What Is the “Your Work” Insurance Policy Exclusion, and Why Should You Care?

If you find yourself faced with the prospect of litigating a construction dispute claim, especially if you are the property owner, there are three things that you should analyze when deciding whether or not to pursue litigation.

Construction Law 101: Commercial General Liability and the "Your Work" exclusion policy

1. Liability

In situations where there is a construction defect, is there a case of liability against the contractor? In other words, is there something that a contractor, design professional, subcontractor, or supplier did wrong which caused you harm?

2. Damages

What is the dollar amount of the harm that was caused to you, assuming you can prove liability? This tabulation also includes a consideration of whether or not you can recoup attorney’s fees, either under your contract with the party you are alleging to have done something wrong, or by statute.

3. Collectability

If you can respond positively to No. 1 and No. 2, an arbitration award or a judgment is typically printed on a piece of paper, and the judgment itself makes the paper actually worth less money than if it were a blank sheet of paper, because now it has printing on it and cannot be used for another purpose. Not to be too cynical here, but the reality is that a judgment or arbitration award only has value to the extent that you can collect on it, which brings us to a discussion of insurance coverage. Insurance coverage is of primary importance when analyzing collectability.

Once you have a judgment against a contractor:

(For purposes of this article, we will include general contractors, subcontractors, design professionals, and perhaps even suppliers.)

Once you have a judgment against a contractor, you still need to collect on that judgment. While there are many ways one might collect on a judgment, the simplest and most obvious way is if the contractor against whom you have a judgment simply rolls over and decides to write you a check. This is surprisingly uncommon in the world of judgment collections. In my experience, there is then often a game of “keep-away” that ensues. You might find yourself waging a secondary war for collection in the form of asset depositions, various legal maneuvers to freeze bank accounts, or attachment of legal interests in real property, like houses or vacant land, or any other number of complicated actions to actually collect on a judgment. Keep in mind that, while these efforts are under way, the meter typically continues to spin in terms of attorney fees and the costs of prosecuting the case.

Those collection maneuvers form a vast body of law that could probably be the subject of ten more blog posts. All sorts of stuff like writs to seize bank accounts, asset depositions, foreclosures…collecting on a Judgment can sometimes be more resource-intensive than getting the Judgment in the first place. But the point of this blog post is to discuss insurance coverage in these situations. This is obviously something that you should evaluate early on in the case, usually before you ever file a lawsuit. All cases should be evaluated in terms of all three elements discussed above: liability, damages, and collectability.

An important consideration under collectability is the existence of insurance coverage that would satisfy a judgment.

What Is the “Your Work” Insurance Policy Exclusion, and Why Should You Care?

The most common form of insurance for contractors is a commercial general liability policy (CGL). Design professionals typically have either an errors and omissions policy (commonly called E&O) or some other form of a professional liability policy. The “your work” exclusion exists in almost all CGL policies. The most common CGL form is produced by a company called Insurance Services Office, Inc., a recognized industry organization that offers all sorts of insurance services, including standardized forms for insurance. The CGL policy form is commonly known as the “CG 00 01 10 01” or “Commercial General Liability Coverage Form.” This form contains an exclusion that reads as follows:

Property damage to ‘your work’ arising out of it or any part of it and included in the ‘products completed operations hazard.’

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

So what exactly does this mean? And again, why should you care?

To describe the exclusion better, let me state it this way: The insurance company is not required to make a payment for damages to the contractor’s work itself. In other words, the policy is not designed to be a warranty policy, but rather covers consequential damages or dollar damages caused to other aspects of the project other than the work done by the contractor himself. If the “damage” is caused not by the contractor in question, but by a subcontractor to that contractor, then the exclusion would not apply.

Illustration by way of a fairly common scenario might be helpful.

Let’s assume that an earth-moving contractor was charged with preparing the pad for a major office building. Let’s further assume that the plans and specifications call for very specific preparation of the pad, including testing the compaction of the soil prior to the pouring of concrete footings and the foundation on which the building would rest. Let’s further assume that the earth-moving contractor decides to cut corners by only having the soil tested in a handful of locations and at a handful of different times rather than strictly following the plans and specifications, which would have required much more thorough testing. And let’s further assume that the soil is not compacted properly, that the concrete footings and foundation are poured, and the building is built on top of the improperly prepared pad. For the sake of this scenario, let’s assume that there is settling within a few years of the building being completed, and that it causes $5,000,000 worth of damage to the building in terms of repairing or remediating the situation.

Of the $5,000,000, let’s assume for the sake of round numbers that $1,000,000 will redo some of the soil work. The remaining $4,000,000 is to remediate and repair cracking in the foundation, walls, and other issues with the building, including, possibly, loss of use of the building for a period of time which, in turn, causes the building’s owner to suffer costs associated with vacancy of the building. The insurance company can take a hard line with respect to the $1,000,000 component that is associated with redoing the soil.

This can obviously be very confusing, a fact recognized by the New Mexico Court of Appeals in the case of Computer Corner v. Fireman’s Fund, 132 NM 264 (Ct. App. 2002). In fact, this case calls into question the enforceability of this exclusion all-together in New Mexico, a legal reality that can often be used to give you greater leverage in negotiating with the insurance companies. There the judges, in attempting to construe this language, referred to it as a “semantic bog” and quoted a Kentucky Court’s apparent unhappiness with such policy provisions:

It would be somewhat ludicrous for us to say this policy is not ambiguous. It is. But no more so than most others. Ambiguity and incomprehensibility seem to be the favorite tools of the insurance trade in drafting policies. Most are a virtually impenetrable thicket of incomprehensible verbosity . . . . The miracle of it all is that the English language can be subjected to such abuse and still remain an instrument of communication. But, until such time as courts generally weary of the task we have just experienced and strike down the entire practice, we feel that we must run with the pack and attempt to construe that which may well be impossible of construction.

Here’s the take-home point:

The “Your Work” exclusion is there because policies are not intended to be warranty policies. If a contract does negligent work, and that work causes harm to other things or causes consequential damages, you can recover for those. But you cannot recover for the cost of redoing the work itself according to the language. Usually the argument over these policy provisions just folds itself into negotiation about a settlement amount, and everything gets monetized into that amount, checks get cut, releases get signed, and the parties move down the road.

Why should you care? If you are forced into a situation where you have to litigate a construction-defect case as a plaintiff, your analysis of the “collectability” prong of the three part analysis discussed above will be impacted. In the end, you will probably be able to collect, because after all, insurance companies are not in the business of litigating the finer points of law if there is a preferable business resolution to the problem. But the insurance company will certainly use the “Your Work” exclusion as a negotiating chip by which they will seek to reduce the amount it will pay on behalf of the general contractor. This creates all sorts of questions about the duties of the insurance company to its insured and various other fissures that can be used to your advantage, but in evaluating a construction litigation case, you must be knowledgeable about the “your work” exclusion.