liability policy] into a performance bond,” but rather, to provide insurance for the risk of “damage the insured causes to another person’s property.”


[1] “Occurrence” is defined as “an accident”

PA Superior Court Provides Clarification on Definition of CGL “Occurrence” When Property Damage Is Caused by Faulty Building Conditions

Konrad Krebs and Anthony Miscioscia | White and Williams | July 25, 2019

The standard for an “occurrence” under a commercial general liability (CGL) insurance policy has been addressed on several occasions by Pennsylvania courts when an insured has allegedly performed faulty workmanship on a construction project. Specifically, in Pennsylvania, a claim for damages arising from an insured’s performance of faulty workmanship pursuant to a construction contract, where the only damage is to property supplied by the insured or worked on by the insured, does not constitute an “occurrence” under the standard commercial general liability insurance policy definition. But what about the circumstance when the insured has failed to perform contractual duties where the claim is for property damage to property not supplied by the insured or unrelated to the service the insured contracted to provide? The Pennsylvania Superior Court recently addressed this question in Pennsylvania Manufacturers Indemnity Co. v. Pottstown Industrial Complex LP, No. 3489 EDA 2018, 2019 Pa. Super. 223, 2019 Pa. Super. LEXIS 729* (Pa. Super. 2019).

Pottstown Industrial Complex arose out of an underlying dispute between a landlord and a commercial tenant who had leased space to store its product inventory. The tenant alleged that the landlord was responsible under the lease for keeping the roof “in serviceable condition in repair.” Notwithstanding this responsibility, the tenant alleged that the landlord failed to properly maintain and repair the roof, resulting in leaks and flooding during four separate rainstorms, destroying over $700,000 in inventory. The tenant specifically alleged that the floods were caused by poor caulking of the roof, gaps and separations in the roofing membrane, undersized drain openings, and accumulated debris and clogged drains.

The insurer filed a declaratory judgment action, seeking a determination that there was no coverage under a commercial general liability policy issued to the landlord. Following a motion for judgment on the pleadings, the trial court entered an order in favor of the insurer, holding that allegations of inadequate roof repairs were claims for faulty workmanship and were not covered under Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006) and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007).

In its opinion, the Superior Court reversed the decision of the trial court, holding that the tenant had alleged a covered “occurrence” under the commercial general liability policy.[1] The Superior Court noted that Kvaerner and Gambone only precluded the finding of an “occurrence” where a claim is for damage to property supplied by the insured, where the only property damage is the product or property that the insured supplied or on which it worked, or where the damages sought are for the insured’s failure to deliver the product or perform the service it contracted to provide. The Superior Court distinguished Pottstown Industrial Complex from Kvaerner and Gambone on the grounds that those cases only alleged damage to the property that the insured had worked on or supplied, while the Pottstown Industrial Complex underlying plaintiffs sought to recover for damage to their own property, stored on the ground of the insured’s facility, rather than damage to the insured’s faulty roof. The Superior Court held that this interpretation of the term “occurrence” was consistent with Kvaerner’s rationale that the term “occurrence” was not to be construed to “convert [a commercial and general liability policy] into a performance bond,” but rather, to provide insurance for the risk of “damage the insured causes to another person’s property.”

When is a Mistake an ‘Accident’?

Jason R. Potter | Claims Magazine | June 2019

Commercial General Liability (CGL) policies, like all insurance products, are intended to protect the insured from unexpected claims or suits by third parties. A CGL policy covers bodily injury, property, personal and advertising liability, products and completed operations and fire liability unless they are excluded by a specific endorsement. CGL coverage can provide important protections to a business owner for a variety of losses, but they are most ubiquitous in the construction setting.

Perhaps no issue is as litigated and disputed within the CGL context as whether faulty construction work comes within a typical CGL policy’s initial grant of coverage. Pundits, professors and law professionals have all offered starkly differing views, but recent cases appear to be coalescing in favor of coverage, albeit for a specifically delineated subset of damages. This article will briefly summarize the positions and arguments in favor and in opposition to such coverage and offer a glimpse of what the future may hold. This article is limited to analyzing the CGL’s initial grant of coverage and does not delve into how, if at all, the policy’s 20 or so exclusions would affect that grant. The case for CGL coverage CGL insurance was first developed in 1941 as a way to purchase separately insured risks in one, unified policy. The Insurance Services Office, Inc. last modified the current standard form CGL policy in 1986. Its initial grant of coverage provides: “We will pay those sums that the insured becomes obligated to pay as damages because of ‘bodily injury’ or ‘property damages’ to which this insurance applies.” It clarifies that “This insurance applies to ‘bodily injury’ and ‘property damage’ only if: 1. The ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’

The case for CGL coverage

CGL insurance was first developed in 1941 as a way to purchase separately insured risks in one, unified policy. The Insurance Services Office, Inc. last modified the current standard form CGL policy in 1986. Its initial grant of coverage provides: “We will pay those sums that the insured becomes obligated to pay as damages because of ‘bodily injury’ or ‘property damages’ to which this insurance applies.” It clarifies that “This insurance applies to ‘bodily injury’ and ‘property damage’ only if: 1. The ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’ 2. The ‘bodily injury’ or ‘property damage’ occurs during the policy period.” It defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident,” however, is undefined. That lack of definition bears responsibility for much of the current dispute.

Consider the following example. A university contracted with a general contractor (GC) to build a new hotel on its campus. GC has a CGL policy. GC subcontracted most of the work to subcontractors. After construction was complete, the university discovered extensive water damage from hidden leaks, as well as other structural problems, all of which, it contended, arose from defective workmanship. The repair cost was estimated at $6 million.

The university sued the GC for the defective construction, and the GC turned to its CGL carrier for a defense of the case and indemnity for any judgment rendered against it. The CGL carrier argued there was no coverage because no accident (and thus no occurrence) had taken place. The court agreed with the insurer, leaving the GC with the $6 million repair bill.

In this scenario, if the GC is relatively solvent, it will file suit against its subcontractor or subcontractors seeking some or all of those repair costs. If the subcontractor has no insurance coverage and no surety performance bond, the GC and/ or the subcontractors will bear the risk of loss. If, however, the GC and/or the subcontractors has insufficient capital or credit, then some or all of the repair costs will be passed onto the owner. Regardless of who bears that cost, all of the parties are likely to complain that they believe the GC’s CGL carrier should bear such a burden because, for contractors, defective workmanship is by far the largest claim risk they face. In fact, for that reason, they are likely to say that CGL policies are purchased specifically to protect against such risks. Who is right? It will come as no surprise that the answer depends on whom you ask, or, in this case, what court you ask.

Courts’ treatment of CGL coverage for faulty workmanship

Courts throughout the country hold disparate views regarding whether defective construction is an occurrence within the confines of a CGL policy’s initial grant of coverage. By definition, an occurrence must be an accident; thereby raising the question as to whether the failure to properly construct something is an “accident.” As courts have repeatedly demonstrated, the answer to that question is not an easy one.

A minority of jurisdictions holds that defective construction is not an accident. Pointing to the everyday meaning of the term accident, these courts say that construction defects are not unexpected, because, they argue, it is foreseeable that a contractor that does faulty work would cause damages for which it would be obligated to pay the costs of repair. Because an accident must be, by its nature, unexpected, defective construction is no accident.

These jurisdictions often state that if a CGL policy provided coverage for defective workmanship, it would be converted into a warranty or guaranty of the contractor’s performance, which is more properly the province of a surety performance bond, whose sole purpose is to guaranty the contractor’s performance on the construction project. Courts in Ohio, Arkansas, Kentucky, and Pennsylvania adhere to this view and typically deny CGL coverage for construction defects, regardless of the types of damages caused by the defective work.

The majority position says that construction defects may be accidents, and thus occurrences that are eligible for CGL coverage. They are accidental because the contractor performing the work does not intend for the resulting damages to occur. Further, they argue, if CGL policies did not cover construction defects, no contractor would ever purchase them because they would provide no coverage for their single largest category of claim risk – construction defects. These majority -view jurisdictions often look at whether the damages were intended, expected or foreseeable. The focus, therefore, is on whether the results (the damages resulting from the defective work) would have been expected or foreseeable had the contractor performed correctly. If so, then it was not an accident for purposes of the CGL policy; if not, then it was.

Granting coverage for construction defects does not render as insured all such damages, however. Within these majority -view jurisdictions, there is a further split of authority as to whether the CGL policy covers only damages to a third party’s work or whether it also covers the repair and/or replacement cost of the defective work itself.

Most hold that a construction defect may be an occurrence (i.e., an “accident”) but only to the extent that the faulty work damaged property other than the insured’s defective work. These jurisdictions, which include Oregon, Illinois, Iowa, South Carolina, and Nebraska, believe that faulty workmanship itself is not an accident because the damages (the defective work) were within the insured’s control. They further justify their position on policy grounds, believing that the ultimate liability for such defective work should fall on the party that performed it, not the insurance carrier.

Other courts say that there is no basis for distinguishing between damages to the work itself and damages to other property. As the Supreme Court of Florida stated, “the definition of ‘property damage’ in the CGL policies does not differentiate between damage to the [insured] contractor’s work and damage to other property. [W]e reject a definition of occurrence that renders damage to the insured’s own work as a result of a subcontractor’s faulty workmanship expected, but renders damage to property of a third party caused by the same workmanship unexpected.” These jurisdictions, which include Florida, Kansas, Minnesota, Tennessee, Texas, and Wisconsin, find property damage to the work itself, as well as damage to the work of third parties, to be an occurrence that triggers CGL coverage.

What does the future hold?

In 2004, the Supreme Court of Nebraska stated, “the majority of courts have determined that faulty workmanship is not an accident and, therefore, not an occurrence.” [Auto-Owners Insurance Co. v. Home Pride Companies, Inc., 268 Neb. 528 (2004).] Since that case, however, courts in Florida, Kansas, Iowa, New Jersey, Georgia, West Virginia, Montana, Missouri, South Dakota, Tennessee, and South Carolina have reversed that majority, and it appears that a strong consensus has emerged that construction defects are occurrences that come within the initial grant of CGL coverage. The Ohio Supreme Court stemmed the unanimity of these authorities favoring coverage with its 2018 opinion in Ohio Northern University v. Charles Construction Services, Inc., from which the above example was taken.

Despite Ohio Northern, the clear trend favors initial coverage for defective workmanship. And, at least four state legislatures (Colorado, Hawaii, South Carolina, and Arkansas) have enacted statutes that define occurrences in the CGL context to include construction defects. Although such decisions are state-specific, they often rely on policy interpretations from other jurisdictions, a fact which suggests the majority view may continue to grow with support from new jurisdictions that have yet to consider the matter.

What does all this mean for the insurance industry and its insureds? This greater trend toward uniformity in construction defect coverage should provide optimism in the goal toward greater understanding and therefore fewer disputes among all parties (and fewer lawsuits against carriers) regarding the question of CGL coverage of damages arising from