General liability (or CGL) insurance is everywhere. It is an essential tool required by construction contracts, yet it might be one of our most mysterious tools. Sometimes, knowing if and when coverage is triggered can take us into a land “between light and shadow, between science and superstition.”
A case that may soon be headed to the Iowa Supreme Court helps unlock the mysteries of one common coverage question:
Are you covered for losses caused by subcontractors’ faulty work?
Expanding Coverage in Iowa: The Subcontractor Exception
In October, for the first time, an Iowa appellate court recognized the subcontractor exception, providing CGL coverage for damage to work performed on your behalf, or damage caused by that work, which is otherwise excluded from coverage.
In National Surety Corporation v. Westlake Investments, the court affirmed coverage after a subcontractor’s faulty work in a 300-unit apartment complex led to water penetrating several units.
The decision should assure Iowa contractors they will be protected when their subcontractor’s faulty work (like installing windows with faulty seals) leads to a subsequent event or occurrence that causes property damage (like water leaking through those seals).
CGL Insurance Coverage Always Starts With an Accident
The Iowa Court of Appeals’ Westlake decision requires some context. It makes no difference who performed the work if coverage is not first triggered by an occurrence.
Standard CGL policies define an “occurrence” to include an accident, but the policies do not define “accident,” so state courts have stepped in. Courts generally require accidents fit within the purpose of CGL insurance, which does not include guaranteeing contract performance or eliminating business risks.
Following this approach, even subcontractors’ faulty work is not always covered. First, something else (an occurrence) has to happen in order to unlock that door. Only then does it matter who performed the work.
In other words, CGL insurance in most states will be triggered not when somebody installs faulty seals around windows, but when water seeps through those seals. For example:
- In Iowa, Westlake involved poor workmanship in an apartment complex—coverage was triggered after water penetrated several units.
- In Minnesota, a subcontractor installed defective coping stones in a swimming pool—coverage was triggered after several of those stones cracked and caused injuries.
- In North Dakota, a subcontractor installed bad footings and poorly compacted soil—coverage was triggered after substantial shifting caused property damage.
- In South Dakota, a subcontractor left voids in insulation and failed to securely attach a vapor barrier—coverage was triggered after the vapor barrier fell and temperature fluctuations caused property damage.
In each instance, faulty work led to some other event to trigger coverage.
Questions of Time and Space
If the Iowa Supreme Court takes up Westlake, it should affirm the decision. The Iowa Court of Appeals reached the right result because faulty work led to a subsequent event (water penetration), unlocking the door to the subcontractor exception and providing coverage for losses caused by work performed on the insured contractor’s behalf.
As a member of the construction industry and an advocate for contractors, I hope the Iowa Supreme Court also takes the opportunity to clarify an important nuance of CGL insurance coverage: an occurrence can trigger initial coverage even if the damaged property does not extend beyond your work.
In The Twilight Zone of CGL coverage, if there was no “occurrence,” there are no exceptions. On the other hand, if the sole issue is that the damaged property did not extend beyond your work, there are exceptions, including if a subcontractor’s work is involved.
In the unfortunate event you ever have to defend a claim for property damage or bodily injury, the subcontractor exception may be the only thing standing between your business and dimensions of risk you’d rather not imagine.
Build it right. Keep it real.
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