Endorsement #1 – The Sunset Clause
A general contractor completes a new home in 2008. He carried a $1,000,000 general liability policy at the time the house was built and has continued to renew his coverage ever since. In 2011, the contractor is sued for a construction defect on the 2008 home. He files a claim with his insurance carrier. The carrier denies coverage and refuses to provide any defense for the contractor. Why? The policy had a sunset clause.
A sunset clause limits the amount of time after a policy expires that a claim can be filed, usually two to five years. This endorsement is typically seen in policies written for construction related risks. Considering the fact that most construction defect losses arise years after a project is completed, this endorsement is dangerous for contractors.
Endorsement #2 - The Prior Work Exclusion
At face value, prior work exclusions do not always concern contactors. The rationale is, why should they buy coverage for prior work when they already had policies during the time that work was completed? To understand why this endorsement is dangerous, you must first understand coverage triggers. Most general liability policies for contractors are written on an Occurrence form, meaning that coverage is based upon when the loss occurs. Most often a loss is considered to have “occurred” when a project is completed, but not always. It depends on the type of loss and the coverage trigger wording in your general liability insurance policy.
Many occurrences happen years after a project is completed, especially construction defect losses. Because of this, a contractor with a Prior Work Exclusion may think he is covered, but most likely is not. According to one major carrier in California, this is the number one reason that claims are denied in their contractor’s general liability program.
Endorsements #3 – The CG 22 94 - Work Performed By Subcontractors
The CG 22 94 is one of the most complicated endorsements in contractors liability insurance. To understand this endorsement, you must first understand the standard “Your Work” exclusion in the ISO CG 00 01 policy. A standard general liability policy states that damage resulting from your work is covered, but damage to your work is excluded. For example, a general contractor builds a fence. The damage to the fountain is covered, but the cost to rebuild the fence is not.
The exclusion reads as follows:
As you can see, the exception to the exclusion is work performed on your behalf by a subcontractor. With this exception, work completed by a subcontractor is not considered “your work”. Consequently, if the same fence was built by the insured’s subcontractor, there may be coverage under the general contractor’s policy for both the fountain and the fence.
The CG 22 94 removes the exception to the exclusion.
So, as a result, if the general contractor’s policy has a CG 22 94 endorsement, he would have no coverage for the damage to either the fountain or the fence.
Endorsement #4 – The CG 21 39 - Contractual Liability Limitation
One of the most important considerations a contractor must make is the amount of liability he assumes in a contract and whether or not his insurance covers contractual liability. In most construction contracts, liability is transferred through an indemnification agreement. There are different types of indemnification agreements and laws regarding such agreements vary from state to state. Here’s how it typically works though:
- A general contractor is automatically liable for the work of his subcontractor.
- The GC transfers that liability back to the subcontractor through an indemnification agreement.
- As a result, the subcontractor is now obligated to indemnify the GC in the event of a loss, including the GC’s defense costs.
Now the question is: Will the subcontractor’s liability policy cover the subcontractor’s contractual obligation to indemnify the GC? The answer is maybe.
First, let’s look at the standard language regarding contractual liability in an ISO Occurrence Policy. The coverage for contractual liability is actually found in the exclusions section. See below:
As you can see, contractual liability is excluded unless the contract is an “insured contract”. To find out what is an insured contract, we must go to the Definitions section of the policy.
Under the definitions Section 9.f. an indemnification agreement would be considered an insured contract.
The CG 21 39 simply deletes sections 9.f. from the definitions of an “insured contract”. The result is that a subcontractor can now be on the hook to pay for the legal expenses and liability of the general contractor in the event of a loss. So, before you sign your life away on an indemnification agreement, check your insurance policy for a CG 21 39.
Endorsement #5 - The CG 21 49 - Total Pollution Exclusion
To understand the Total Pollution Exclusion, you must first know about the standard Pollution Exclusion that already exists in most general liability policies. Specifically, the standard ISO Commercial General Liability policy excludes bodily injury or property damage losses arising out of the release of pollutants. There are, however, several exceptions to this exclusion. Below is an example of the first page of the Pollution Exclusion:
Here’s a breakdown of the exceptions to the first half of the pollution exclusion:
1. Your Premises
- Building Heating Equipment - Coverage will still be provided for bodily injury resulting from the release of smoke or toxins caused by equipment used to heat your building.
- Owner as Additional Insured – Provides coverage for bodily injury and property damage resulting from the release of pollutants if the insured is a contractor working at his client’s premises. But, only if the client is named as an additional insured on the contractor’s policy.
- Hostile Fire – There is still coverage for bodily or property damage from smoke or fumes arising out of a hostile fire.
2. Away From Your Premises
- Mobile Equipment – Provides coverage for the discharge of chemicals from your mobile equipment such as fuel and motor oil.
- Operations Within Building – If a contractor brings materials into a building that release toxins or fumes that cause bodily injury or property damage, there is coverage as long as the damage or injury happened inside the building.
- Hostile Fire - There is still coverage for bodily or property damage from smoke or fumes arising out of a hostile fire.
The first half of the Pollution Exclusion deals with bodily injury and property damage that arises from the release of pollutants. The second half of the exclusion deals with the cleanup of such pollutants.
The second half of the Pollution Exclusion excludes all costs related to cleanup. There is, however, one key exception. It will cover cleanup for damages because of property damage, but not cleanup at the request of a government agency.
So, after reviewing the Pollution Exclusion, we find that there is actually a lot of coverage for pollution under a standard general liability policy. Look at all that yellow. That’s all coverage.
Now that you understand how the standard Pollution Exclusion works, the Total Pollution Exclusion is really simple. All those exceptions are deleted. It replaces the original Pollution Exclusion with the following:
So why is this important to you? Pollution losses can be very costly. This is one of the most overlooked types of coverage in contractors insurance. A major pollution loss could put you out of business if you don't have the right coverage.
Endorsement #6 – The Manifestation Provision
Although there is not a standard manifestation provision, this type of wording has been adopted by many insurance carriers as a way to restrict coverage for losses resulting from long term exposures like construction defects. The manifestation provision restricts coverage to occurrences that “first manifest” during the policy period. Therefore, an occurrence is deemed to have happened when the damage is first discovered.
Example of Standard Wording:
Example of Manifestation Wording:
So why is manifestation wording so bad for contractors? Here’s a scenario:
A general contractor builds a house in 2008 when he has a manifestation policy. He continues to renew his coverage for the next two years. In 2011 he lets his coverage lapse because he is unable to find work. Late in 2011 there is a claim resulting from a construction defect on the house he built in 2008. The contractor will have no coverage due to the fact that the damage was first discovered in 2011.
Some insurance professionals will argue that manifestation wording provides sufficient coverage for contractors as long as the policy doesn’t have a Prior Work Exclusion and it is renewed year after year. While there may be some validity to this argument, the fact remains that carriers are able to deny more claims with this wording than without it. That is why some carriers offer discounts of up to 40% to have this wording added to your policy.