An electrical contractor runs miles of wiring through what will be a three-story office building. After completion the contractor tests the wiring, finds it satisfactory and leaves the job.
After other subcontractors hang and paint the walls and do other finishing work, the general contractor tests all systems and the electrical system fails. The GC summons the electrical contractor back; after more testing and diagnosis, the contractor concludes that there are faults in two segments of the system on different floors and adjacent sides of the structure.
Fixing the problem will require tearing out finished walls and a few appliances attached to them (a dishwasher in an office kitchen area, computer network equipment, etc.). Tearing these things out, repairing the faulty wiring, and reinstalling the walls and finishing them so they look flawless will cost much more than simply fixing the electrical problem.
What the ISO CGL policy says
- The ISO CGL policy covers the insured contractor's legal liability for physical damage to tangible property, including all resulting loss of its use, or loss of use of tangible property that is not physically injured.
- Coverage applies when the damage is caused by an "occurrence," which the policy defines as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
- The policy excludes liability for property damage to work or operations the insured performed (or which a subcontractor performed on the insured's behalf) if the damage arises out of any part of the work and occurs after the work's completion.
- The policy also excludes damage to other tangible property that is unusable or less useful because it includes the insured's work that is known or thought to be defective, deficient, inadequate, or dangerous, when fixing the insured's work will restore the property to usefulness.
Some courts have ruled that the CGL policy covers the cost of tearing out and reinstalling undamaged property when that is necessary to fix defective work. For example, a federal appeals court in Washington held that removal and destruction of other subcontractors' work due to the insured's defective work is property damage as the CGL defines the term, and that providing defective work met the policy's definition of "occurrence."
Other state decisions reached similar conclusions when they found that unintentionally providing defective components was accidental and therefore an occurrence, and that loss of use or removal and replacement of other suppliers' work could qualify as property damage under the policy.
Conversely, some courts have held that tearing out and replacing undamaged property is not physical damage caused by an "occurrence" because it is not an accident, instead treating the cost as part of the project itself.
Because courts differ by jurisdiction, contractors may find it helpful to learn how their state treats these claims and which insurers have a history of paying them. Consider reviewing available policy options such as Contractors Design and Build (Property only) or Residential Artisan Contractors Property Insurance, and then talk to your agent about the carrier's claims practices and endorsements that may affect coverage.
Frequently Asked Questions
Will a standard CGL policy always pay to tear out undamaged work?
No. Coverage depends on the policy language and how courts in the jurisdiction interpret "occurrence" and the policy exclusions.
What influences whether a court treats defective work as an "occurrence"?
Courts consider whether the defective work was accidental or inherent to the work and how policy terms and exclusions apply in the specific case.
Can an endorsement or separate policy help cover these risks?
Yes. Specific endorsements or project-specific property coverage can address gaps that a standard CGL may not cover.
What should a contractor ask an agent when buying coverage?
Ask about how the insurer handles claims for removal and replacement of undamaged property, relevant exclusions, and any endorsements that restore coverage.