INSURANCE COVERAGE & CONTRACTORS 

 Posted on December 08, 2022 in Personal Injury

by: Paralegal Sarah Reckling

A frequent issue that arises in insurance is the extent to which a standard CGL policy covers contractor liability. In my most cases, the issue is not of fact, but of liability insurance language. An insurer, regardless of whether the allegations are covered, must provide a defense of the entire lawsuit. If an insurer wrongfully fails to provide a defense, then the insurer is responsible for the damages to the insured (potentially including attorney’s fees). 

An insured can establish a claim as covered under the policy when there is a defined “occurrence,” giving rise to a qualifying “bodily injury” or “property damage.” It is worth noting that exclusions and ambiguities will be narrowly construed against the insurer. 

Contract or Tort Theory: 

Courts have gone back and forth to allow for indemnification under a contract or tort theory when considering coverage issues in construction claims. In Phico the court stated: 

To allow indemnification under [a breach of contract theory] would have the effect of making the insurer a sort of silent business partner subject to a great risk in the economic venture without any prospects of sharing in the economic benefit. The expansion of the scope of the insurer’s liability would be enormous without corresponding compensation. There is simply no reason to expect that such a liability would be covered under a comprehensive liability policy which has, as its genesis the purpose of protecting an individual or entity from liability for essentially accidental injury to another individual, or property damage to another’s possessions, even if, perhaps, the coverage of the policy has been expanded to cover other non-bodily injuries that sound in tort.

However, the court in Vandenberg decided that an insurer “cannot avoid coverage for damages awarded against [the insured] solely on the grounds the damages were assessed on a contractual theory.” Desert Mountain Ltd. Partnership v. Liberty Mut. Fire Ins. Co. also ultimately landed on the same conclusion but found that “proper inquiry is whether an ‘occurrence’ has caused ‘property damage,’ not whether the ultimate remedy for that claim lies in contract or in tort.”

The interplay between contract and or tort law specifically in policy exclusions: 

1. Business Risk:

Business risk exclusions are those that are intended to insure against accidents or other unexpected events that cause bodily injury or property damage to property other than the contractor’s work itself and not to serve as a ‘performance bond’ that protects the contractor against its poor workmanship and other breaches of its contractual obligations. In most cases, complaints may fall directly under business risk exclusions, and the insurer would most likely deny coverage.  In American Family Mut. Ins. Co. v. American Girl, Inc. the court stated: 

We agree that CGL policies generally do not cover contract claims arising out of the insured’s defective work or product, but this is by operation of the CGL’s business risk exclusions, not because a loss actionable only in contract can never be the result of an “occurrence”… This distinction is sometimes overlooked and has resulted in some regrettably overboard generalizations about CGL policies in our caselaw…[T]here is nothing in the basic coverage language of the current CGL policy to support my definitive tort/contract line of demarcation for purposes of determining whether a loss is covered by the CGL’s initial grant of coverage. “Occurrence” is not defined by reference to the legal category of the claim. The term ‘tort’ does not appear in the CGL policy. 

2. The Contract Itself: 

Policies often contain provisions excluding coverage that is assumed by the insured; the purpose is to exclude liability by way of the contract itself. The exclusion for contractually assumed liability applies if the insured would not be liable for damages but for the fact that it assumed liability under an expressed contract; where the contract adds nothing to the insured’s liability and the liability assumed under the contract is coextensive with the insured’s liability under the law, the exclusion does not apply. Some courts utilize a “but for” test, where “the injury is only considered to have arisen out of the contractual breach if the injury would not have occurred but for the breach of contract.” Id. While other courts apply an “incidental relationship test,” where coverage is precluded if the contact bears some relationship to the dispute in question. 

3. Economic Loss Exclusion:

An economic loss is often triggered when a defective product is delivered and there is no personal or property injury that has resulted – the loss is measured by the cost of remedying the defect and oftentimes for the loss of profits. “When the damages resulting from a breach of contact are limited to economic loss, the injured party may recover only in contract and not in tort, and such recovery may be reasonably limited by the terms of the contract.” However, the policy may exclude recovery of lost profits and or consequential damages; thus, limiting recovery to replacement or repair. If the economic loss doctrine is desired to be avoided, the best course of action is to argue recovery in tort rather than in the form of a breach of contact (recovery to be in the form of damages to the property rather than the work done by the contractor). Id. 

Triggering coverage tactics: 

There is one of three tactical ways coverage could be triggered - contingent on the facts. One way would be to expand the damage, so that the exclusions no longer apply. Although the coverage may only cover a small part of the claim, nonetheless, the insurer would have to defend all claims. Such a claim would have to be covered as an occurrence; thereby avoiding the triggering of an accident. Id. 

Secondly, an allegation may be brought after the subcontractor completed the work; thus, falling under a “products completed operations hazard (PCOH)” exclusion. The business risk exclusion does not extend to subcontractors in the case of damages falling under PCOH exclusions. Id. Wisconsin courts have also acknowledged that PCOH exclusions as being far-reaching: 

We realize that under our holding a general contractor who contracts out all the work to subcontractors, remaining on the job in a merely supervisory capacity, can ensure complete coverage for faulty workmanship. However, it is not our holding that creates this result: it is the addition of the new language to the policy. We have not made the policy closer to a performance bond for general contractors, the insurance industry has. 

Lastly, the option of joining the insured of the general contractor or subcontractor in the underlying action, pursuant to Wis. Stat. section 632.24 is also feasible. 

Contact our Experienced Milwaukee Attorneys

If you come across any of these issues as a contractor, then you should reach out to lawyers experienced in dealing with this process in litigation. Call Gimbel, Reilly, Guerin & Brown, LLP at 414-271-1440 today to set up a confidential consultation.

¹ Phico Insurance Co. v. Presbyterian Medical Service Corp., 444 Pa.Super. 221, 663A.2d 753 756-758 (1995). See, Keystone Filler & Mfg. Co. v. Am. Mining Ins. Co., 179 F. Supp. 2d 432 (M.D. Pa.), aff'd, 55 F. App'x 600 (3d Cir. 2002)

2 Vandenberg v. Superior Ct., 21 Cal. 4th 815, 982 P.2d 229 (1999). 

³ Desert Mountain Properties Ltd. P'ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194, 236 P.3d 421 (Ct. App. 2010), aff'd, 226 Ariz. 419, 250 P.3d 196 (2011). See, Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1, 16 (Tex.2007). 

⁴ 25 No. 3 Cal. Ins. L. & Reg. Rep. 1.

⁵ Insurance Coverage in Construction Claims, Wis. Law., JUNE 2002, at 10.