TWENTY FIFTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE SEPTEMBER 17th - 19th, 2014

Transcription

1 TWENTY FIFTH ANNUAL NORTHEAST SURETY AND FIDELITY CLAIMS CONFERENCE SEPTEMBER 17th - 19th, 2014 THE CURRENT STATUS OF COMMERCIAL GENERAL LIABILITY INSURANCE COVERAGE FOR FAULTY WORKMANSHIP PRESENTED BY: GERARD P. SUNDERLAND MARC A. CAMPSEN Wright, Constable & Skeen, LLP 100 North Charles Street, Suite 1600 Baltimore, MD 21201

2 I. INTRODUCTION The standard form Commercial General Liability Policy ( CGL Policy ) is widely used throughout the insurance industry to protect against various delineated business risks. Over the last half century, the CGL Policy has undergone numerous revisions, which altered the contours of coverage offered to an insured. This article, essentially, deals with two narrow coverage issues: (i) faulty workmanship; and (ii) property damage resulting from faulty workmanship. Briefly, the CGL Policy provides no coverage for mere faulty workmanship. By contrast, the CGL Policy provides an initial grant of coverage for unintended and unexpected damage to the insured s nondefective work and third-party property resulting from faulty workmanship in either ongoing or completed projects. Notably, this initial grant of coverage extends to property damage resulting from faulty workmanship performed by either the insured/contractor or a subcontractor. The CGL Policy s initial grant of coverage for such property damage is ultimately qualified by certain exclusions. Namely, the Your work exclusion effectively eliminates coverage for damage to the insured s ongoing or completed work operations caused by faulty workmanship performed by either the insured/contractor or a subcontractor. Notwithstanding this partial exclusion, under the most recent iteration of the CGL Policy, the Your work exclusion includes an exception reinstating the initial coverage for damage to the insured s work resulting from a subcontractor s faulty workmanship the subcontractor exception. Thus, the current majority trend throughout federal and state courts recognizes that although a CGL Policy initially provides a broad scope of coverage for property damage resulting from faulty workmanship, the initial coverage is significantly qualified by certain exclusions. Accordingly, this paper discusses both the initial grant of coverage under the CGL Policy and relevant exclusions and exceptions affecting the initial grant of coverage. Ultimately, the goal of this paper is to provide foundational knowledge of specific coverage aspects of the CGL Policy in order to assist the surety in evaluating its rights and liabilities in certain situations on bonded projects including, but not limited to: (i) the overlapping and differing coverage scopes between a performance bond and the CGL Policy particularly where the same company issues a performance bond and CGL Policy for the principal; (ii) the surety s liability on a performance bond if the CGL Policy insurer satisfies a property damage claim arising from faulty workmanship performed by the bond principal; and (iii) the surety s subrogation rights against the CGL Policy insurer if the surety rectifies property damage covered under the CGL Policy on a bond principal s behalf. II. THE CGL POLICY A. The Purpose Of The CGL Policy The purpose of a CGL Policy is to protect an insured against defined losses arising out of its business operations. 1 It is well recognized the CGL Policy begins with a broad grant of 1 U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 877 (Fla. 2007). { v. ( )}

3 coverage followed by a series of exclusions (and exceptions to the exclusions) that define the contours of coverage. 2 The insurance industry began drafting a standard form CGL Policy as early as The CGL Policy resulted from a voluntary, industry wide effort to address the misunderstandings, coverage disputes, and litigation resulting from the unique language employed by each liability insurer in their respective CGL policies. 4 The original 1940 standard form CGL Policy, however, has undergone numerous revisions in the intervening decades. 5 Currently, the Insurance Services Office, Inc. ( ISO ) promulgates the CGL Policy. 6 The most recent substantive revision to the CGL Policy was issued in Today, the post-1986 CGL Policy is widely used throughout the insurance industry. 8 The most recent iteration of the post-1986 CGL Policy was issued in 2006 ( 2006 CGL Policy ). 9 B. Relevant Terms In The 2006 CGL Policy Relevant to the instant discussion, the 2006 CGL Policy provides: 10 SECTION I COVERAGES COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY 1. Insuring Agreement a. We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages. However, we will have no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which this insurance does not apply. We may, at our discretion, investigate any occurrence and settle any claim or suit that may result. ******** 2 Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 67 A.3d 961, 974 (Conn. 2013). 3 J.S.U.B., Inc., 979 So. 2d at Id. at Id. at ISO is an insurance industry organization which promulgates various standard insurance policies utilized by insurers nationwide. See J.S.U.B., Inc., 979 So. 2d at 880; see also Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772 (1993) ( Insurance Services Office, Inc. (ISO), an association of approximately 1,400 domestic property and casualty insurers..., is the almost exclusive source of support services in this country for CGL insurance. ISO develops standard policy forms and files or lodges them with each State s insurance regulators; most CGL insurance written in the United States is written on these forms. ) (citations omitted). 7 French v. Assurance Co. of Am., 448 F.3d 693, 697 (4th Cir. 2006); J.S.U.B., Inc., 979 So. 2d at 879.The cases discussed in this paper deal with post-1986 standard form CGL policies. 8 Id ISO CGL form CG ISO CGL form CG { v. ( )} 2

4 SECTION V DEFINITIONS 3. Bodily injury means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time. 13. Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. 17. Property damage means: a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. Notably, and germane to the discussion infra, the definition of occurrence in the CGL Policy relies on the term accident. The CGL Policy, however, does not define the term accident. Fortunately, both federal and state courts throughout the country consistently define the term accident in the CGL Policy context. Generally, in its simplest terms, an accident is defined as an event that is unintended or unexpected from the perspective of the insured. 11 Conversely, if the event is reasonably expected or intended (i.e. intentional tort), an action taken by a contractor cannot be an accident. 12 Thus, whether an accident occurred in a CGL Policy context turns on the foreseeability of the event. 13 Importantly, courts recognize that an accident can arise from negligent conduct because the resulting harm was unexpected, even though the underlying action taken by a contractor was deliberate. 14 The Tenth Circuit elaborated that a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly. 15 The Supreme Court of Florida explains the logic by way of example: 16 A shingle falling and injuring a person is a natural consequence of an improperly installed shingle just as water damage is a natural consequence of an improperly installed window. If we assume that either the shingle or the window installation will be completed negligently, it is foreseeable that damages will result. If, 11 Greystone Const., Inc. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272, 1278 (10th Cir. 2011)( an accident is an unanticipated or unusual result flowing from a commonplace cause ); Capstone Bldg. Corp., 67 A.3d at 975 ( [a]n accident is an event that is unintended from the perspective of the insured ); K & L Homes, Inc. v. Am. Family Mut. Ins. Co., 829 N.W.2d 724, 729 (N.D. 2013)(an accident is a happening by chance, unexpectedly taking place, not according to the usual course of things ); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 8 (Tex. 2007) ( An accident is generally understood to be a fortuitous, unexpected, and unintended event. ). 12 See e.g., Greystone Const., Inc., 661 F.3d at ( by definition, only damage caused by purposeful neglect or knowingly poor workmanship is foreseeable ); Lamar Homes, Inc., 242 S.W.3d at Greystone Const., Inc., 661 F.3d at French, 448 F.3d at Greystone Const., Inc., 661 F.3d at 1283 (citation omitted). 16 J.S.U.B., Inc., 979 So. 2d at { v. ( )} 3

5 however, we assume that the installation of both the shingle and the window will be completed properly, then neither the falling shingle nor the water penetration is foreseeable and both events are accidents. Assuming that the windows would be installed properly, [the contractor] could not have foreseen the water penetration. On this point, the Fourth Circuit further opined the test to determine foreseeabilty is subjective (i.e., from the insured s perspective) because: 17 [i]f we were to adopt an objective standard and hold that the term accident as used in liability insurance policies excludes coverage for damage that should have been foreseen or expected by the insured, such insurance policies would be rendered all but meaningless. (emphasis added). Courts, therefore, reject an objective test because: 18 Under such an interpretation, the policy would provide no coverage for negligent acts resulting in objectively foreseeable or expectable damage. Only acts of negligence resulting in objectively unforeseeable or unexpectable damage would be covered. Of course, under basic principles of tort law, the insured is unlikely to be held liable for unforeseeable or unexpectable damages resulting from his negligence. Thus, interpreting accident as encompassing only negligent acts resulting in unforeseeable and unexpectable damages would leave the insured covered against only those damages for which he or she is not likely to be held liable. We decline to adopt such a restrictive construction of the term accident. In other words, if a contractor reasonably believes the contracted for work was performed properly, damages resulting from negligent workmanship are unintended and unexpected under a subjective foreseeability test and constitute an accident. 19 Accordingly, a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured s actions, that is, was highly probable whether the insured was negligent or not French, 448 F.3d at 698 (citing Sheets v. Brethren Mut. Ins. Co., 679 A.2d 540, 549 (Md. 1996)); Greystone Const., Inc., 661 F.3d at ( In assessing whether damage caused by poor workmanship was foreseeable, we ask whether damages would have been foreseeable if the builder and his subcontractors had completed the work properly. ). 18 Sheets, 679 A.2d at 549 (emphasis in original). 19 Capstone Bldg. Corp., 67 A.3d at 975 ( because negligent work is unintentional from the point of view of the insured, we find that it may constitute the basis for an accident or occurrence under the plain terms of the commercial general liability policy ). 20 Lamar Homes, Inc., 242 S.W.3d at 9. { v. ( )} 4

6 III. COVERAGE UNDER THE CGL POLICY A. Mere Faulty Workmanship Is Not Covered Under A CGL Policy It appears universally recognized that the costs associated solely with repair and replacement of faulty workmanship or defective component parts without respect to property damage beyond the faulty workmanship are not considered property damage under the CGL Policy. 21 This results because the obligation to repair defective work [or defective component parts] is neither unexpected nor unforeseen and, therefore, is not physical injury [to property] within the meaning of the policy s terms necessary to trigger coverage. 22 Indeed, courts recognize property damage as that term is used in the standard CGL policy, necessarily must refer to property that is nondefective, and to damage beyond mere faulty workmanship. 23 The fact that such faulty workmanship may reduce the overall value of a construction project is nonetheless still insufficient to trigger coverage under the CGL Policy because diminished value does not equate to property damage. 24 B. Damages to Non-Defective Work Of The Insured And Third-Party Property Is Covered Under The CGL Policy In recent years, federal and state courts throughout the country have concluded the CGL Policy provides an initial grant of coverage, without regard to applicable exclusions, for certain property damage (or loss of use ) resulting from faulty workmanship other than the faulty workmanship itself, as previously discussed. 25 Courts, however, were initially split as to whether property damage in the CGL Policy context was limited only to property owned by the third parties, to which there was never a dispute, or also included non-defective work of the insured. Over the last several years, a definitive majority trend emerged taking the position that property damage includes (i) non-defective work product of the insured; (ii) non-defective property of the owner not otherwise within the scope of the insured s work; and (iii) property owned by third parties. 26 The rationale for declining to impose a distinction between non-defective work of the insured and third-party property results because the CGL Policy does not define an 21 Owners Ins. Co. v. Jim Carr Homebuilder, LLC, CA , 2014 WL , at *5 (Ala. Mar. 28, 2014) ( the cost of repairing or replacing faulty workmanship is not the intended object of a CGL policy issued to a builder or contractor ); Taylor Morrison Servs., Inc. v. HDI-Gerling Am. Ins. Co., 746 S.E.2d 587, 591 (Ga. 2013) (no CGL coverage for the repair or correction of the faulty workmanship of the insured ); Capstone Bldg. Corp., 67 A.3d at 980 ( defective work, without more, is not property damage within the meaning of the policy ); Greystone Const., Inc., 661 F.3d at 1281(noting under Colorado law a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence ); J.S.U.B., Inc., 979 So. 2d at 889 ( If there is no damage beyond the faulty workmanship or defective work, then there may be no resulting property damage. ). 22 Greystone Const., Inc., 661 F.3d at 1286; Capstone Bldg. Corp., 67 A.3d at Taylor Morrison Servs., Inc., 746 S.E.2d at Capstone Bldg. Corp., 67 A.3d at Greystone Const., Inc., 661 F.3d at 1287; French, 448 F.3d at 706; K & L Homes, Inc., 829 N.W.2d at 729; Capstone Bldg. Corp., 67 A.3d at 978; J.S.U.B., Inc., 979 So. 2d at Greystone Const., Inc., 661 F.3d at ; French, 448 F.3d at 705; Taylor Morrison Servs., Inc., 746 S.E.2d at ; Capstone Bldg. Corp., 67 A.3d at ; K & L Homes, Inc., 829 N.W.2d at ; J.S.U.B., Inc., 979 So. 2d at { v. ( )} 5

7 occurrence in terms of ownership or character of the property damaged by the act or event. 27 The Supreme Court of Connecticut explained: 28 As a threshold matter, we see no basis in the language of the policy for limiting coverage to liability for harm to third parties. Just like the definition of the term occurrence, the definition of property damage in the [commercial general liability policy] does not differentiate between damage to the contractor s work and damage to other property. Rather, as previously discussed, a coverage analysis looks only to whether the property damage was intended or fortuitous, that is, whether the injury was an accident. 29 The Florida Supreme Court elaborated: 30 [W]e fail to see how defective work that results in a claim against the contractor because of injury to a third party or damage to a third party s property is unforeseeable, while the same defective work that results in a claim against the contractor because of damage to the completed project is foreseeable. This distinction would make the definition of occurrence dependent on which property was damaged. For example, applying [the insurer s] interpretation in this case would make the subcontractor s improper soil compaction and testing an occurrence when it damages the homeowners personal property, such as the wallpaper, but not an occurrence when it damages the homeowners foundations and drywall. Moreover, as noted by the Supreme Court of Alabama, an interpretation of a CGL Policy that defines coverage by property ownership or the character of the property would render the bargained for coverage illusory where the insured contractor is engaged in constructing an entirely new building, or in a case where the insured contractor is completely renovating a building because the entire project would be uninsured against property damage to nondefective work of the insured arising from faulty workmanship. 31 Importantly, courts recognize the contours of this initial grant of coverage extend to faulty workmanship performed by subcontractors. In K&L Homes, the Supreme Court of North Dakota stated: 32 We conclude that defective work performed by a subcontractor that causes damage to the contractor s completed project and is neither expected nor intended from the standpoint of the contractor can constitute property damage caused by an occurrence as those terms are defined in a standard form commercial general liability policy. Accordingly, a claim made against the contractor for damage to the completed project caused by a subcontractor's defective work is covered under a post 1986 CGL policy unless a specific exclusion applies to bar coverage. 27 Lamar Homes, Inc., 242 S.W.3d at Capstone Bldg. Corp., 67 A.3d at Lamar Homes, Inc., 242 S.W.3d at J.S.U.B., Inc., 979 So. 2d at Jim Carr Homebuilder, LLC, 2014 WL , at *5. 32 K & L Homes, Inc., 829 N.W.2d at 733 (quoting J.S.U.B., Inc., 979 So. 2d at 875); see also Capstone Bldg. Corp., 67 A.3d at 983; French, 448 F.3d at { v. ( )} 6

8 Similarly, the Tenth Circuit opined that a subcontractor s faulty workmanship resulting in damage to the insured s nondefective work or a third-party s property triggers coverage under the CGL Policy because the contractor/insured has no anticipation that damage will occur. 33 This reasoning comports with the subjective foreseeability test employed by courts to determine whether damages from faulty workmanship constitute an occurrence under the CGL Policy. 34 The case law on this point is in accord with a circular issued by ISO on July 15, 1986, confirming that the 1986 revisions to the CGL Policy cover[ed] damage caused by faulty workmanship to other parts of work in progress; and damage to, or caused by, a subcontractor s work after the insured s operations are completed. 35 Notably, extending CGL coverage to damaged non-defective work of the insured or third-party property while excluding coverage for repair and/or replacement costs of faulty workmanship raises the issue of apportionment. Indeed, based on the current scope of coverage, an insured or one asserting the rights of the insured must properly apportion the total losses arising from the faulty workmanship between the distinct costs of repairing faulty workmanship and the costs of repairing the resulting covered property damage. A failure to properly apportion costs may preclude the insurer or a court from determining the extent of entitlement to coverage or even whether coverage was triggered. Instructively, the Fourth Circuit s opinion in French laid the ground work for each aspect of CGL coverage discussed in this paper. 36 In French, the Frenches purchased a newconstruction home from Jeffco Development Corporation ( Jeffco ). 37 Jeffco employed a subcontractor to install a synthetic stucco exterior on the home. 38 Five years after the purchase was complete, the home suffered extensive moisture and water damage to otherwise nondefective portions of the home as a result of faulty installation of the synthetic stucco exterior. 39 The French court made two determinations. First, consistent with the discussion in Section III.A of this paper, the defective installation of the exterior stucco did not constitute an accident, and, therefore, not an occurrence under the 1986 ISO CGL Policies. 40 The Court held, [T]he obligation to repair the façade itself is not unexpected or unforeseen under the terms of the sales contract. Therefore, the repair or replacement damages represent economic loss and consequently would not trigger a duty to indemnify under a CGL Policy. 41 Second, consistent with the majority trend, the presence of moisture in non-defective portions of the home resulting from the faulty workmanship was accidental and, therefore, constituted an occurrence causing property damage under the CGL Policy triggering coverage: 42 Here, there is no evidence that Jeffco subjectively expected or intended that the nondefective structure and walls of the Frenches home would suffer damage from moisture intrusion. Indeed, there does not appear even to be an allegation 33 Greystone Const., Inc., 661 F.3d at Greystone Const., Inc., 661 F.3d at ; French, 448 F.3d at J.S.U.B., Inc., 979 So. 2d at 879 (citing Insurance Services Office Circular, Commercial General Liability Program Instructions Pamphlet, No. GL (July 15, 1986)). 36 French, 448 F.3d Id. at Id. 39 Id. at Id. at Id. 42 Id. at { v. ( )} 7

9 that Jeffco either expected or intended that its subcontractor (Coronado Stucco & Stone) would defectively install the [stucco] exterior on the Frenches home. Accordingly, as was the case of the sinking soil in American Family, the moisture intrusion into the nondefective structure and walls of the Frenches home was an accident, and therefore, an occurrence under the initial grant of coverage of the 1986 ISO CGL Policies, which coverage is not defeated by the express exclusion for coverage of damage which is expected or intended from the standpoint of the insured. ******* This aspect of coverage is inherently different from coverage to correct the defective [stucco] exterior on the Frenches home. As we have already held, coverage to correct the defective [stucco] exterior is not provided under the 1986 ISO CGL Policies, as opposed to damage to other nondefective parts of the home, i.e., the interior and structural members of the home, which were not damaged or defective upon completion of construction, certification for occupancy and delivery of the home, but may have sustained damage as the result of the failure of the [stucco] exterior. The Tenth Circuit reached the same conclusion in Greystone Const., Inc. 43 In Greystone, homeowners purchased a to-be-built home from Greystone, who, in turn, employed a subcontractor to complete all work on the home. 44 The home was constructed on soils containing expansive clays. 45 The subcontractor, however, provided poor design and construction of the house s soil-drainage and structural elements. 46 Subsequently, soil expansion caused the home s foundation to shift resulting in extensive damage to the home s living areas. 47 Following French, the Greystone court determined property damage to nondefective portions of the home directly resulting from the subcontractor s faulty workmanship was covered under the CGL Policy, while the faulty workmanship itself was not: 48 Here, the property damage for example, the movement of the basement floor and damage to the upper living areas allegedly resulted from the house s exposure to expansive soils, which was not otherwise prevented due to the subcontractor s poor design and construction of the house s soil-drainage and structural elements. [The insurer] does not contend the exposure to the expansive soils or the resulting damage was intended or anticipated by the policyholders. For these reasons, we find the damage suffered by the homeowners may have resulted from an unforeseen occurrence: the damage caused by the faulty workmanship that failed to account for exposure to expansive soils. The damage suffered was an unanticipated or unusual result flowing from a commonplace cause. See Hottenstein, 83 P.3d at There is simply no allegation the appellants knew the property damage would flow directly and immediately from [ ] intentional act[s] of the subcontractors. Hecla 43 Greystone Const., Inc., 661 F.3d Id. 45 Id. 46 Id. at Id. at Id. at { v. ( )} 8

10 Mining, 811 P.2d at Accordingly, we find that the damage to nondefective property could be covered under the insurance policies... We do note, however, that CGL policies implicitly distinguish between damage to nondefective work product and damage to defective work product. In this case, the homes soil-drainage and structural elements were potentially defective. The potential defects in these aspects of the construction may have caused damage to the homes themselves the nondefective work product. In line with the Fourth Circuit s holding in French v. Assurance Co. of America, 448 F.3d at 703, the logic of CGL policies require us to conclude that the damage to the homes is covered, while the damage to the soil-drainage and structural elements is not. The obligation to repair defective work is neither unexpected nor unforeseen under the terms of the construction contract or the CGL policies. Therefore, repairing the foundations represents an economic loss that does not trigger a duty to defend under the CGL policies. The current scope of relevant coverage under a CGL Policy has also been addressed outside the residential home construction context. In Capstone Bldg. Corp., the University of Connecticut ( UConn ) contracted for the construction of a large student housing complex. 49 Subsequent to completion of the project, UConn discovered elevated levels of carbon monoxide in the complex, among other defects. 50 Following the opinions espoused in French and Greystone, the Supreme Court of Connecticut determined the faulty workmanship giving rise to the elevated carbon monoxide omissions and other defects was not property damage under the CGL Policy and, therefore, not within the scope of coverage. 51 By contrast, and consistent with the current majority trend, the court determined UConn s CGL Policy would cover claims for damage, or in this case, loss of use, to non-defective work caused by the faulty workmanship. 52 In sum, the CGL Policy provides an initial grant of coverage for damages to nondefective work of the insured, property of the project owner outside the insured s scope of work, and third party property regardless of whether the faulty workmanship is performed by a contractor/insured or a subcontractor. Moreover, as the case law makes clear, the initial grant of coverage extends to damage occurring during ongoing or completed operations of the contractor/insured. 53 C. Exclusions To The Initial Grant Of CGL Policy Coverage Notwithstanding the initial grant of coverage provided in the CGL Policy, various delineated exclusions within the CGL Policy ultimately reduce the contours of coverage. The primary CGL Policy exclusion relevant to this paper is the Your work exclusion found in Section I.2(l) of the 2006 CGL Policy and states in relevant part: Capstone Bldg. Corp., 67 A.3d Id. at Id. at Id. at The relevant products completed operation hazard clause is discussed infra at note ISO CGL form CG (emphasis added). { v. ( )} 9

11 2. Exclusions This insurance does not apply to: l. Damage To Your Work Property damage to your work arising out of it or any part of it and included in the products completed operations hazard. 55 This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. Section V of the 2006 CGL Policy further defines the exclusion, in relevant part: 56 SECTION V DEFINITIONS 22. Your work : a. Means: (1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations. Courts, including the Fourth and Tenth Circuits, recognize the Your work exclusion effectively eliminates the initial grant of coverage for property damage to an insured s nondefective work arising from either a contractor/insured s or a subcontractor s faulty workmanship. 57 The second clause of the Your work exclusion, however, states the exclusion does not apply if the faulty workmanship was performed by a subcontractor. 58 This clause creates the subcontractor exception to the Your work exclusion, which partially reinstates the initial grant of coverage. Accordingly, the CGL Policy s initial grant of coverage for property damage caused from faulty workmanship performed by a contractor/insured is eliminated by the Your work 55 The products completed operation hazard refers to bodily injury and property damage occurring on the project site arising out of an insured s work subsequent to completion of project operations. See 2006 ISO CGL form CG , Section V.16. Thus, the your work exclusion applies both to damage sustained during ongoing operations and damage sustained subsequent to completed operations of an insured. Notably, supplemental coverage can be purchased to cover an insured s products completed operations. This supplemental coverage acts as an exception to the products completed operation hazard clause in the your work exclusion by providing coverage for damage to non-defective work after completion of operations resulting from faulty workmanship performed by the contractor/insured. See e.g., Jim Carr Homebuilder, LLC, 2014 WL , at *6-8. With respect to subcontractors, courts generally find that the subcontractor exception discussed infra reinstates coverage for damage otherwise excluded under the products completed operation hazard clause, without need for supplemental products completed coverage. See J.S.U.B., Inc., 979 So. 2d at 891 ( a post 1986 standard form commercial general liability policy with products completed-operations hazard coverage, issued to a general contractor, provides coverage for a claim made against the contractor for damage to the completed project caused by a subcontractor's defective work provided that there is no specific exclusion that otherwise excludes coverage ) ISO CGL form CG Greystone Const., Inc., 661 F.3d at 1289; French, 448 F.3d at 706; Capstone Bldg. Corp., 67 A.3d at ; K & L Homes, Inc., 829 N.W.2d at See id. { v. ( )} 10

12 exclusion. By contrast, although the CGL Policy s initial grant of coverage for property damage caused from faulty workmanship performed by a subcontractor is also eliminated by the Your work exclusion, the initial coverage is reinstated by the subcontractor s exception. In Capstone, the Supreme Court of Connecticut explained the interplay between the Your work exclusion and the subcontractor exception: 59 Applying the [your work] exclusion s language to the facts of this case, the entire Hilltop project meets the definition of your work because it was completed by the [insureds] or their subcontractors. All property damage arising out of an occurrence is therefore initially excluded by the your work exclusion. The subcontractor exception, however, restores coverage for subcontractors work which caused damage under the insuring agreement of the policy. Whether the work out of which the damage arises was performed by a subcontractor is a matter of fact, to be determined in each case. Here, insofar as the [insureds ] claims meet the definition of occurrences causing property damage, the plaintiffs allege that they arose from faulty heating, venting, and mechanical work performed by their subcontractors. We hold that the subcontractor exception to the your work exclusion would reinstate coverage if the [insureds] ultimately prove that property damage was caused by its subcontractors defective work. Property damage resulting from the [insureds ] own faulty work, however, is precluded from coverage by the your work exclusion. Similarly, in K&L Homes, a contractor sought a determination of coverage under a CGL Policy relative to damages to a newly constructed home resulting from faulty workmanship performed by a subcontractor. 60 In determining coverage was available under the CGL Policy, the court opined: 61 Although the CGL policy grants coverage for property damage, the grant is limited by the exclusion for damage to your work. This exclusion would eliminate coverage but for the subcontractor exception to the exclusion under the CGL policy. We conclude that when a general contractor becomes liable for damage to work performed by a subcontractor or for damage to the general contractor's own work arising out of a subcontractor's work the subcontractor exception preserves coverage that the your-work exclusion would otherwise negate. Finally, it should be noted that the Your work exclusion will not apply to damage to third-party property caused from faulty workmanship performed by a contractor/insured or subcontractor because such property is not within the scope of Your work as defined by the CGL Policy. IV. CONCLUSION In sum, after applying the relevant exclusions and exceptions, the CGL Policy only provides coverage for damaged property arising from faulty workmanship if performed by a 59 Capstone Bldg. Corp., 67 A.3d at K & L Homes, Inc., 829 N.W.2d at Id. at 737 (citing Lamar Homes, Inc., 242 S.W.3d at 12)). { v. ( )} 11

13 subcontractor. Accordingly, a surety analyzing its rights and liabilities on a bonded project relative to potential coverage provided by a CGL Policy must understand that no coverage is provided for mere faulty workmanship or property damage arising from faulty workmanship performed by the contractor/insured. { v. ( )} 12

14 BIOGRAPHY Gerard P. Sunderland Jerry Sunderland is a partner in the Maryland based law firm of Wright, Constable & Skeen, LLP. Jerry has over 40 years experience in fidelity, surety, and construction law. Upon completion of his military service in 1970, Jerry started work with the Aetna Casualty and Surety Company as a claims representative in Baltimore Maryland specializing in large surety claims. Thereafter, Jerry spent four years with Aetna Casualty and Surety Company as a Home Office Surety attorney. He then spent two years as an Assistant Manager and attorney with the Fidelity & Deposit Company of Maryland in its home office in Baltimore, Maryland. Jerry took a short break from the surety and fidelity community to serve as Assistant Attorney General and Principal Counsel to the Maryland Transportation Authority. During his tenure as the Maryland Transportation Authority s counsel, he negotiated the agreements between his client and a local governmental authority for the financing and construction of, at that time, the largest public works project in the state of Maryland, which construction costs exceeded $1 billion dollars. In 1981, he joined another law firm and spent the next 28 years with that firm prior to joining Wright, Constable & Skeen, LLP, as a partner, in Jerry is a 1968 graduate from the Tulane University of New Orleans, Louisiana and a 1973 graduate from the University of Maryland School of Law with honors and Order of the Coif. Jerry is admitted to Maryland Court of Appeals, the United States District for the District of Maryland, the Court of Appeals for the District of Columbia, the United States Court of Federal Claims, the Federal Circuit, and the Fourth Circuit. Jerry currently serves as a member of the Surety Claims Institute s Board of Directors. Marc A. Campsen Marc Campsen is an associate with the law firm of Wright, Constable & Skeen, LLP, located in Baltimore, Maryland. Mr. Campsen s practice focuses on commercial litigation, including surety law, in both state and federal courts. Mr. Campsen received his law degree from the University of Baltimore School of Law where he was an editor on the Law Review and a member of the Heuisler Honor Society. Prior to joining Wright, Constable & Skeen, LLP, Mr. Campsen clerked for the Honorable Lawrence F. Rodowsky on the Maryland Court of Special Appeals. Mr. Campsen also brings significant business experience to his practice from his time working in New York City for an internet start-up and a national publishing house. { v. ( )}