In the third iteration of our ongoing construction insurance series, we examine the ramifications when a contractor is required to carry a commercial general liability (“CGL”) insurance policy.
CGL insurance is intended to cover contractors against claims for injury or property damage to others arising from your contracting or construction activities. The triggering event is generally an “accident”, including events arising out of negligence by the insured.
Under the CGL policy, coverage therefore exists for compensatory damages owed to third parties in three categories:
- property damage (i.e., physical injury to or the loss of use of tangible property);
- bodily injury;
- personal injury (i.e., intangible injuries that do not generally involve physical harm).
Coverage is therefore provided for damage to work performed by others during the project but it will not extend to the insured’s own property.
Exclusions from Coverage
As with most other policies, other than professional liability insurance, if the loss is the cost of remedying a defect that arises out of faulty design or workmanship, it will not be an “occurrence” within the terms of the policy. The CGL policy does not cover damage caused by deliberate actions that are not accidents. Such is the case where damage is done at the discretion of the project engineer, even though the action may be required to remedy a defect of the original system. Other common exclusions include injuries otherwise covered by Workers’ Compensation, and liability arising from the use of an automobile and pollution.
The most significant exception to CGL coverage precludes recovery for property damage to the insured’s own products, property, and work. The “your product” exclusion limits recovery for damage to the insured’s own products (generally, anything that is not real property) that is caused by fault or defect in the products themselves. Similarly, the “own property” exclusion limits recovery for property damage by excluding:
- all property owned by the insured;
- real property on which the insured is performing operations if the damage arises out of those operations; and
- property that must be repaired or replaced during the course of the performance of the work arising from the incorrect performance of the work by the insured.
The “your work” exclusion, as noted above, bars coverage for property damage to the insured’s own work where the damage arises out of the work itself. However, if this excluded damage leads to damage to other property, that resultant damage will be covered, with one significant exception: if the contractor’s work covers the entire project, damage to the project will likely not be covered.
A pollution exclusion clause is now a standard clause found in most CGL policies in Canada. Given the prominence placed on the specific terms and phrases in environmental pollution exclusions, special attention should be given to the wording of the policy and exclusions to ensure adequate coverage. Courts have often noted that if the insurer’s intent was to exclude coverage for something specific, then the insurer would state this in the exclusions.
Generally, the exclusion operates to bar coverage for damages arising from environmental contamination or pollution and not to contamination or pollution of indoor spaces. Of particular note is the case of Zurich Insurance Co. v. 686234 Ontario Ltd. In this case, the insurer argued that the “plain meaning” of the exclusion should apply to exclude liability for the emission of carbon monoxide from a leaking furnace in an apartment complex. However, the Ontario Court of Appeal held that the initial intent of the CGL policy was to protect the insured. Therefore, the court must examine the specific wording of the provisions and if there is ambiguity, the policy is to be construed, in favour of the insured, considering the reasonable expectations of the parties.
Other exclusions relating to water as a pollutant, handling or treatment of waste, fumes at the worksite, and faulty machinery, chimneys, and heaters, have received conflicting judicial treatment. Therefore, care must be taken in drafting and agreeing to provisions respecting these and other possible contaminants.
Next time, we will tackle Design Professionals’ Liability Insurance.