Property damage resulting from defective construction is unquestionably excluded in the commercial general liability policy. But is bodily injury caused by defective construction excluded? Is injury or damage caused by the growth and proliferation of mold arising out of defective construction covered because it is not excluded by the unendorsed CGL?

Two days ago this three-article series based on a recent Ohio court case (Costner v. Maronda Homes) was begun, its sole purpose being the analysis of commercial general liability coverage for injury or damage caused by defective construction or mold. The first article documented the four commercial general liability coverage triggers and detailed the definition of an "occurrence" as these concepts apply to defective construction and mold damage.

However, the final coverage trigger question was left unanswered for both perils. Open for discussion and debate among readers has been: is coverage for injury or damage caused by defective construction or mold limited due to a specific exclusion, excluded action or an excluded cause? Although three of the four coverage triggers have been hypothetically satisfied, all four must be satiated before coverage exists. If the fourth trigger question is answered "yes," no coverage is available.

Commercial general liability coverage for injury or damage arising out of defective construction will be the focus of this article. The question of coverage for injury or damage caused by mold will be saved for the third issue.

Exclusions Applicable to Defective Construction

Poor and shoddy workmanship does not, of itself, qualify as an "occurrence." An incident exploiting the defective work must occur for there to be any chance of coverage. Two standard exclusions in ISO's commercial general liability policy leave little doubt as to the insurance industry's intent to exclude coverage for property damage claims resulting from defective construction, even if an incident occurs:
• Damage to Impaired Property or Property not Physically Impaired; and
• Damage to "Your Work."

Damage to Impaired Property or Property not Physically Impaired: As the name suggests this CGL exclusion removes any coverage for property damage arising out of a defective, deficient, inadequate or dangerous condition of the insured's work ("Your work"). Further, no coverage is provided for "impaired property" arising out of the same listed conditions.

"Impaired property" is property that has not been damaged, but which cannot be used or is made less useful because of the insured's poor workmanship. This definition (and thus the exclusion) applies when the work is known, or only thought, to be defective, deficient, inadequate or dangerous. The definition goes on to state that property is considered impaired if it can be fixed or repaired by the removal and replacement of the insured's work.

Failing to attach the structure to the foundation, improper application of the waterproofing and installation of the wrong size windows individually qualify as defective, deficient and inadequate conditions - even before any damage occurs. These conditions in the incident case lead to damage and to the unhealthy conditions within the house.

Even undamaged, the house would still qualify as "impaired property" because it is useless until it can be repaired; further it is now subject to diminished value (made less useful) - both resulting from the contractor's work.

Not all property damage claims are precluded by this exclusion. Exception wording within this exclusion extends property damage coverage to completed operations claims resulting from defective construction: "This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to 'your product' or 'your work' after it has been put to its intended use." A second exclusion is necessary to assure that the contractor does not get paid for ANY property damage to his work caused by the poor quality work itself once it has been put to its intended use (a "completed operation") - Damage to Your Work.

Damage to Your Work: Property damage to the contractor's work product (the structure) arising from or directly attributable to the contractor's work (operations) is excluded. The breadth of the "Your Work" definition/exclusion is often overstated and leads to its misapplication, but the full range of such misuse is outside the scope of this series. In essence, insurance is not intended to be a warranty, this exclusion responds to keep the policy from being used like one.

Installing the wrong size windows can be a hypothetical example. The windows leak causing them to warp - they warp because they leak; they leak because they are the wrong size. Notice the circle of events? The windows are damaged due to the poor workmanship of the contractor. Had the contractor just done adequate work, the windows would not have leaked and would not have been damaged. There is an unbroken chain of events from the poor workmanship to the damage with no extraordinary or external incident required. The cost to replace the windows is not covered by the policy because of the Damage to Your Work exclusion.

Growth of mold in the Maronda Homes case can likewise be attributed to the contractor's work, or lack thereof. Individually, the various defective conditions may not have resulted in the development and ultimate growth of the toxic mold. But collectively, all misdeeds combined to allow the growth of the mold resulting in damage to the property. Would the cost to tear out and replace the damage be covered by the CGL? No, because the damage to the property (defined in the "Your Work" exclusion) was caused by the original work; there's an unbroken chain of events that began with poor construction habits and ended in damage, with no intervening incidents. The damage to the work arose from the work itself, thus, no coverage is provided by the CGL.

An exception to this exclusion makes coverage available if the work is done by a subcontractor. This exception exists because the carrier has a theoretical means of subrogation by which they can recover any payment made to fix or repair the damage caused by the poor workmanship.

Insurance carriers are actively undertaking to remove this exception by attachment of the CG 22 94 (Exclusion - Damage to Work by Subcontractors). The growth of this exclusion's use is directly related to the volatility of the subcontractor market, especially in residential construction. Subcontractors come in and go out of business so quickly, insurers are concerned that there will be no one against whom they can subrogate in cases of poor workmanship, thus they remove the exception. The entire structure becomes the general contractor's work - effectively excluding coverage for all property damage resulting from any defective construction.

The effect of these two standard exclusions and the exclusionary endorsement - no property damage coverage exists for claims arising from defective construction. But notice, these exclusions only apply to property damage, bodily injury is not excluded.

Defective Construction and Bodily Injury

Bodily injury resulting from a contractor's poor work habits is not excluded by any exclusionary wording explored thus far. If there is no exclusion within the commercial general liability policy or added by endorsement, coverage exists. Bodily injury to a third party resulting from defective construction techniques is covered by the CGL.

For example, a contractor incorrectly installs a large chandelier, it falls landing on the homeowner. Exclusionary wording, as detailed above, obviously precludes coverage for the cost to repair or replace the chandelier, but the cost to cover any expenses for the injury suffered by the homeowner is not excluded and therefore covered.

Defective construction practices in the Ohio case lead to toxic mold growth; the mold caused breathing problems with the potential for death (thus the term "toxic"), and made the house unlivable. Just like the above example, bodily injury would be covered by the commercial general liability policy, provided there were no contravening endorsements, even though the cost to repair or replace the mold-damaged property is excluded.

There are only a few endorsements that remove coverage for bodily injury that relate to construction and possibly defective construction.

Conclusion

Property damage resulting from defective construction is excluded, but bodily injury is covered. Traditional insurance is not intended to cover an operation's business risk, and choosing to permit or practice defective construction methods is a business risk. The unintended bodily injury resulting from such choices is covered by insurance.

Still the question of coverage for injury or damage caused by mold itself remains to be answered. The next installment in this series will apply the fourth coverage trigger to mold claims.