Commercial General Liability (“CGL”) Insurance policies generally cover an insured for costs the insured becomes obligated to pay due to “bodily injury” or “property damage.” Thus, on their face, CGL policies appear to cover an insured for a host of potential costs. However, as many insureds know, a number of exclusions work to limit this seemingly expansive coverage. Two common exclusions—found in many CGL policies—are the “Own Property” and “Your Work” exclusions, typically found in Exclusion J. These two exclusions have a substantial impact on the scope of coverage. For instance, the Own Property exclusion typically excludes coverage for “property damage” to:
Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason.
This exclusion creates unique issues for developers and spec builders in particular. This is because the developer/builder “owns” the property throughout development, potentially precluding coverage for many instances of property damage. Builders should still purchase CGL policies in order to cover those instances in which coverage applies (and should additionally purchase Builder’s Risk Insurance, which provides more expansive property coverage for first party claims arising during construction).
How CGL polices will effect builders and developers
However, builders and developers need to be aware of a relatively new exclusion in CGL policies which insurers are now attempting to wield in order to further limit the scope of coverage. This exclusion, found in successive CGL policies, is called the “Continuous or Progressive” damage exclusion and it broadly excludes coverage for damage which occurs after the builder/developer no longer owns the property, if the damage was caused by or alleged to have been caused by conditions (such as work performed) prior to the policy period. Common language in a Continuous or Progressive exclusion excludes coverage for property damage:
- If the damage first existed, or was alleged to have first existed, prior to the policy period; or
- If the damages was, or was alleged to be taking place prior to the policy period, even if actual or alleged damage continued during the policy period; or
- If the damage was caused by, or was alleged to have been caused by, conditions that existed prior to the policy period and that resulted in damage taking place during the policy period.
Under this exclusion, insurers are taking the position that property damage (e.g., such as water damage) which occurs after the home has been sold to a buyer will not be covered under a later policy, despite the fact that the damage occurred during the policy period, because the condition which allegedly caused the damage (e.g., improper caulking) existed prior to the policy period. Stated differently, insurers are arguing that the Continuous or Progressive exclusion works to exclude coverage under a successive CGL policy for property damage which occurs during the policy period, but arises from work performed prior to the policy period.
Liability of CGL policies
Continuous or Progressive damage exclusion is a continuation and expansion of the Own Property and Your Work exclusions. Insurers are attempting to use these two exclusions together to exclude the vast majority of property damage for which a builder or developer may become liable. Of course, nearly all damages for which a builder or developer may become liable will arise either during ownership of the property (excluded by Own Property exclusion) or at a later date due to property damage resulting from defective workmanship or materials previously provided (excluded by the Continuous or Progressive damage exclusion).
Builders, developers, and insurance brokers need to be aware of how insurers are attempting to use these two exclusions to narrow the scope of coverage under CGL policies. Otherwise, builders and developers may be left holding the bag for property damage despite the seemingly broad coverage conferred by their insurance policies.
If you are a builder/developer concerned about the scope of your commercial general liability insurance coverage, or if you have received a letter from an insurer denying your coverage based on one of the above exclusions, please contact Chris Reed or any one of insurance coverage attorneys at MPBA and we would be happy to review your insurance policies for coverage related issues.