January 18, 2006
During construction, faulty workmanship may not only require rework, but also may result in damage to construction work performed by others. In a recent case, the work force of a contractor (Limbach Company) with a commercial general liability (CGL) policy improperly unpacked pipe which caused a leak in the steam pipe system and damaged other work. The contractor claimed that ripping out completed work performed by its subcontractors was covered under its CGL policy despite the defective workmanship exclusion that excluded coverage for property damage to “your work.” The lower court’s ruling that the damage was excluded was reversed by the United States Court of Appeals for the Fourth Circuit, which applied the law of Pennsylvania and held that the cost of repairing the resulting damage to construction work performed by others was covered as property damage under the CGL policy. Limbach Company, LLC v. Zurich American Ins. Co., 396 F.3d 358 (4th Cir. 2005).
Limbach had a subcontract to perform the mechanical work that included installation of a prefabricated, insulated underground steamline. Limbach subcontracted the production of the steamline to one company and subcontracted the excavation and backfill of the trench where the line was to be installed to another company. After installation, a leak was discovered in the steam line, which damaged the insulation covering the pipe, the backfill which had been placed around the steam line, and the landscaping in the area surrounding the leak, including concrete walkways. The repair of the steamline also required the removal of concrete, which had been installed by a third party. Limbach filed a claim under its CGL policy for the cost of replacing the damaged steamline and included the cost of repairing the work damaged by the leak such as repairing the backfill, replacing the steam pipe, repairing the landscaping, replacing the concrete, and the cost of a temporary steam boiler. The insurer agreed to cover the cost of the temporary steam boiler and part of the landscaping, but denied the other claims on the basis of CGL policy exclusions.
CGL Coverage: Exclusions and Exceptions
The CGL policy provided that the insurer would pay for those sums that the insured (Limbach) became legally obligated as property damage to which the policy applied. The policy included a “products – completed operations hazard” which was defined to include all property damage occurring away from premises owned or rented by the insured and arising out of “your work.” The term, “your work” was defined as “work or operations performed by you or on your behalf” and included “materials, parts or equipment furnished in connection with such work or operations.”
Exclusion (l) known as the “your work” exclusion excluded property damage to “your work” arising out of it or any part of it included in the products – completed operations hazard. However, an exception to the “your work” exclusion stated that the exclusion did not apply if the damaged work or the work out of which the damage arose was performed on the insured’s behalf by a subcontractor. Based on this exception to the “your work” exclusion, Limbach argued that the cost of repair or replacing damaged work performed by its subcontractors and/or third parties was covered.
On the backfill claim, the parties agreed that it was damaged by the leak and that the backfill work had been performed by another subcontractor. The insurance company’s position was that the “your work” exclusion precluded coverage for the damaged backfill because it was performed on the insured’s (Limbach’s) behalf. However, the court rejected this argument and held that the exclusion did not apply if the damaged work or the work which results in the damage was performed on the insured’s behalf by a subcontractor. The Fourth Circuit reviewed the history of the Insurance Services Office (ISO) exclusion on which this CGL policy was based and a Pennsylvania state court decision addressing the same exclusion where the Pennsylvania court noted that the subcontractor exception alters the definition of “your work” so as to except work performed by a subcontractor from the coverage exclusion. The Fourth Circuit concluded that since the backfill was performed on Limbach’s behalf by a subcontractor, the “your work” exclusion did not preclude coverage for the cost of repair to the damaged backfill. The court noted that to hold otherwise would be to ignore the clear terms of the exclusion’s exception for work performed by a subcontractor.
On the damaged pipe claim, Limbach argued that the damage was covered because the pipe was manufactured by a subcontractor. The lower court had determined that the manufacturer was a materialman and not a subcontractor, and therefore excluded damage to the steam pipe from CGL coverage under the “your work” exclusion. The Fourth Circuit disagreed and found that the manufacturer’s role was distinguishable from that of an ordinary supplier because it had custom manufactured the steam pipe in accordance with shop drawings and project specifications for this particular project. In addition, the manufacturer’s representative had visited the site, reviewed the installation drawings with Limbach, and provided specific instructions regarding installation of the pipe. Consequently, under these facts a manufacturer of a custom product was deemed to be a subcontractor for the purposes of the CGL policy.
On the claims for replacing the concrete and repairing the damaged landscaping, the lower court applied the “your work” exclusion to preclude coverage, which was reversed when the appellate court held that the exclusion did not exclude coverage for damage to a third party’s work. Therefore, since the concrete and landscape work were performed by third parties, the “your work” exclusion did not preclude coverage for the costs of repairing and replacing the landscaping and concrete.
CGL insurance policies have many standard provisions, but coverage is determined by the state law applicable to the policy. In Limbach, the Fourth Circuit applied Pennsylvania law. A number of states have applied the exception to the “your work” exclusion and concluded that CGL policies with these ISO standard provisions provide coverage for damage resulting from work performed on behalf of the insured by a subcontractor. Examples of other states’ decisions are as follows:
• O’Shaughnessy v. Smuckler Corp., 543 N.W.2d 99 (Minn.Ct.App.1996) (recognizing that 1986 amendments to “your work” exclusion changed standard CGL policy so as to provide coverage for property damage to a contractor’s work when that damage is caused by a subcontractor’s defective work); • Kalchthaler v. Keller Constr. Co., 224 Wis.2d 387, 591 N.W.2d 169 (1999) (holding that CGL policy granted coverage for property damage to contractor’s completed work and that the exclusion for property damage to the insured’s work did not apply because an exception to the exclusion restored coverage if the work was performed by a subcontractor).
• Fejes v. Alaska, Ins. Co., Inc., 984 P.2d 519 (Ak.1999) (holding that CGL policy covered claim by general contractor for damage to septic system caused by subcontractor’s faulty installation of curtain drain);
• Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997, 1003 (Kan.Ct.App.2005) (concluding that damage caused to structure of home as a result of continuous exposure to moisture due to subcontractor’s defective materials and work was an occurrence triggering indemnity provisions of CGL policy);
Thomas E. Abernathy [email protected] 404/582-8013 Member of the State Bar of Georgia