Anna M. Perry, Rachel S. Kindseth and Nina Catazaro | Saxe Doernberger & Vita
I. Course of Construction Exclusions
Course of Construction (“COC”) exclusions are found on General Liability and excess liability policies, typically a wrap-up or project specific policy, and generally exclude “all property damage occurring during the course of construction.” Insurers claim COC exclusions are not problematic because they are intended to prevent an overlap in coverage between the general liability policy and first-party property Builder’s Risk policy. However, because General Liability policies and Builder’s Risk policies provide coverage for different risks, COC exclusions can create a gap in coverage for owners and contractors. Therefore, any exclusion on a wrap-up or project specific policy that limits coverage for property damage liability should be scrutinized, and amendments sought when warranted and commercially achievable, for owners, developers and contractors because General Liability policies do not cover the same risk as that of a Builder’s Risk policy.
General liability policies provide defense and indemnity to the insured(s) for claims made by a third-party against the insured. Broad COC exclusions serve to preclude coverage for all property damage, not just property damage to the insured project. This includes property damage to property other than the insured project, e.g. an adjacent property. On the other hand, Builder’s Risk policies provide first-party property coverage for direct physical loss to the project during the course of construction. The Builder’s Risk policy will not provide coverage for property other than the project itself (e.g., adjacent property) and it will not provide a defense or indemnity in the event the owner of the damaged property brings a claim against a potentially at-fault party.
It is important to remember that COC exclusions are not always a standalone endorsement or titled clearly. The policy should be reviewed carefully to ensure that a COC exclusion is not embedded into another endorsement. Furthermore, the policy modifications discussed herein will not always be necessary or relevant and might not be achievable considering market conditions and commercial considerations even when advisable.
II. Course of Construction Exclusions and Builder’s Risk Policies
As an initial matter, a Builder’s Risk policy will not necessarily provide coverage for all losses excluded under the COC exclusion of a General Liability policy. Even if the Builder’s Risk policy has LEG-3 coverage[1], there are certain exclusions, terms and conditions, that limit coverage. As a result, a Builder’s Risk policy does not cover “all property damage during the course of construction” and, consequently, certain losses could fall outside of the coverage provided by a General Liability policy with COC exclusions and a Builder’s Risk policy.
There are various instances where property damage occurs during the course of construction and the Builder’s Risk policy will not provide coverage. First, if the contractor places the Builder’s Risk policy, then the policy most likely will not cover the loss of use of the project resulting from an otherwise covered loss. Second, the Builder’s Risk policy will not provide property damage coverage for adjacent property or existing structures damaged during the course of construction. Third, the Builder’s Risk policy provides only first-party coverage and will not provide a defense or indemnity to the potentially at fault contractor if the owner, or any other third-party, pursues an action against the contractor.
III. Course of Construction Exclusions and Phased Projects
COC exclusions are especially potentially problematic in policies covering phased projects[2], particularly when “completed,” as used within the COC exclusion, is not defined in the same manner as the Extended Products Completed Operations Hazard (“EPCOH”) endorsement. EPCOH endorsements generally clarify when a project, or portion of the project, is deemed completed for purposes of triggering the completed operations coverage. However, courts might not apply that same definition of “completed” when used in the COC exclusion.
Recently, the 11th Circuit found that a COC exclusion applied to a loss for “property damage” to a completed building included in a phased project that still had ongoing work to other buildings[3].The court came to this conclusion by finding that the phrase “until the project is completed” as used in the COC exclusion, means the entire project and the exclusion did not apply separately to each individual phase or building of the project. This case provides policyholders with guidance on modifications to narrow the scope of COC exclusions if the COC exclusion cannot be removed from the policy.
As a general proposition, COC exclusions should be resisted on policies applying to phased project(s). In the event a COC exclusion is not avoidable, it is advisable to seek to limit its application only to losses covered under the ongoing operations coverage to prevent the application of the COC exclusion to any losses occurring during the project’s, or a portion of the project’s, completed operations hazard. One way to do so, if commercially achievable, is to define “completed” and “project.” The definition of “project” should state that for purposes of the exclusion it applies only to that portion or phase of the project not yet deemed completed. Next, the definition of “completed” should be the same as the definition of “completed” as used in the EPCOH endorsement.
IV. Solutions and Recommendations
It will often be beneficial to the insured to strike COC exclusions; however, if the insurer will not remove the exclusion, or removal is not otherwise commercially viable, then having broad coverage under the Builder’s Risk policy and amending the COC exclusion to apply as narrowly as possible is the recommended alternative.
COC exclusions are generally added to General Liability policies when Exclusion j. – Damage to Property – is removed from the policy. Alternatively, Exclusion j. may remain on the policy and can be narrowed, rather than removed, by endorsing the policy to define “that particular part” as:
The language “that particular part” in Exclusion j., subparts (5) and (6) means only the segregated portion or component part of the property on which the insured, or those entities working on its behalf, are actively performing operations at the time of the property damage.
Notwithstanding any case law to the contrary, the language “that particular part” does not mean all of the work called for in the insured’s contract, and where the insured is a construction manager, general contractor, design-builder or other entity contractually responsible for the entire project, the language “that particular part” does not mean the entire project.
Alternatively, efforts could be made to modify the COC exclusion to be narrowed to only exclude property damage to the project itself (such that it would not preclude coverage for damage to adjacent property for example) and to include an exception for property damage to any existing structures, if applicable to the project, and loss of use claims. These exceptions (if commercially achievable) may not be necessary if the Builder’s Risk policy provides loss of use coverage or there is property coverage for the existing structure.
Finally, when reasonably and commercially possible, the contract should require the owner to exhaust Builder’s Risk coverage before making a claim against the contractor for property damage covered under the Builder’s Risk policy and that the parties waive claims against each other to the extent covered by the Builder’s Risk policy. These contractual provisions eliminate the contractor’s need for a defense under its General Liability policy for losses intended to be covered under the Builder’s Risk policy.
[1] The LEG-3 exclusion allows coverage for defective damaged property but excludes cost of improvements of materials, workmanship, designs, plans, or specifications.
[2] “Phased projects” as used in this white paper incorporates any project where certain portions will be put to their intended use and/or turned over to the owner, including, but not limited to, projects where certain floors will be completed and put to their intended use prior to others or certain buildings will be completed and put to their intended use prior to completion of the entire project.
[3] Liberty Surplus Corp. v. Kaufman Lynn Constr., Inc., 130 F.4th 903, 915 (11th Cir. 2025).
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