Overall growth of the U.S. construction industry has been robust in recent years. But when the construction industry sees an upturn, so do faulty workmanship claims.
When you enter into a construction contract, your customers assume the materials and services will be delivered and perform according to specifications. Even if you don’t explicitly write this in the contract, it’s implied. There is risk that you may need to repair or replace defective products or faulty work. When this happens, you’re often expected to pay out of your own pocket.
But in terms of property damage and bodily injury, how can you protect yourself from liability?
A commercial general liability (CGL) policy typically provides coverage for work or products that cause bodily injury or damage to property. CGL coverage provides important protections to any business owner for a variety of losses, but it’s also common to secure a a GCL policy within the construction industry. However, a CGL policy is not a guarantee of your work quality or reliability, so there are exclusions designed to preclude this type of risk.
Knowing what’s covered under a contractor’s CGL policy can help you safeguard your business and better plan for potential risks.
Defining CGL policy coverage
Think of a CGL policy as covering “resulting damages.” Coverage doesn’t typically apply to the cost incurred to repair or replace defective work. For example, a hotel contracts a painter to paint all of the walls in the hotel. The total cost of the job is $100,000. During the job, the painter is careless and spills paint all over the hotel’s new carpets, resulting in significant damages. The hotel is also dissatisfied with the painting job and feels that the painter did poor work.
The hotel claims they are owed $200,000 for damages. They want their money back for the painting work, plus the $100,000 it will cost to replace all of the affected carpets. In this case, the painter’s CGL policy may provide coverage for the carpets, since the damage resulted from the contractor’s work. However, the policy may exclude the faulty painting of the walls, since the policy doesn’t guarantee the quality of the work itself.
Understanding policy exclusions
CGL policies have numerous exclusions. Here are two of the most frequently encountered.
1. The “your work” exclusion — This means the policy will not cover damage resulting from alleged faulty workmanship. Why? It’s considered a business risk you assume when signing a contract with a client.
For example, let’s assume you replace faucets in an apartment building. Later it’s discovered that a plumbing line inside the wall is broken, causing the building to flood. You’re covered for the insured’s flooded apartment building. However, the “your work” exclusion would not include coverage for the plumbing work that caused the line to flood.
2. Property damage exclusion — This refers to damage that takes place while you (or your subcontractor) is in the process of performing work. For example, if you were working on a roof and accidentally damaged it with a scissor lift, the damage wouldn’t be covered because you were performing work on that part of the property (the roof).
This clause also excludes correcting any property damage that is caused by work that is improperly performed. For instance, you were installing flooring and discovered halfway through the project that you had installed the wrong wood. The cost to rip it up, start over and repair any damage to the subflooring is excluded by your CGL policy.
Finding the right protection
A CGL policy costs most small-business owners between $400 and $600 per year. However, the cost is typically higher for contractors because their work is performed on someone else’s property and it usually involves potentially dangerous equipment or supplies. Coverage limits and deductibles also affect cost.
Obtaining insurance coverage is an important part of protecting the financial viability of your contracting business. If you have questions regarding how faulty workmanship claims are handled or the extent of coverage under a CGL policy, reach out to your insurance professional. They can provide the answers you need.
