Subcontractors’ work: If they build it, are you covered?

The answer may not be as easy as you think.

Pop quiz: Is the work of subcontractors covered by your liability insurance?

If you answered yes, you may be correct. If you said no, you may also be correct. 

You likely already know that the typical commercial general liability (CGL) insurance policy doesn't cover "your work." (Why is "your work" in quotation marks? Because it's like that in the actual policy … indicating it's a specifically defined word in the policy.) For example, one of the more commonly used forms in the insurance industry, CG 00 01 04 13, excludes coverage to redo or fix "your work." Why? Because providing sloppy, faulty or bad workmanship is a risk you may assume as a business. It's not what insurance is meant to cover. The idea is that you have control over the quality of work you perform. You owe the customer a good work product and results that would make you happy if you were the customer.

But when it comes to subcontractors, you have less control and more risk when it comes to the work being done. That's why the typical CGL makes an exception for the work of subcontractors. If they do a bad job, there could be coverage if this exception is in your policy. In the exclusion for "your work", the ISO CG 00 01 04 13 form mentioned earlier states that "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."

This is good news! But here's the kicker - it's becoming more common for insurance companies to add an endorsement that removes the exception to the exclusion for "your work". This means that the work of a subcontractor is now also excluded from coverage. Why would an insurance company do this? The purpose is to put the onus of responsibility on the party that can control the losses - just as you control the quality of work your business provides, the subcontractor controls their work product. They should be responsible if the work is faulty.

Let's say you're a general contractor and recently completed a beautiful new office complex. You put in a lot of work and so did a number of subcontractors. You had double and triple checked every detail to make sure everything was completed as planned. But late one night, you get a phone call to come to the project site. You find that the newly installed roof is leaking and causing damage to the sheetrock, insulation and wood flooring.

Is the installed roof covered, or not? Well, if a subcontractor did the work and the work is defective, your CGL policy may still cover it. You might have a policy that gives an exception for subcontractors in the "your work" exclusion. Great!

But, you could also have a policy that removes this exception - and then the subcontractor's work isn't covered. The damage resulting from it may be covered still, but you're not going to find coverage for that roof in your CGL policy.

This can create a significant coverage gap for a general contractor when it comes to subcontractor work. If the subcontractor is unable to pay to fix the faulty work, it's likely to leave the contractor in a bind. That's why it's critical that you talk through the details of your insurance coverage with your independent agent. You need to know what will happen if a subcontractor's work is bad. Will you be left with the bill to redo or fix the work?

Most general contractors are added as an additional insured to their subcontractor's policy with primary noncontributory wording. The subcontractor's policy (in our example, the roofer's policy) should provide coverage for the general contractor for all damage to the building except for the roofing damage (which would be excluded as "your work" under the roofer's policy).

Because of these potential gaps, one of the most common questions I get asked when looking to write a contractor policy is a variation of, "does the policy have an exclusion for subcontracted work?" This is a great question for agents and contractors to consider as they review their insurance policies. Other great questions include; "how much work is being subcontracted out to others," "what are the additional insured requirements, and how strictly are they enforced?"

Is your head spinning trying to digest all of this?  Those of us in the insurance industry understand that this is a complicated topic. But, that's only because our products are designed to address so many different types of situations. Just another reason why working with your independent insurance agent is the best way to make sure your operation is properly covered.  

State Auto Insurance makes no representations or guarantee as to the correctness or sufficiency of any information contained herein, nor guarantees results based upon use of this information. State Auto does not warrant that reliance upon this document will prevent accident and losses or satisfy federal, state and local codes, ordinances and regulations. The reader assumes entire risk as to use of this information.


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