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Inside Your Liability Policy

The only thing most contractors know about their liability insurance is the amount of their annual premium.  Few of them have good understanding of value they get in return for that premium. 

 

Generally, a commercial general liability insurance (“CGL”) policy covers a contractor for the financial consequences of an accident that results in bodily injury or property damage to a third party.  For example, if one of your employees accidentally dropped a tool off of the fourth storey that hit a pedestrian, then your CGL insurer would indemnify you for any damages payable to the pedestrian.  If instead the tool damaged a building adjacent to the worksite, then your CGL insurer would indemnify you for the cost incurred by the owner of the building to perform repairs.  While these simple examples are useful to illustrate the general scope of coverage, they are, thankfully, rare events.  The accidents that tend to trigger coverage under a CGL policy are accidents that result in damage to the project itself. 

 

There are number of policy exclusions that may come into play where an accident results in damage to the project, but the most important is the ‘Own Work Exclusion’.  Policy language varies, but here is one example of the Own Work Exclusion: 

 

This insurance does not apply to:

 

j.   "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. 

 

The general purpose of the Own Work Exclusion is to protect insurers from having to indemnify a contractor for the cost of repairing the contractor’s own shoddy work.  If an insurer had to indemnify a contractor for the consequences of shoddy work, then it would create a moral hazard:  Contractors would have little incentive to do the work correctly in the first place if they knew their insurer would have to pick up the cost of repair. 

 

However, there are lots of accidents that occur on site to which the Own Work Exclusion does not apply.  For example, if a window leaks because it was improperly installed, the installer would still be covered for the cost of repairing damaged drywall and flooring because that is not its ‘own work’.  The flooring, drywall, and the window are the ‘own work’ of the general contractor, but the Own Work Exclusion would still not bar a claim for indemnity by the GC because the work out of which the damage arose was performed by a subcontractor, the window installer.   

 

I suspect that subcontractors in particular are leaving money on the table when they fail to recognize that backcharges made against them for damage may fall within coverage.  If the amount of the backcharge is minimal, then it may be wise for the subcontractor to absorb the loss without referring the matter to their insurer.  Different considerations apply where the cost of repair is substantial.  

 

My final point is that the most valuable part of your liability policy is not the damages your insurer will pay on your behalf if you are found liable for an accident but the lawyers’ fees that it will pay on your behalf to defend you.  If a claim is made against you that may fall within coverage, then your insurer has an obligation to appoint and pay for a lawyer to defend you against that claim.  If a claim is made against you that may fall within coverage, then notify your insurer so it can start investigating the claim. 

 

Ted Dreyer is a lawyer and adjudicator at Madorin, Snyder LLP in Kitchener.  This article should not be relied on as legal advice. 

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