Common Insurance Coverage Exclusions
The insurance company bears the burden to establish the applicability of any exclusion.
Insurance policies limit coverage through the use of exclusions written into the policy. The insurer bears the burden to establish the applicability of any exclusion.
Expected or Intended Injury
Exclusion (a) in the standard CGL policy excludes any injury or damage that is “expected or intended from the standpoint of the insured.” This form of intent relates to the insured’s state of mind with respect to the consequences of the act, i.e., the resulting harm, and should not be confused with the test for “occurrence,” which focuses on the intent to commit the act itself.
The language “from the standpoint of the insured” indicates that Exclusion (a) imposes a subjective test. The focus is on what the insured expected or intended, rather than an objective test that would charge the insured with some level of foresight or intent. Additionally, Exclusion (a) looks to whether the injury or damage resulting from an act was expected or intended, not merely whether the act itself was intentional in nature.
In Arizona, this policy exclusion applies only if an act was intentional and there was either a subjective desire to cause some specific harm (intent) or substantial certainty expectation) some significant harm would occur.
Exclusion (b) of the ISO CGL policy excludes coverage for:
“Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract,” provided the “bodily injury” or “property damage” occurs after the execution of the contract or agreement.
The CGL policy defines “insured contract” as follows:
(f) That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. Paragraph f does not include that part of any contract or agreement:
(2) That indemnifies an architect, engineer or surveyor for
(a) Preparing, approving or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings and specifications; or
(b) Giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage: or
(3) Under which the insured, if an architect, engineer or surveyor, assumes liability for an injury or damage arising out of the insured’s rendering or failure to render professional services, including those listed above and supervisory, inspection, architectural or engineering activities.
Exclusion (b) relieves the insurer of liability under the policy in situations where the insured would not be liable to a third party except for the fact that the insured “assumed” the liabilities in question under a hold harmless or indemnity agreement. However, the exclusion will not apply, even in the face of a contractually assumed liability, where there is a legal basis for such liability separate from the contractual assumption, e.g., where the insured would also be liable to the indemnitee under principles of tort law, implied indemnity, or contribution. Therefore, where the insured specifically assumes liability under a contract with a third party, such exclusion relieves the insurer of liability, otherwise existing under the policy, only in situations where the insured would not be liable to a third party except where the insured’s liability would not exist except for the express contract.
Damage to Property
Two portions of Exclusion (j) may apply to a claim arising out of construction activities. Exclusion (i)(5) excludes from coverage “property damage” to:
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations.
The use of the term “particular part” limits the exclusion’s application to damages to the work on which the insured is actually working at the time of the occurrence. The property damage to be excluded must arise out of the work of the insured, its contractors, or its subcontractors in the process of “performing operations.” Therefore, exclusion (j)(5) applies only to property damage that result from ongoing work.
Exclusion (j)(6) excludes from coverage repairs to defective construction before the entire project is completed. It excludes “property damage” to:
(6) That particular part of any property that must be restored repaired or replaced because “your work” was incorrectly performed on it.
Paragraph (6) of this exclusion does not apply to “property damage” included in the products-completed operations hazard.
Exclusion (j)(6) excludes coverage for property damage sustained to “that particular part of any property requiring repair due to “your work.” Under the CCL policy, “your work” means “work or operations performed by you or on your behalf” and “materials, parts or equipment furnished in connection with such work or operations.” Exclusion (j)(6) excludes coverage for damage to property on which the insured performed work where the property itself must be restored, repaired or replaced. Like Exclusion (j)(5), Exclusion (j)(6) requires a “particular part” test, which may serve to limit the reach of this exclusion.
Exclusion (j)(6) only pertains to repair or replacement of defective work while construction is ongoing; the policy excludes from the exclusion property damage included in the “products-completed operations hazard,” which covers damage arising out of the insured’s work that does not occur until after the work has been completed or abandoned. Work is completed when “that part of the work done at the jobsite has been put to its intended use by any persons or organizations other than another contractor or subcontractor working on the same project” – in essence, when the project as a whole has reached final completion. Furthermore, work that needs correction or repair but is otherwise complete will be treated as completed. Thus, the fact that warranty work is required does not mean that the work is not completed.
Exclusion (k) provides that CGL coverage does not apply to “property damage” to “your product” arising out of it or any part of it.
The CGL policy defines “your product” as:
(a) Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:
(2) Others trading under your name; or
(3) A person or organization whose business or assets you have acquired; and Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products. “Your product” includes: (a) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your product;” and
(b) The providing of or failure to provide warnings or instructions.
This exclusion is intended to deny coverage for damages arising out of items manufactured or fabricated by the insured contractor, breach of warranty thereon, or failure to warn. To exclude coverage under this exclusion, the insurer must show that (1) the damage was done to the insured’s product, and (2) the damage arose out of the insured’s product. A question often arises whether a building itself constitutes a general contractor’s “product.” While a few jurisdictions consider a building constructed by the insured to be a “product” of the insured, the majority do not. Property damage caused by the insured’s product to other parts of the construction project is not affected by this exclusion.
Insured’s Work and the Subcontractor Exception
Exclusion (l) states:
This insurance does not apply to: “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.
Exclusion (l) generally excludes coverage for damage to completed work; however, the 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. Thus, if the work that causes the damage or the work that is damaged is subcontractor work, coverage exists.
The F.C.&S. Bulletin illustrates this exclusion as follows:
[A]ssume the named insured, a general contractor, constructs a building that is accepted by its owner. Sometime later the building is damaged by fire as the result of a faulty heating system installed by the insured. The insured is not covered for the damage to the completed work – the heating system and any other work performed by the insured – but is covered for damage to work performed by subcontractors. Or, suppose the cause of damage – faulty heating system – was the work of a subcontractor. Any subsequent damage to the building, whether the work of the insured (general contractor) or of subcontractors, is covered.
In other words, the insured contractor’s CCL will respond to all of the following:
- Damage to the insured contractor’s work that arises out of the work of a subcontractor.
- Damage to a subcontractor’s work that arises from that subcontractor’s work.
- Damage to a subcontractor’s work arising out of the insured contractor’s work.
- Damage to a subcontractor’s work arising out of another contractor’s or subcontractor’s work.
Exclusion (m) excludes coverage for loss of use of certain property not physically damaged. It states:
This insurance does not apply to:
(m) “Property damage” to “impaired property” or property that has not been physically injured, arising out of:
(1) A defect, deficiency or dangerous condition in “your product” or “your work”; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to “your product” or “your work” after it has been put to its intended use.
The CGL policy defines “impaired property” as follows:
“Impaired property” means tangible property, other than “your product” or “your work”, that cannot be used or is less useful because:
(a) It incorporates “your product” or “your work” that is known or thought to be defective, deficient, inadequate or dangerous, or
(b) You have failed to fulfill the terms of a contract or agreement;
If such property can be restored to use by the repair, replacement, adjustment or removal of “your product” or “your work” or your fulfilling the terms of the contract or agreement.
The impaired property exclusion has been held to preclude coverage for economic losses caused by the insured’s failure to live up to a contractual obligation. However, the impaired property exclusion does not apply if there is damage to property other than the insured’s own work.