Insurance policies often include endorsements that materially alter the scope of coverage, especially in residential and multi-use construction.
Very often insurance policies include endorsements that materially alter the scope of coverage, especially in residential and multi-use construction. When blindsided by an endorsement excluding coverage, all is not lost. These endorsements may be subject to attack due to ambiguity if terms are undefined or overly broad. If a clause appears ambiguous, Arizona courts will interpret it by looking to legislative goals, social policy, and the transaction as a whole. If an ambiguity remains after considering these interpretive guides. the courts will construe the clause against the insurer.
Although each insurer’s endorsement language will differ, you should keep your eye out for endorsements which alter coverage as follows:
Additional Insured Endorsement
Construction contracts frequently require contractors to add other parties (i.e., the owner or other contractors) as additional insureds on their liability policies. Generally speaking, the additional insured wants broad protection for any claim it might face with respect to the construction activity. In reality, their coverage may be much narrower than they expected.
The two key issues regarding an additional insured’s coverage are whether coverage applies to completed operations and whether there is coverage with respect to losses caused by the additional insured’s own negligence.
In 1993, the standard additional insured endorsements were modified to extend coverage to additional insureds only with respect to the contractor’s “ongoing” operations for the additional insured, thus attempting to eliminate completed operations coverage for the additional insured. Insurers have also drafted their own additional insured endorsements that not only attempt to remove completed operations coverage but also narrow the scope of coverage for claims that can be tied to the additional insured’s own negligence. Careful review of an additional insured endorsement is critical.
Known Loss Provisions
Construction detects often produce property damage that takes place over a period of time. For example, faulty installation of roofing, windows or flashing may cause water leakage leading to deterioration of wood and other materials. It is possible, therefore, for a contractor to be aware of defects that are likely to give rise to claims well before the claims actually surface.
In Montrose Chemical Corp. v. Admiral Insurance Co., the California Supreme Court ruled that prior to the determination of an insured’s actual liability for the injury or damage, the loss is neither certain nor fully “known.” Consequently, knowledge of a potential claim at the time the policy becomes effective does not negate coverage (at least in that jurisdiction) as long as there is uncertainty regarding the insured’s actual degree of liability.
To counter the impact of the Montrose decision, many insurers developed “known injury or damage” endorsements that specifically exclude coverage for losses or potential losses of which the insured was aware prior to the policy period.
Exterior Insulation and Finish Systems (EIFS) Exclusions
Exterior insulation and finish systems (EIFS) are multilayered exterior wall systems that are designed to provide high energy efficiency. EIFS have been at the core of a significant amount of construction defect litigation. Typically, these claims allege faulty installation or some other product defect that allowed water to penetrate the walls, where it became trapped, resulting in mold or wood and drywall damage.
Mold Exclusions
In recent years, the construction and insurance industries have seen a dramatic increase in the number of claims alleging bodily injury and property damage caused by mold. Most insurers have attached mold exclusions to a broad cross section of contractors’ liability policies. Some insurers attach mold exclusions to all contractors’ policies, regardless of the risk assessment. The standard ISO “fungi or bacteria exclusion” endorsement is very broad, removing coverage for all injury or damage that would not have occurred “but for” exposure to any fungi (e.g., mold) or bacteria, as well as any costs incurred in cleaning up the fungi or bacteria.
Earth Movement Exclusion
Contractors whose work involves the foundation of a building, or any form of moving, grading, or compaction of land or dirt on the construction site may see an “earth movement” or “subsidence” exclusion on their general and umbrella liability policies. (Where the term “subsidence” is used, it is typically defined to include virtually any form of earth movement, including landslide, mudflow, collapse, or movement of fill, earthquake, and virtually any form of earth rising, sinking, setting, eroding, tilting, or settling.)
Residential Construction Exclusion
As discussed previously, construction defect litigation profoundly impacted contractors’ ability to secure affordable coverage. This is especially true for the residential construction industry. Some insurers have withdrawn from residential construction markets altogether, or in certain problem regions. Other insurers have included residential construction exclusions. The scope of the exclusions can vary significantly, but in one form or another set out to exclude coverage for certain types of projects, including tract homes, condominiums, apartments, townhomes, and/or projects in excess of 25 units in a 12-month period. The inclusion of residential construction exclusion on a subcontractor’s liability policy would also eliminate any coverage the contractor may have had as an additional insured on that policy.
Subcontractor Exclusion Endorsements
The CGL policy’s “Damage to Your Work” exclusion, frequently referred to as the “workmanship’ exclusion, eliminates coverage for damage to the insured contractor’s completed work that arises out of the contractor’s work. This prevents the CGL policy from acting as a warranty on the insured’s work. Although the definition of “your work” includes work performed by subcontractors, by exception, the exclusion does not apply to damage to a subcontractors’ work nor to damage caused by a subcontractor’s work.
However, in 2001, ISO introduced optional endorsements that remove the coverage that the subcontractor exception left intact. One of these endorsements eliminates all coverage for damage to “your work” that is, or is caused by, a subcontractors’ work.
Contractors’ Limitation Endorsements
With respect to construction defect exposures, most umbrella insurers have chosen to combine various industry-specific exclusions into one endorsement commonly referred to as a contractor’s limitation endorsement. In recent years, many umbrella insurers have added a number of construction defect-related exclusions to their contractor’s limitation endorsements. For the most part, these exclusions mirror their CGL counterparts. Mold, EIFS, subsidence, and residential construction are all potential exclusions on the contractor’s limitation endorsement.
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.