How is a claim initiated?
The trigger of the claims-made form is the first making of a claim against the insured during the policy period. If the damage occurs today but a claim is not made until after the policy expires, the claim will be covered under next year’s policy, assuming that no exclusions apply and that the loss occurs after the retroactive date in the policy that defines the extent of coverage for occurrences that happened before the inception of the policy in effect at the time the claim is made.
A contractor may face a construction defect claim several years after construction is complete because under many state laws, he or she remains responsible for the work up to 10 years. If the contractor switches carriers and, in the process, changes policy types from a claims made to an occurrence form, or does not renew with a retroactive date that goes back to the inception of the insured’s first claims-made policy, there may be a gap in CGL coverage, and hence no coverage for the defect claim. The contractor would have to purchase a ‘tail’ as a supplement to cover potential claims on past work.
What is excluded in CGL policies?
CGL policies often exclude residential projects. If there is a residential exclusion, special care must be taken to make sure the contractor’s CGL policy applies to, for example, a mixed-use retail commercial project with condos or apartments above retail stores.
Some project owners and general contractors use controlled insurance programs (CIPs) to insure construction projects. Instead of every contractor on a project purchasing separate general liability, excess liability and workers’ compensation, one master wrap-up policy is written. This is purchased not only to cover all construction activities during the project but subsequent to construction, as well. Contractors and subcontractors often have CGL wrap-up exclusions on their individual policies to avoid duplicating coverage elsewhere. It is best if individual CGL policies for contractors and subcontractors provide coverage excess of wrap-ups to avoid the situation whereby a construction defect claim is made several years after project completion when the extended completed operations coverage under the wrap-up has expired.
What other exclusions are often included in CGL policies?
Insurers add exclusions based on the use of high-risk building materials such as asbestos, exterior finish and insulation systems, silica and lead. Also, pollution and mold exclusions are often added to CGL policies. Contractors are protected from these perils by a contractor’s pollution liability policy, but not all contractors carry a separate pollution policy. Commercial general liability policies protect a contractor, and the owner, from exposure to losses from completed construction projects. These losses often result in significant claim settlements and expensive litigation. Contractors and owners need to be aware of restrictive endorsements related to coverage trigger, project type, damage type and building materials that may have altered coverage.
Susan R. Schwartz is a director of Aon Risk Services Central Inc.’s Construction Services Group. She is responsible for business development, consultation and placement of commercial insurance for contractors. Reach her at (314) 719-5161 or [email protected].
