• New Coverage for Faulty Workmanship - "Gap" Insurance Policies
  • July 1, 2003 | Author: Harold D. "Chip" Holmes
  • Law Firm: Parker Poe Adams & Bernstein LLP - Charlotte Office
  • For decades now, the insurance industry has offered Commercial General Liability (CGL) coverage designed to protect businesses from claims for bodily injury, property damage and advertising injury resulting from business operations, products and services. The exclusions in the typical CGL policy, however, could often limit coverage beyond what the policyholder expected. For example, as outlined in the May 2001 issue of Coverage Concerns, many claims for faulty workmanship are not covered.1

    Consider this hypothetical. A residential roofing subcontractor builds a defective roof that collapses, injuring the homeowner and damaging the contents of the home. The subcontractor's CGL policy would likely cover the personal injury claim of the homeowner as well as the property damage to the home's contents. However, the costs of repairing the roof itself would not be covered because of "work product" exclusions present in most CGL policies. Indeed, North Carolina courts have recognized that liability insurance policies are not "performance bonds," and that the quality of an insured's work is a "business risk" solely within the insured's control, for which the liability insurance carrier should not be called upon to indemnify.2

    In an effort to fill some of the voids in coverage left by the CGL work product exclusions, some liability insurance carriers have begun offering CGL "Gap" Policies to customers concerned about property damage liability for allegedly faulty products or negligent services. The Gap policy affords this coverage in two ways. First, the definition of a covered "occurrence" is expanded to include property damage resulting from "mistakes" made during the construction or assembly process. (The typical CGL policy more narrowly defines a covered "occurrence" as an accident or harmful exposure.) Then, the CGL policy exclusionary language regarding property damage arising from the insured's work or product is converted to the indemnifying language of the Gap policy. In a rudimentary sense, the idea is that the Gap Policy giveth where the CGL work product exclusions taketh away.

    While the concept behind CGL "Gap" coverage is relatively simple, there are potential pitfalls to consider. As a threshold matter, coverage is only triggered if "property damage", as that term is defined, has occurred as a result of the insured's work operations or product. "Property Damage" is defined much as it is in the typical CGL Policy, as physical damage or loss of use of tangible property. Consider once again the foregoing hypothetical. If the insured's foreman notices the problem with the roof and corrects it before it collapses, at a significant cost of additional labor and materials, those costs might not be covered, despite the fact that they resulted from a "mistake" during work operations (thus satisfying the definition of a covered "occurrence"). Perhaps more importantly, the Gap coverage typically applies only to "completed operations", another problem for the roofing contractor in this hypothetical.

    As a general proposition, CGL Gap coverage can be quite valuable in situations where an insured faces liability for property damage resulting from mistakes in the construction process or product assembly process. However, the coverage concerns that can arise from the seemingly simple concept of converting liability exclusions to insuring language warrant a close look before purchasing or recommending Gap coverage. For brokers, agents and consumers, the assumption that a Gap Policy will cover everything that a CGL policy does not cover might lead to unwanted surprises when a claim is made.

    1 Claims for Faulty Workmanship - Are They Covered? Probably Not! Coverage Concerns (May 2001).

    2 See, Western World Ins. Co. vs. Carrington, 90 N.C. App. 520, 369 S.E.2d 128 (1988); Barbee v. Hartford Mutual Insurance Co., 330 N.C. 100, 408 S.E.2d 840 (1991); Vick vs. Pennsylvania National Mutual Casualty Insurance Company, 52 F.Supp. 2d 569 (E.D.N.C.1999).