All too often business owners believe that by procuring a commercial general liability policy, or CGL policy, they will be protected from almost all mishaps and accidents on any projects. However, few business owners take the time to understand what exactly they are purchasing and when the CGL policy’s coverage will and will not apply. For example, what happens if you are welding on a project and the sparks ignite, causing a fire that damages substantial portions of the project? Does the CGL policy cover all of the damage? Does the CGL policy only cover damage to certain parts of the project? Will it cover consequential damages such as the loss of use of the damaged property? Does it matter whether you took every safety precaution possible to prevent the damage?
To determine what exactly your CGL policy does and does not cover depends on the language found in the policy. Unfortunately, many of these policies use complex language and terms of art that are all but indecipherable to those outside of the insurance industry. Of course, pleading ignorance regarding the terms of a policy after a claim has been denied is not the recommended course of action. So, what can you do on the front end to help mitigate your risks?
First, it is important to understand certain important coverage exemptions. For example, many CGL policies now contain an exclusion for “your work.” Specifically, the policy language will read that an exclusion applies to “property damage to that specific part of any property that must be restored, repaired, or replaced because of faults in your work.” This means that if you or an employee working for you fails to do the work correctly, the insurance company does not have to pay to fix the work not performed correctly. This should not be that controversial, as work that has been performed incorrectly is considered a business risk and has typically been excluded from CGL insurance coverage. See Builders Mut. Ins. Co. v. Mitchell, 709 S.E.2d 528 (N.C. App., 2011) (explaining liability insurance is not designed to function as a performance bond).
However, the “your work” exclusion has been coming up more frequently in insurance disputes because it is difficult to always determine what counts as “your work.” For example, what happens when in the course of performing your work, you accidentally damage other parts of the property. The North Carolina courts have considered the above quoted “your work” exclusion language and held that such language will only exclude coverage to the specific part of the property on which you are working. See Alliance Mut. Ins. Co. v. Dove, 714 S.E.2d 782 (N.C. App. 2011). So long as your policy does not have different language, then it should cover damage to other parts of the property, even if it was caused by your faulty workmanship. Furthermore, the exclusion does not apply to consequential damages that flow from the accident.
Unfortunately, there are still gray areas that North Carolina courts have not yet addressed, such as what happens when a portion of your work that you have completed is damaged by the incorrect performance of additional work by you. For example, if you are hired to perform multiple tasks and an accident on one task damages other property on which you are working. In that instance, it is unclear what would be excluded. Oftentimes, a policy will include language stating that work you have completed and turned over to the owner is no longer considered “your work” but it is often difficult to prove what work qualifies as having been completed.
Second, if a claim is denied that you think should have been covered, don’t give up. Ask the adjuster and your agent for clarification. Remember that insurance adjusters and agents can make mistakes. Also, if you were told by your agent at the time you procured insurance that you would be covered in similar situations and your claim is denied, you may have a claim on the agent’s errors and omissions insurance. However, such cases will often come down to your word against their word, unless your agent provided you with an e-mail or other letter proving the agent mislead you.
So, what other steps can you take to protect yourself? The best course of action is to get a knowledgeable insurance agent that you trust. Also, try to get verbal and if possible, written confirmation that the insurance policy you are purchasing or have purchased will cover you for the situations you are most worried about. Also, ask about what other policies the insurance agent believes would be warranted for your type of business, or if an insurance company offers any additional protection for businesses like yours. Because insurance contracts can change, make sure you carefully read all notices sent to you by your insurance company, especially those notifying you of coverage changes. It is a good idea to review your insurance contracts regularly with your insurance agent to make sure they are still applicable and cover you adequately. You may also want to consider having your insurance contracts reviewed by an attorney to make sure that they adequately protect your interests and that you understand when they do and do not apply. In particular, if you are working on an unusual project, or a particularly dangerous project, take the time before bidding the project to make sure your insurance coverage will protect you in the event something happens.
In sum, it is important to understand what exactly you are purchasing in a CGL policy. A little time and effort on the front-end of insurance contracts can save a lot of work and heartache down the road.