Policy Exclusions and Limitation Endorsements

Sadler Insurance

Products and Completed Operations Exclusion

Builders, remodelers, and light commercial general contractors should review their policies to verify whether or not the following common exclusions or limitations are present on their General Liability policy. If they are, they could represent significant coverage gaps which could leave contractors wide open to uncovered lawsuits and out-of-pocket expenses.

In other words, you would only have coverage for premises related incidents during the course of construction. Examples of such lawsuits that would not be covered include:

  • A fire caused by faulty wiring occurs three years after construction resulting in a total loss to the house, its contents, and the death of three occupants.
  • Water damage caused by failure to install adequate flashing causes rotting to wall supports and wood sheathing.
  • Five years after construction, the roof begins to sag due to truss failures.

Examples of lawsuits that would still be covered include:

  • A child wanders onto the jobsite and is injured while playing.
  • A worker accidentally severs an underground utility line.
  • A worker accidentally starts a fire during construction that burns down a neighbor’s house.

Attempts should be made to negotiate away any of the following exclusions that represents a concern or to find a new General Liability carrier that may not include these exclusions.

It may not be possible to find a policy that will eliminate all of these exclusions and if that is the case, additional risk management precautions should be taken to reduce the risk.

Synthetic Stucco (EIFS) Exclusion

Most General Liability policies no longer provide coverage for lawsuits arising from problems related to Stucco exclusionsynthetic stucco (EIFS). Each insurance company seems to have a different version of the exclusion.Furthermore, each state has its own case law that has a bearing on the impact of the exclusion.

As a general rule, homebuilders/remodelers should no longer use EIFS on their new construction projects if they expect to have coverage arising out of any EIFS-related problem. The more complicated issue is whether coverage exists for EIFS projects that were performed in the past. You might be surprised to find out that you may not have coverage for future lawsuits arising out of your past EIFS jobs. You need to know the facts so that you can protect yourself from bankruptcy.

The answers to these questions are complex and 99% of insurance agents don’t give the proper advice because they are not dedicated experts. It pays to be working with a competent insurance agent who can advise you on this topic.

Soil Movement (Subsidence) Exclusion

Some General Liability policies no longer provide coverage for lawsuits arising from soil movement or subsidence-related problems. Soil movement includes movement resulting from expansive soils, sinkholes, settling, shifting, etc. If you have this exclusion on your policy, you have no coverage for such damage to the foundation or home that you have built.

Soil movement and subsidence claims are more common in certain parts of the country where expansive soils are common. Home builders and developers should consider having construction sites tested by an engineering firm to make sure that there are no soil issues that could result in foundation sinking.

Fungus, Mold, Mildew, and Bacteria Property Damage Exclusions

These exclusions eliminate all property damage liability coverage arising out of mold, fungus, mildew, and bacteria. This is an emerging litigation area; most insurance carriers started to use this exclusion in 2003 in order to not provide plaintiff’s attorneys a funding source.

The jury awards in this area can be excessive, so you should take all risk management precautions in your materials handling and design to circumvent these claims. Detailed information on preventative measures can be found by contacting the National Association of Home Builders (NAHB) headquarters.

Property Damage To Prior Completed Operations Exclusion

This exclusion eliminates all property damage lawsuits arising out of construction jobs that were completed and accepted by the owner or purchased prior to the start of the policy period. Property damage could be to the house itself, its contents or to a neighboring house.

This exclusion can create problems since such excluded property damage would not be covered by prior General Liability policies.

Contractual Liability Limitation Endorsement

This endorsement takes away coverage for liability that may be assumed under a construction contract between two contractors (ex: contract between general contractor and subcontractor) or a project owner.

Most of these construction contracts contain a provision known as a hold harmless or indemnification clause. These clauses require the contractor signing the contract to assume liability that may ordinarily belong to another party.

The Contractual Liability Limitation Endorsement can result in a significant coverage reduction for contractors that enter into written construction contracts.

Independent Contractor Exclusion

This exclusion takes away General Liability coverage for general contractors that use independent contractors or subcontractors in connection with a claim unless such independent contractor or subcontractor has valid and collectible insurance that meets certain minimum requirements. The independent contractor or subcontractor is normally required to carry General Liability limits of at least $1,000,000 Each Occurrence/$1,000,000 General Aggregate including Products/Completed Operations. In addition, there is usually a requirement to carry Workers’ Compensation as required by the state where the job is located.

These types of exclusions can be risky since there is no guarantee that an insured independent contractor or subcontractor will keep his insurance in force indefinitely without lapse.

Roofing Operations Exclusion

This roofing exclusion can result in denial of General Liability claims for bodily injury and property Subcontractordamage arising out of rain, hail, snow, ice, or wind if:

  • The contractor leaves an open roof unattended for more than four hours without taking appropriate steps to determine approaching adverse weather.
  • The contractor fails to provide appropriate temporary covering to protect the structure and its contents.

Damage to Work Performed by Subcontractors on Your Behalf Exclusion (CG2294)

Most General Liability carriers that insure homebuilders and remodelers began adding this exclusion in 2004. It results in a substantial reduction in coverage as compared to prior policy forms.

The intent of CG2294 is to recognize that property damage to a homebuilder’s or remodeler’s work itself is a business loss not intended to be covered by the General Liability policy. The contractor is the one intended to bear such losses. Instead, the General Liability policy intends to cover consequential or resulting injury or damages to “other property” that flows from the improper, faulty, or defective workmanship.

The definition of other property is the key to interpreting the scope of this exclusion, and insurance carriers have differing opinions on that definition. This has a huge bearing on the impact of this exclusion.

The best way to illustrate this point is to look at an example. Assume that a homebuilder builds a house and faulty wiring is installed by the electrical sub that results in a fire that destroys the entire house three years after the sale.

Some insurance carriers would use CG2294 to deny coverage for property damage to the entire house because the entire house was the work” of the homebuilder. This is the majority view on the application of this exclusion.

On the other hand, other insurance carriers would use CG2294 to only deny coverage for property damage to the wiring installed by the electrical sub and would provide coverage for property damage to the rest of the house. The carriers that follow this reasoning believe the intent of CG2294 is to cover the resulting or consequential damage to other parts of the house that are not related to the faulty work. This is the minority view on the application of this exclusion.

More detailed information on how contractors can protect themselves against construction defect litigation is available in our “Construction Defect and General Liability for Builders”article.”