Eric M. Clarkson | Saxe Doernberger & Vita
The risks and losses associated with construction operations and property development push many insurance concepts to their limits. As a result, the construction industry has long been at the forefront of many complex insurance coverage issues and both drives but also depends on market standards to assess and adequately address risks. SDV closely monitors insurance markets for changes that impact contractors and developers, particularly through our Subcontractor Insurance Review Program (“SIRP”) services.[1] This also allows SDV to spot emerging issues in the way markets address insurance concepts critical to the construction industry.
One area the markets have been moving away from policyholder expectations is Commercial General Liability (“CGL”) coverage for continuing or progressive injury or damage. CGL policies generally cover defense and indemnity for third-party claims because of “bodily injury” or “property damage.” The primary CGL requirements are that such injury or damage must be caused by an “occurrence” (i.e., an accident) and that the injury or damage must occur during the policy period. Critically, CGL policies do not require the “occurrence” to take place during the policy period for coverage to be triggered. This makes sense as there are many circumstances where injury or damage might not manifest until after the policy period in which the “occurrence” or accident transpired.
For example, imagine a plumbing subcontractor working on a building fails to secure part of its work properly, leaving it susceptible to leaks. In certain states, this faulty work might be considered an “occurrence” or accident, but critically, not injury or damage. Assume the plumbing contractor finishes its work, and sometime later—after its insurance has renewed—a leak develops and damages the building or causes a slip and fall. Here is the timeline for the two policies:
The damage to the building and the bodily injury should be covered by the second policy because, as CGL coverage requires, the injury or damage occurred during that policy period. The expired policy will not cover it because there was no property damage or bodily injury during that policy period. This is the expected result for consecutive CGL policies.
However, given the possibility that continuing injury or damage might span multiple policy periods, CGL markets have trended toward siloing off coverage to the first policy where injury or damage took place. The industry standard for addressing this issue involves a two-part solution. First, the ISO standard CGL coverage form deems any covered injury or damage that occurs during the policy period to include “any continuation, change or resumption of that [injury or damage] after the end of the policy period.” In the case of injury or damage that begins during one policy period that then continues or progresses after that policy period, this means it should still be covered by that first policy. Second, many CGL policies now contain “continuing or progressive loss exclusions” that bar coverage for injury or damage that began to occur before the policy period.[2] This limitation, coupled with the extension of the first policy on the risk, pushes all coverage for continuing or progressive losses back to the first policy covering them without leaving a gap.
Consider our plumbing contractor again. If the leaks went undetected and caused damage during several policy periods, that should be covered under the policy period where the damage first commenced. Here is the illustration:
The combination of these two CGL mechanisms has become a generally understood and acceptable solution to ensuring that the policy on the risk at the time injury or damage first occurs covers the continuation of progressive losses.
Some markets accomplish this sequester effectively without creating any coverage gaps. However, we frequently see continuing or progressive loss forms emerge that get this all wrong because of a misunderstanding about how CGL coverage works. Again, standard CGL coverage does not require the “occurrence” or accident that causes injury or damage to take place during the policy period—only the injury or damage itself. However, there are some forms that exclude coverage even if the “occurrence” took place before the policy period, regardless of when the injury or damage first commences. This limitation makes little sense and threatens coverage for latent defects.
If our plumbing subcontractor had such an exclusion on its insurance policies, both the expired and the new policy might deny coverage for the loss. The expired policy in place when the work was conducted would not cover the loss because there was no injury or damage during that policy period. The new policy might not apply either because the “occurrence” took place before the policy period. The result being loss that clearly should be covered by one of a series of consecutive CGL policies, but none of which will respond. Here is our illustration with an onerous continuing or progressive loss exclusion in place:
There are numerous examples of construction-related loss involving an “occurrence” and resulting injury or damage that takes place much later. For this reason, the emergence of these uninformed continuous or progressive loss exclusions represents a serious threat to risk transfer for contractors.
These continuing or progressive loss forms clearly do not provide coverage in line with policyholder expectations when purchasing consecutive GCL policies. So, how have these terms made their way into the CGL markets undetected? When pressed with examples like our plumbing subcontractor above, we often receive little response other than that claims before the policy period are not supposed to be covered by CGL. However, CGL is not supposed to be claims-made coverage. There also seems to be two common misconceptions in the market. First, the “occurrence” is the date that “bodily injury” or “property damage” happens. As discussed above, this is certainly not always the case—the “occurrence” is the cause and may take place well before injury or damage commences. Second, the “occurrence” or cause and the resulting injury or damage are always contemporaneous. Again, as we saw with our plumbing subcontractor and myriad other examples of latent defects in construction, this assumption is also short-sighted. We hope that our illustration helps dispel some of these misconceptions so the market can correct course on coverage for latent defects.
Without a thorough understanding of complex issues such as this one, it is easy for emerging terms in the market to go unnoticed. Our goal in educating industry members on market changes is to prevent inadvertent impacts on claims. We strongly encourage commercial policyholders to monitor the markets and stay ahead of issues that are critical to the risks they face every day.
Stay tuned to our series of publications on emerging issues to keep up to date on developments in the construction insurance markets.
[1] This is the first in a series of publications on emerging problems SDV is seeing in construction insurance markets. Stay tuned for additional resources on non-standard modifications of ISO business risk exclusions, “insured contract” coverage, and more! In various forms under SDV’s SIRP services, our Attorneys review and analyze thousands of contractors’ and subcontractors’ insurance policies a year to ensure intended risk transfer across hundreds of projects.
[2] Some carriers use Non-Cumulation clauses to silo coverage for continuing or progressive injury or damage into one policy period. Non-Cumulation addresses the issue by applying only one policy’s limits if multiple policies in a continuous series are triggered.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.