Understand Your Insurance: CGL Coverage

ST&A Construction Law Bulletin:

Many contractors and project owners enter into contracts or projects with a false sense of security because the contractor has an insurance policy with limits that exceed the value of the project. If a dispute arises over allegedly defective work, everybody assumes insurance will take care of the problem. Often, that is not the case.

One of the more common insurance coverage problems that arises in construction disputes is that the contractor’s insurance does not cover what the contractor or the owner thought it would. Many contractors carry just one type of insurance – CGL insurance, otherwise known as Commercial General Liability or Comprehensive General Liability insurance. Perhaps due to use of the terms “general” or “comprehensive,” the common assumption is that CGL insurance covers just about any problem that may arise during a project. It does not.

In broad terms, CGL insurance covers personal injury or property damage caused by the contractor. It does not cover defects in the contractor’s work. If defects in the work cause damage to pre-existing components of a building, or if someone is injured on the project, CGL coverage likely will apply. However, with limited exceptions – CGL insurance may cover defective work if the work was performed by the contractor’s subcontractors – CGL insurance will not cover costs associated with repairing defects in the contractor’s work. Unfortunately, too many contractors and owners do not learn this fact until after disputes arise. At that point, the contractor discovers that he or she may be have to pay for any defects, and the owner discovers that there may not be sufficient funds available to make things right.

What can be done to manage this risk?  Contractors should work closely with an insurance professional – do not simply assume that “general,” or “comprehensive” insurance covers all of your needs. Find out what types of insurance products are available to cover the type of work you do. And, where there are gaps in what is covered – and there will be – make sure you understand them, and price your projects to account for the associated risks. Owners similarly should not simply assume that a contractor is “fully” insured based on the dollar value of coverage. Make sure you know both the insurance limits and the types of insurance a contractor has. Where there are gaps in coverage – and there will be – do what you can to determine whether the contractor has the financial ability to take care of problems insurance does not cover, and consider all these factors in assessing the price for the project.

The most paramount point is that thinking through these issues before you sign a contract, or before you begin a project, goes a long way toward managing your risks, and limiting the impact of any problems that may arise during a project.

We are sending this bulletin to bring useful and timely information to our clients and colleagues.  It is only information we hope you will find interesting or useful and not legal advice.  You should not rely on any information or views in this bulletin as legal advice on any specific legal issue you may have.  Please contact your Skelton Taintor & Abbott attorney for specific legal advice. U.S. Treasury rules require us to tell you that any U.S. Federal tax advice contained in this communication (whether distributed by mail, email or fax) is not intended or written to be used and cannot be used by any person for the purpose of avoiding U.S. Federal tax penalties or for the purpose of promoting, marketing or recommending any entity, investment plan or other transaction.

Skelton Taintor & Abbott is a full service law firm providing legal services to individuals, companies, and municipalities throughout Maine. It has been in operation since its founding in 1853.