- CGL Policy Does Not Cover General Contractor's Risk of Negligent Work by its Subcontractors
- May 28, 2009
- Law Firm: Frost Brown Todd LLC - Office
The 7th Circuit Court of Appeals recently issued its opinion in Westfield Insurance Co. v. Sheehan Construction Co., Inc. and held that the "your work" exclusion in the general contractor's ("Sheehan") Commercial General Liability Policy ("CGL") included the work of Sheehan's subcontractors and consequently barred coverage for claims arising out of the remediation of that defective work. In Westfield, numerous homeowners discovered moisture infiltration problems in their homes. They filed suit against Sheehan who then brought third-party claims against its subcontractors. Ultimately, the defective work was traced to one of the subcontractors. Sheehan settled the claims for $2.8 million and sought indemnification from its CGL carrier ("Westfield").
Sheehan advanced two arguments in support of coverage. First, Sheehan relied upon the 1986 changes to the standard form CGL policy which provided that the "your work" exclusion "[does] not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." These changes were inapplicable here however because Sheehan did not purchase a policy on that form; rather Sheehan's policy expressly provided that "your work" includes: "[w]ork or operations performed by you or on your behalf." (Emphasis added). As a result, the 1986 changes to the standard CGL form policy did not save Sheehan. Second, Sheehan argued that a recent decision from the Indiana Court of Appeals in T.R. Bulger, Inc. v. Indiana Insurance Co., 901 N.E.2d 1110 (2009) supported its coverage position. However, the contractor was entitled to recovery in Bulger because the insured was a subcontractor whose work had been damaged by the negligence of another subcontractor over whom it had no control. Such was not the case in Westfield where Sheehan was the general contractor and chose (and had control over) the subcontractors performing work on the project.
As the general contractor, the entire project was Sheehan's "work" for purposes of its CGL coverage. Because Sheehan chose to purchase coverage which did not include the 1986 changes, the fact that the defective work was performed by one of its subcontractors did not alter the coverage analysis. In addition to the plain language of the policy itself, the court noted the potential moral hazard which could exist if the CGL policy provided indemnification to Sheehan for the negligent work of its subcontractors: "[T]he prospect of indemnity would lead the general contractor to save money by hiring substandard subcontractors, then turning to the insurer to fix the customers' homes." Clearly, general contractors in Indiana seeking coverage under a CGL for the negligent work of their subcontractors must be mindful of this decision and wary of the scope of the "your work" exclusion in their policy.