Eric Eisenberg, Robert Ferguson Jr. and Alexandra Gordon Briggs | Hinckley Allen
You, a general contractor, receive a notice of claim on a building you finished years ago. The Owners allege: (1) damage to the underground pipes due to the settlement of the foundation/backfill; and (2) water damage to interior spaces due to defects in the roof systems/building envelope. Subcontractors performed the foundations, backfill, carpentry, and roofing work. Are you, as the general contractor, covered under your Commercial General Liability (CGL) policy?
In most (but not all) states you should be. While general contractors are not generally covered for their own defective work, over the past 10+ years the law has evolved so that general contractors are, in the great majority of states, covered for damage caused by non-intentional defective work performed by their subcontractors. As grounds, these state and federal appellate courts focus on the language and history of the Insurance Services Organization’s (“ISO”) standard form CGL policy and the difficulty of controlling the work of subcontractors
In contrast, courts in a small minority of states have held, for various reasons, that defective work can never be covered under CGL policies. While Massachusetts’ lower courts have come out both ways, Massachusetts’ highest court, the Supreme Judicial Court or SJC, has not yet decided this issue.
The question of whether there can be coverage for general contractors for damage caused by defective subcontractor work, and in what circumstances, recently came before the U.S. First Circuit Court of Appeals in Admiral Ins. Co., et al. v. Tocci Building Corp., et. al. (“Tocci”). That case involved allegations similar to the examples above, except that the owner terminated Tocci before the damage occurred. As a result, Tocci had not completed its work as the construction manager. While the First Circuit’s ruling is very narrow and is not binding upon the SJC, some lower Massachusetts courts may choose to follow it until the SJC weighs in.
The First Circuit chose not to resolve (or, as it said, to “side step”) the principal issues presented on appeal. It first found that for purposes of policy exclusions, a general contractor’s “work” is the entire project. The Tocci court went on to resolve the case by applying a single policy exclusion, and then only because Tocci had abandoned, or otherwise failed to complete the project. Both of these determinations are subject to significant criticism based upon the language of the ISO standard form CGL policy and well-reasoned decisions in other states. Also, the actual holding of Tocci was dependent upon the atypical circumstance of the general contractor having been terminated prior to the damage to the project occurring. The First Circuit even noted that, if Tocci had not been terminated and had actually completed the work, a policy exception might have restored coverage. Also, in deference to the SJC, the First Circuit expressly took “no view” with respect to the potential applicability of the so-called “subcontractor exception” to the “your work exclusion,” which exception is often the basis for courts finding coverage in cases involving CGL policies and allegedly defective subcontractor work.
The First Circuit’s decision is likely to be limited to the atypical facts of the case (i.e., the construction manager having been terminated prior to the occurrence of damage stemming from defective work). We think it likely that when given the opportunity, the SJC will follow the great majority of appellate courts that have decided these issues and hold that CGL policies afford a general contractor coverage for damage caused by defective subcontractor work. But until that time, coverage in the Commonwealth for general contractors for defective subcontractor work remains an open question.
So where does this leave general contractors? General contractors should not assume that Tocci means that there is never CGL coverage in cases involving subcontractor defective work. If you receive a claim of post-completion damage due to allegedly defective subcontractor work, you should consult with an experienced insurance advisor or counsel. Separate and apart from CGL coverage, if you experience damage to contract work prior to Final Completion/project turnover, whether self-performed or performed by subcontractors, you should investigate/consider whether you possess coverage under any Builder’s Risk insurance policies applicable to the project.
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.