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Business Protection Bulletin


By June 1, 2012No Comments

When accidents happen on construction sites, the result usually involves property damage. Faulty wires cause fires, which burn the walls. Collisions often put dents in expensive equipment, and paint can be inadvertently sprayed onto nearby cars. If such incidents occur, the contractor must look to their General Liability policy to compensate for damages. Although the CGL policy covers several types of incidents, not every situation is covered.

In order for a situation to be covered, three requirements must be met. First, there must be a legal obligation for the contractor to pay the damages. The contractor’s tort liability is covered by insurance, so most negligent acts are covered. However, if the contractor fails to complete the work he or she agrees to, there is no coverage.

The second requirement is that the damage must happen out of an occurrence, which the policy defines. In a CGL policy, an occurrence is an accident that includes repeated or continuous exposure to the same harmful conditions. In order to qualify for coverage, the damage must be accidental. The insurance company will decide if the incident was accidental.

The third requirement is that an accident must result in damage to the property. Such damage is defined as a physical injury to the property. This may include loss of use of the damaged property and loss of use of any other accompanying property that the incident affects. Since computer data is not tangible property, it is one of the exclusions in this type of coverage.

Unfortunately, if a contractor is legally liable for a damage claim, the policy might not cover it if the claim is categorized as faulty workmanship. If damage results from work performed by the contractor or a hired subcontractor to “the particular part” of property being fixed, the damage might not be covered. For example, assume a contractor is fixing a wiring system for an old light fixture. If the fixture falls and damages the floor during the process, the fixture itself would not be covered. This is because the fixture was the particular part of property that the contractor was working on. However, the contractor was not working on the floor, so the damaged flooring would be covered.

In some cases “that particular part” might be difficult to define. For example, if a contractor accidentally starts a fire and burns a multi-level roof, only a portion of the roof might be covered. The language in the policy is not clear enough for a definite answer to such a situation, so outcomes can vary. However, one provision in the policy is very clear. It states that coverage does not apply to any particular part that must be repaired because of incorrect work performed by the contractor. In the previous scenario, if the light fixture did not work after the contractor repaired it, the policy would not cover a replacement.

Inland Marine policies might help for some types of losses that a regular policy does not cover. There are also other types of losses that contractors must pay for upfront. However, it is important to know what to expect before entering the job site. Discuss coverage options with our agents.