Are You Covered If Your Subcontractor’s Work Isn’t Done Right?

Acme Construction, a home building company, constructed 20 homes in 2003. It hired subcontractors to perform the concrete work, plumbing, wiring, and roofing. One year later, it received complaints from two of the homeowners about cracks in their foundations. Acme notified its liability insurance company. When the homeowners eventually sued Acme, the insurance company provided legal defense and set up reserves to pay for any resulting settlements.

Fast forward to 2005 when Acme built 35 homes to meet the demands of an active housing market. Other than the subcontractor who did the concrete work in 2003, Acme hired the same group of subs to work on these homes. When snow started melting after the winter of 2007, complaints started to come in about leaking roofs. Eventually, seven homeowners determined that they had to completely replace their roofs, and sued Acme for the faulty work. Acme again notified its insurance company. This time, however, the company denied the claims, saying that the insurance policy did not cover them. Acme had to pay for its own legal defense and liabilities.

What changed between 2005 and 2007? The insurance company added to the policy an endorsement that created a significant coverage gap: ISO form number CG 22 94 10 01, Exclusion-Damage To Work Performed By Subcontractors On Your Behalf.

This endorsement modifies an important exclusion contained in the ISO Commercial General Liability Coverage Form. Without this endorsement, the exclusion states that the insurance does not apply to damage to the insured’s work if the damage arises out of it or any part of it and if the damage occurs after the insured has finished the work. However, the provision gives coverage back if the damage arose out of work performed by a subcontractor working on the insured’s behalf. In the 2005 incident, Acme had hired a subcontractor to build the foundations for the new homes. Because the subcontractor had done the faulty work, Acme’s CGL policy covered the resulting defense costs and liability.

Endorsement CG 22 94 strips that coverage give-back from the policy. With it attached, the policy does not cover liability for damage to the insured’s work and arising out of it, even if another contractor actually performed the work. Accordingly, Acme’s policy did not cover its liability for the defective roofs. Without the attachment of this endorsement, Acme would have had coverage.

An insurance company might add this endorsement to a policy in the belief that faulty construction is a business risk, not an insurable one. Accidents such as slips and falls, unintentional fires, and injuries suffered while using a product are all examples of insurable risks. Performing work improperly, mismanaging cash flow, and making poor strategic business decisions are examples of business risks. Insurance companies feel they cannot insure business risks because to do so would remove an incentive to reduce those risks. If a carpenter knows he can collect insurance if he does a sloppy job building a house, he has less of an incentive to build it well. When a company attaches CG 22 94 to a policy, it is transferring the risk of a subcontractor’s poor performance back to the insured.

Almost all contractors subcontract at least some of their work, so this is an issue to take seriously. All contractors should review their liability insurance with their insurance agents to determine whether they have this endorsement. Since it can present a very significant coverage gap, they should discuss alternatives such as negotiating with the company to remove it or seeking another company that is willing to leave it off. Even if it means paying an additional premium, removing the endorsement may save a lot of expense in the long run.

If you would like to speak with us call Gary Wallach at 914-806-5853 or click here to email or click here to visit our website.

BGES Group’s office, located in Larchmont, NY is a full service insurance agency offering, Property, Liability, Umbrella Liability, Business Auto, Bid & Performance Bonds, Inland Marine, Worker’s Compensation, New York State Disability, Group Health, Life insurance, Personal lines and Identity Theft.

Special Contractor Insurance Programs (NY, NJ, CT) – We we have 60+ insurance companies to market your general liability, umbrella liability, business auto, workers compensation, bid & performance bonds and group health coverages. We help contractors set up proper risk transfer. If you’re a contractor we offer extensive information about insurance markets, coverages, risk transfer, subcontractor screening, ways to lower your insurance costs.

BGES Group are Worker’s Compensation Specialists for the States of New York, New Jersey and Connecticut – Issues we address: 1) Lowering pricing – we have specialty programs that can save you up to 40%; 2) Finding a new company; 3) Replacing policies that are being cancelled or non renewed; 4) Audit disputes; 5) Company creating fictitious payroll at audit time; 6) Lowering high experience modifications factors; 7) Misclassification of payrolls; 8) Lowering or eliminating renewal deposits;  9) Getting coverage when you’ve been without for a few months; 10) Covering multiple states under one policy; 11) Eliminating 10% service or policy fees; 12) Timely issuance of certificates; 13) Always being able to get someone on the phone or by email when you need to.

If you would like to speak with us call Gary Wallach at 914-806-5853 or click here to email or click here to visit our website.

Company: BGES Group, 216A Larchmont Acres West, Larchmont, NY 10538



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