Construction Defect Exclusions: Subcontractor CGL Limitations that Should Worry Additional Insureds

Construction is a costly business…in more ways than one. Not only are many projects worth millions of dollars, but so are the lawsuits that often attach to them. A growing trend of construction defect litigation has insurance premiums going “through the roof.” As a result, contractors must rely on their commercial general liability (CGL) policies more as insurers try to cover less.

Construction defect lawsuits have produced an entire group of policy exclusions. These leave the named insured uncovered and expose the additional insured as well. And far too often, these five exclusions are found too late.

As we conclude our series on CGL policy gaps, we’ll shine a light on these common exclusionary endorsements. Property owners, property managers, and general contractors seeking coverage as an additional insured should be on the lookout for these policy limitations:

Residential Exclusion

Insurers often perceive a greater exposure risk tied to residential construction projects. Condominium, apartment, single-family home, and tract housing builds can generate more claims and higher severity. To minimize this risk, insurance companies will exclude coverage for work tied to all phases of construction, remodeling, or repairs. The residential exclusion endorsement also may limit coverage to a maximum number of units within a project. The benefit to the named insured subcontractor is that allowing this exclusion can generate lower insurance rates. However, this could completely nullify coverage for the additional insured if the subcontractor’s policy and scope of work do not align.

Total Pollution Exclusion

Standard CGL policies offer limited pollution coverage. Typically included are injury or damage from accidental escape of fuels, lubricants or fluids needed to operate equipment, and gases or fumes from equipment connected to work. A total or absolute pollution exclusion endorsement eliminates most of this coverage. The Insurance Services Office (ISO) has three such endorsements (CG 21 49, CG 21 55, and CG 21 65). Between them, they remove coverage for bodily injury or property damage caused by a pollution incident, byproducts of hostile fires, and byproducts of faulty heating equipment.

Subsidence/Earth Movement Exclusion

From excavating to site development to running utility lines, most construction projects include at least some earth movement. The higher the frequency, the higher the risk of a claim. Plus, subsidence and earth movement claims can create catastrophic losses and completely cripple a project. For these reasons, insurers will add an endorsement excluding bodily injury or property damage related to earth movement. This eliminates all coverage connected to earth shifting, sinking, rising, landslides, and mudflows leaving a huge exposure for additional insureds.

EIFS Exclusion

Exterior insulation and finish systems (EIFS) are wall systems designed for high energy efficiency. However, they are prone to defects from water damage. Because of the large number of lawsuits related to EIFS, insurers now often attach exclusions to the liability policies of anyone potentially working with the materials. This represents a broad group including EIFS installers, roofers, HVAC technicians, window and garage door installers, and plumbers. An EIFS exclusion becomes most important for subcontractors working on wood frame projects. The endorsements are widespread in both residential and commercial construction. Examine these endorsements carefully because their language may far exceed EIFS-related losses.

Mold Exclusion

Claims related to bodily injury and property damage caused by mold are on the rise. Construction projects hold a particularly high risk for these losses. Therefore, most insurers now attach mold exclusions to CGL policies. Targeted groups frequently tethered with these endorsements include roofers; plumbers; installers of windows, drywall, and siding; HVAC technicians; and anyone performing landscaping or foundation work. That covers most subcontractors on a project. Even separate policies for pollution liability mostly exclude mold-related claims.

How Do You Protect Against Construction Defect Exclusions?

Exclusionary endorsements are common and widespread. The best way to manage them is by finding when and where they exist.

1. Look for “Exclusions Added By Endorsement” on every subcontractor’s COI and start asking questions.
2. Request the actual endorsement to verify the language. Ensure that the exclusion does not affect the scope of work or limit coverage for the additional insured.
3. Include coverage limitations as part of the contract negotiation process. Subcontractors can request that endorsements be added or removed to active policies.  
4. Modify the contract to stop specific exclusionary endorsements. Ensure all subcontractors sign the revised version and update their coverage as necessary.

And finally, before hiring your next subcontractor, put myCOI to work. Managing insurance policies for construction shouldn’t be risky business. Our cloud-based platform digitally tracks COIs and sends automated alerts before non-compliance becomes an issue. Insurance experts back the platform to help with policy and endorsement reviews to keep you covered. Eliminate the worry of risk management by making myCOI part of your next project.

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