In construction defect cases, one of the most relevant exclusions in CGL policies is the “your work” exclusion. The exclusion precludes property damage to an insured’s work that occurs post-completion (i.e., your latent defect claims). However, there is a subcontractor exception to this “your work” exclusion, meaning this exclusion does not apply if the damaged work was performed by subcontractors.
This subcontractor exception to the “your work” exclusion allows general contractors (or subcontractors that subcontract out scopes of their work) to have coverage for damages resulting from latent defects since general contractors typically subcontract most of the scopes of work. Without this exception, however, general contractors would have no coverage since the entire project is their work.
Unfortunately, CGL insurers have issued endorsements eliminating this subcontractor exception to the “your work” exclusion. Obviously, if you are a general contractor or subcontractor that uses subcontractors, you do not want this endorsement that would completely dilute the value of your CGL policy.
For instance, a general contractor hired numerous subcontractors to build a fitness center. Post-construction, water damage was discovered. The owner asserted a claim against the general contractor. The general contractor settled the claim and demanded its insurer reimburse it. The insurer refused. The general contractor’s CGL policy had the “your work” exclusion but did not contain the subcontractor exception. This meant that all of the damage was the general contractor’s work excluded by the “your work” exclusion. The general contractor did not have the benefit of the subcontractor exception that would have afforded the general contractor coverage for damage resulting from subcontractors’ defective work. In other words, without the subcontractor exception to the “your work” exclusion, damage resulting from a subcontractor’s faulty workmanship would not be covered under the general contractor’s CGL policy. Ouch!!!
Remember, if you are a general contractor or subcontractor that commonly subcontracts scopes of work, you absolutely need the subcontractor exception to the “your work” exclusion. Make sure this subcontractor exception was not eliminated through endorsement or otherwise.
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