General Liability Policy Exclusions – How to Plug the Holes
By: Bob Mahan, Esq.
As published in the AGC Constructor, March/April 2014
Every General Liability (GL) and excess policy issued to a subcontractor has a myriad of limiting and exclusionary policy language. As a GC, how do you know that your subs or even your own policies are providing the maximum coverage? Here is a quick look at what may be contained in – or excluded from – your policy, and what you need to know to ensure you’re adequately covered.
The basic Insurance Services Office (ISO) GL Form CG 00 01 incorporates numerous exclusions. These appear in either the bodily injury and property damage or personal injury coverage grants. Some of these exclusions, such as auto, aircraft, and workers compensation, exist because the coverages for these exposures are always purchased separately.
Other exclusions are not so straightforward. These include:
- Intentional acts causing bodily injury or property damage
- Property Damage Limitations — Commercial Property, Builder’s Risk or other related.
- Limited Pollution – A separate pollution policy.
- Liquor Liability – Separate coverage is needed if business operations involve alcohol.
- Electronic Data Breach – Cyber Liability coverage required.
- Numerous exclusions associated with personal injury – Professional liability is needed to fill some gaps.
- Shareholder suits and other pure contract actions -Directors and Officers cover.
Bear in mind that even the basic coverage form is most complex and very difficult for a layman to interpret.
In addition to the built-in coverage limitations in the basic coverage form, the carriers use many comprehensive, very limiting exclusionary endorsements. The following are not allowed on the policy of any subcontractor working under the AGC Standard Form Subcontract:
- Subsidence or earth movement exclusion
- Prior acts or prior work exclusion
- Action Over – Precluding indemnity for passive acts of Contractor contributing to injury of a Subcontractor’s employee.
- Contractual Limitation – Eliminating coverage for assumed liability.
- Supervisory or Inspection Service limitation
- Insured vs. Insured Cross Suits
- Clauses terminating coverage after a designated period of time
- Residential or Habitational limitation if the work includes residential or habitational work.
- Classification limitation limiting coverage for work to be performed.
If any of the above are present in the subcontractor’s policy and an uncovered loss occurs, the subcontractor will be in breach, leading to liability to the upstream party, such as the GC, for such uncovered loss. The carriers writing coverage for contractors in California will generally remove these exclusions, frequently at no charge. BUT, the broker has to be smart enough to get it done.
Any broker who does not have a detailed understanding of your GL policy must be replaced. Look for brokers who have the Construction Risk Insurance Specialist (CRIS ®) designation. AGC membership is also a must. If your broker only holds himself out to be an order taker, he only has liability for failing to procure the coverage you request.
Other exclusionary endorsements that frequently appear include: asbestos, lead, mold, benzene, silica dust and other poisonous substances; total pollution; subcontractor limitation (this can be major problem); terrorism; engineering or construction management; employment related practices; wrap-up coverage; progressive bodily injury; exterior insulation finishing systems (EFIS) – Ensure your drywall and similar subs have coverage for EFIS; andmany others of varying significance.
The negative effects of the various exclusions enumerated above can be partially cured by upgrading the contractor’s program. We recommend the following:
- Professional Exclusion. Ensure a limited contactor’s professional exclusion (CG 22 79 or CG 22 80) is used in lieu of engineering or construction management exclusions.
- Combined Contractor’s Pollution and Professional Liability policy. This will fill the gap left by the total pollution and the poisonous substance exclusions. The basic policy form, as written, provides a substantial amount of coverage by exceptions in the language. But the now common “total pollution exclusion” removes all coverage. The contractor’s professional liability coverage will pick up design build liability exposures along with limited general contractor liability for defective supervision. This coverage is quite complex and should not be left to the layman to interpret.
- Builder’s Risk and Installation Floaters. These insure that work not yet accepted under the owner’s property is covered. No GL policy will cover damage to work where title has not passed. You can’t be liable to yourself! In the event of a fire before owner acceptance the GC may be paying for the damage.
- Employment Practices Liability Coverage. Claims for employment related actions are increasing rapidly. You can’t be without this coverage. A related coverage option that is inexpensive is Employee Benefits Liability.
- Excess Coverage. It is best to purchase excess liability coverage that strictly follows the primary policy. Otherwise you will have an entire set of additional exclusions to bite you. Try to obtain coverage allowing for vertical exhaustion of limits. If not available, don’t assume contractual liability for noncontributory excess coverage. Ask your broker.
- Cyber Liability. This coverage is highly recommended if you are handling credit card billing of any kind.
- Directors & Officers Liability (D&O). This covers shareholder suits and other limited contract exposures. This is mandatory if you have outside shareholders.
- Terrorism Coverage. This important coverage is often widely ignored. If you have any exposure in target locations such as high rises, churches etc., you should elect this option.
Don’t hesitate to obtain a copy of the policies of your subcontractors where high hazard exposures exist. The AGC long form subcontract provides for such.
The contracting community spends billions on insurance often without having a clue as to what their coverage includes (or excludes). Many of the policies sold to contractors today are done by inexperienced brokers with no legal background along with an inability to read the policies.