Exclusion – Business Insurance Coverage

Commercial General Liability Exclusions j. (5) and j. (6) Are Not the Same

paperless — Tue, 19 Oct 2021 20:45:49 +0000

Denial of Commercial General Liability Coverage (CGL) coverage for certain types of property damage claims made against contractors or other repair or service business frequently cite exclusions j. (5) and j. (6), or as Randy Maniloff¹ has named these exclusions, the “double js.” Put another way, these exclusions are appropriately labeled “double js” because if an insurer is citing one “j.”, it will almost always cite the other “j.” as a basis for a coverage denial.

The problem with lumping together of exclusion j. (5) and j. (6), which is the most prevalent when the property damage being claimed is to real property, is that this approach tends to conflate the meaning of the exclusions. While it may not matter in some instances, exclusions j. (5) and j. (6) do not exclude property damage for exactly the same situations. This should be obvious. Courts do not generally treat words as “mere surplusage” and seek to give effect to all the policy wording. Thus, there would be no need for j. (5) if it excludes property damage in precisely the same situations as exclusion j. (6) and vice versa.

Coverage Enhancements. The distinction between the double js is especially important in situations where an insurer removes one of the exclusions but leaves the other. For example, one insurer deleted exclusion j. (5) entirely, purporting to afford “riggers” liability coverage to its insured. However, exclusion j. (6) was still applicable. Another insurer provided a “Care, Custody or Control Coverage” enhancement to its CGL policy with a $50,000 per occurrence sublimit for property damage, deleting exclusions j. (4) and j. (5), but leaving intact exclusion j. (6). If exclusion j. (6) applies to the same causes of property damage as exclusion j. (5), these insurers’ offers are illusory and would provide no coverage at all. It is highly doubtful that an insurer would knowingly offer illusory coverage. Nonetheless, failure of those insurers’ claims adjusters to understand the difference between the double js will result in illusory coverage—a result unacceptable to all courts.

The Differences Between the Double Js

The full wording of each exclusion:

(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; or

(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”. ²

That Particular Part. Both exclusion j. (5) and j. (6) apply narrowly—each excludes only property damage to “that particular part” of certain types of property. A substantial number of coverage dispute focus on what is meant by “that particular part,” with states reaching different conclusions. Generally, the conclusions fall into one of two camps.

The first and most limiting camp interprets the phrase “that particular part” as excluding property damage to all work of the insured – eliminating coverage for property damage to non-defective work done by that insured if caused by that insured’s defective work. The second camp recognizes that “that particular part” is “trebly restrictive” and property damage to that insured’s non-defective work caused by the insured’s defective work is not excluded. However, as the phrase “that particular part” is used in both exclusion j. (5) and j. (6), such conclusions shed little light on the differences between the double js.

Two Recognizable Differences. The first and most noticeable difference between the double js is that exclusion j. (5) applies only to real property. Exclusion j. (6) applies to any property – real or personal. However, another exclusion applies to property damage to personal property in the care, custody or control of the insured – exclusion j. (4). Second, the CGL includes a specific exception to exclusion j. (6) that does not apply to j. (5). Exclusion j. (6) does not apply to property damage that takes place within the products-completed operations hazard. This alone should signify that exclusions J. (5) and j. (6) serve different purposes.

Example Scenarios

Consider the following to explain the workings of the double js.

Example 1

Nick’s Contracting, Inc. has contracted with the Sunshine Condominium Association to repair, and replace as needed, the 12 chimneys in the main building. Nick has purchased an ISO CGL policy, which includes the double js exclusion with the wording found above. Nick’s Contracting, Inc. is a named insured on the CGL policy.

After examining the first chimney, Nick determines that the seal around the chimney is cracked and decides to use tar to patch the area. In heating the tar, it catches fire and the fire damages the chimney and the roof of the building.

Exclusion j. (5). As this is property damage that arose out of operations performed by Nick on real property, exclusion j. (5) applies. But only the property damage to the chimney is excluded. Because the chimney is “that particular part,” property damage to the chimney is excluded. The property damage to the roof is not “that particular part” and therefore is not excluded by j. (5).

Here is where insurers are inclined to assert that exclusion j. (6) also applies. After all, isn’t this a situation where property must be repaired or replaced because “your work” was incorrectly performed on it—it meaning the chimney? The short answer is no—that misconstrues the purpose of exclusion j. (6) and is the result of conflating the workings of exclusion j. (6) with j. (5). In other words, as explained below, exclusion j. (6) applies to a different situation entirely.

Example 2

The situation is the same. Nick’s Contracting, Inc. has been contracted with the Sunshine Condominium Association to repair, and replace as needed, the 12 chimneys in the main building. His CGL coverage is also the same. This time, however, Nick did not cause a fire when patching the tar cracking around the roof. That portion of his repair was done without incident.

Instead, Nick finds the second chimney to be in very poor shape—a number of bricks have fallen out and lay on the roof. The mortar has all but disappeared. Nick takes down what is left of the chimney and prepares to completely rebuild the chimney. He first notifies Sunshine to avoid using chimney number two as he will be rebuilding it. He mixes new mortar and is able rebuild the chimney by the end of the day.

Exclusion j. (6). The next day, Nick finds the chimney he has just rebuilt has fallen apart. Apparently, he did not mix the mortar properly and the bricks simply tumbled to the ground during the night. The chimney needs to be completely rebuilt. Again. Sunshine makes claim against Nick for the cost of rebuilding the chimney he built the previous day.

The purpose of exclusion j. (6) is to eliminate coverage for the cost of rebuilding the chimney. The fallen chimney is that particular part of any property that must be restored, repaired or replaced because Nick’s work (using defective mortar) was incorrectly performed on it(the chimney).

Purpose of Exclusion j. (6)

This exclusion has been historically referred to as the “faulty workmanship” exclusion. That is, the exclusion applies only to the cost of making good work that was incorrectly performed.

By its terms, the exclusion only applies to “that particular part of any property…made necessary by reason of faulty workmanship thereon.” Given the narrow scope of the exclusion, we conclude it applies only to repair defective workmanship…”³

Exclusion j. (6) should be viewed as a complementary exclusion to exclusion l. Damage to Your Work, sans the subcontractor exception. Put differently, exclusion j. (6) and exclusion l. are two sides of the same coin – both exclusions eliminate property damage coverage for the cost of repairing or replacing faulty work i.e., work that was incorrectly performed. But exclusion j. (6) applies only in situations where some portion of the work has been completed, but that work does not yet fall within the products-completed operations hazard. In the case of Nick’s Contracting, the chimney was completed, but because the project was not completed (recall the contract was for all 12 chimneys), the property damage that occurred to the chimney when it crumbled was not within the products-completed operations hazard. If the chimney fell apart a couple of months after completing the entire project, the repair of all 12 chimneys, exclusion j. (6) would not apply. Instead, exclusion l. would apply to eliminate any coverage for Nick to the cost of rebuilding the chimney.

Historical Roots of j. (6). The notion that exclusion j. (6) applies only to the cost of making good work that was incorrectly performed and not to parts of the project not yet completed but damaged when performing operations has its historical roots in the Broad Form Property Damage endorsement. In ISO’s Circular of January 29, 1979, entitled “Broad Form Property Damage Coverage Explained,” the policy drafters stated, as respects exclusion j. (6) (formerly (2) (d) (iii)):

This section excluded property damage to that particular part of any property which occurs after work on that part has been completed and where it can be established that the property damage was the result of faulty workmanship of the insured or his subcontractor.

FC&S Bulletins, Casualty and Surety, Public Liability, August, 1982, page Epb-1-10, provides the following commentary:

Subparagraph (iii) [exclusion j. (6)] emphasizes that the insurance does not cover any obligation to the insured to repair or replace faulty products or to re-do faulty work, even if the faulty work may have been done by a subcontractor.

FC&S labels exclusion J. (5) as “Property Being Worked On” and labels exclusion j. (6) as “Faulty Workmanship” FC&S labeling provides a simple, clear and useful distinction between the double js.

Conclusion

In our example of Nick’s Contracting, Inc., exclusion j. (6) did not apply to the fire damage to the chimney because the damages being sought from Nick were not to redo a portion of completed work Nick had performed incorrectly. Rather, the damages were to real property being worked on. Negligently causing property damage to the property being worked is clearly distinguishable from the cost to replace a portion of completed work that was done incorrectly. In other words, the fire damage is not the type of “faulty workmanship” to which exclusion j. (6) applies. Any such interpretation conflates exclusion j. (5) with exclusion j. (6), encouraging the demonstrably flawed belief that exclusions j. (5) and j. (6) are interchangeable and apply to exactly the same situations.

Sources

¹ Randy Maniloff, “Exclusion j. (5) and j. (6): Appeals Court Provides a Simple Tutorial,” Coverage Opinions, White and Williams, LLP, February 6, 2019. Volume 8, Issue 2.

²Commercial General Liability Coverage Form CG 00 01 04 13 © Insurance Services Office, Inc. 2012

³ Southwestern Contractors v. Cincinnati Indemnity, 390 F.Supp.3d 1009, United States District Court, D. Arizona (2019) citing Desert Mountain Properties Ltd. P’ship v. Liberty Mut. Fire Ins. Co. 225 Ariz. 194, Ariz. Ct. App. 2010)

LEGAL DISCLAIMER Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.  This This article was originally published by AMWins.

Explaining Employers Liability Exclusion

paperless — Tue, 20 Jul 2021 18:42:37 +0000

Even when you follow all the necessary safety guidelines and precautions, accidents and worker injuries can happen on a construction jobsite. And when you have numerous sub-contractors involved, who is held liable for paying worker injury claims can get complicated quickly. This article details how the Employers’ Liability exclusion works in a Commercial General Liability policy through a hypothetical claims scenario and why its important to thoroughly review and understand this wording, especially when changes are proposed.

Employee Injuries – Who Pays?

Employee Injuries and Exclusive Remedy. When employees are injured arising out of and in the course of employment, that employee’s remedy is usually limited to workers’ compensation benefits as prescribed under the applicable workers’ compensation law. The employee is very often prohibited by the workers’ compensation statute from bringing a tort¹ claim or suit against his or her own employer – we understand this concept as the “exclusive remedy” doctrine. But exclusive remedy applies only between the employer and employee. This doctrine does not prohibit an injured employee from bringing a tort claim or suit against a third party, such as a landlord or a general contractor, even if that employee collects workers’ compensation benefits.²

Managing Injuries to the Employees of Others. Of course, third parties are well aware that they are likely to be targeted with claims or suits by the injured employees of others. The traditional way³ to manage this situation has been for the third party to require the others to indemnify or reimburse the third party for damages resulting from employee injuries of others. This requirement to indemnify is known as “contractual indemnification” because the obligation to indemnify the third party is found within a written contract or agreement – specifically a hold harmless and indemnification clause of that written contract or agreement.

Hypothetical Claim Scenario – Employers’ Liability Exclusion in Action

Background. General contractor Day Builder’s, Inc. has entered a trade contract with subcontractor Knight Plumbing, LLC, in which Knight agrees to hold harmless and indemnify Day for jobsite injuries that result, at least in part, from Day’s fault. In essence, Knight has assumed liability for injuries to its own employees that would be partly the fault of Day. In other words, the hold harmless and indemnity agreement used here is a risk financing technique in which Knight has agreed to pay damages for which Day has some responsibility. Subsequently, an employee of Knight, Jonathon, is seriously injured on the jobsite. Jonathon is paid workers’ compensation benefits, including his medical expenses and lost wages (subject to the state weekly maximum).

Third-Party Claim. Because his workers’ compensation benefits do not pay his full damages, such as pain and suffering and loss of consortium, Jonathon brings a tort suit against Day Builder’s, Inc. He alleges that Day breached its duty to keep the jobsite safe. Upon learning of Jonathon’s lawsuit, Knight’s workers’ compensation insurer files a lien against the damages that Jonathon may recover from Day. The suit against Day by Jonathon is a third-party claim.

Action Over Claim – Contractual Indemnity. When Jonathon’s suit is tendered to Day, Day in turn demands that Knight hold harmless and indemnify Day for the damages resulting from Johnathon’s injuries. In its demand for indemnity, Day cites the specific wording of the hold harmless and indemnity clause in the trade contract between Knight and Day. This contractual indemnity claim by Day is known as an “action over” claim.

Action Over Claim – Common Law Tort Claim. In addition to the demand for contractual indemnification, Day also tendered a common law tort claim against Knight, alleging that Knight was at fault in causing injury to Jonathon by not providing appropriate safety equipment to Jonathon. In other words, Day is asserting that even if it had some fault in causing Jonathon’s injuries, Knight also had some fault, and that Knight is obligated to pay back Day for some or possibly all of the damages resulting from Jonathon’s injuries.

Knight’s Insurance. Knight has tendered the contractual indemnification claim and common law tort claim to its Commercial General Liability (CGL) insurer, Fidelity Fiduciary Insurance Company (FFIC). In addition, Knight has tendered the common law tort claim to Knight’s workers’ compensation and employers’ liability insurer, Acme Insurance Company, Inc. (AIC).

The CGL Policy. The CGL purchased by Knight is the ISO Commercial General Liability Coverage Part with an edition date of April 2013, and a number of endorsements not pertinent to this claim. In determining FFIC’s coverage position, the claims adjuster recalls that the CGL policy is never intended to pay for injuries to the employees of the named insured – in this case, Knight Plumbing, LLC. After a quick look at the policy’s Employers’ Liability (EL) exclusion (exclusion e), the adjuster sends a coverage denial letter on behalf of FFIC to Knight, denying the coverage for the claim in its entirety (both the demand for contractual indemnity and for common law tort claim) based on this exclusion.

The EL Exclusion. A closer reading of the CGL’s Employers’ Liability exclusion, found within the body of CGL itself, does exclude bodily injury to an employee of the insured “arising out of and the course of: Employment by the insured.”⁴ Further, the penultimate paragraph of the exclusion states that the EL exclusion applies “even if the insured is liable as employer… to share damages with or repay someone else who must pay damages because of the injury.”⁵

In this scenario, both the contractual indemnification claim and the common law tort claim are demanding that Knight reimburse Day some or all of the damages payable to Jonathon from his injury – falling directly within the penultimate paragraph quoted above.

Claim Adjuster’s Mistake. While it may appear that the complete denial of coverage is correct, it is wrong because the adjuster failed to read the last paragraph on the exclusion. It is an exception to the exclusion that states “This exclusion does not apply liability assumed by the insured under an ‘insured contract.’”⁶ The importance of this sentence is enormous, and easily overlooked or changed.

Insured Contract Exception. By virtue of the hold harmless and indemnity agreement, Knight had indeed assumed the liability of Day in an “insured contract”⁷ as defined in the CGL policy. The result is that the Employers’ Liability exclusion did not apply to the demand for contractual indemnification – Knight’s CGL policy applied to the extent that Knight was liable to Day according to the terms of the agreement.

However, the adjuster was correct in denying coverage for the common law tort claim against Knight as the liability that Day sought to impose on Knight was “liability imposed by law in the absence of any contract or agreement”⁸ and thus completely excluded by the Employers’ Liability exclusion. In short, the employers’ liability exclusion of the CGL applies to tort claims.

AIC’s Response. You may recall that Knight tendered the common law tort claim to its Workers’ Compensation and Employers’ Liability insurer – AIC. The likely defense asserted by AIC on Knight’s behalf would involve AIC challenging Day’s right to make a tort claim against Knight in the first instance. Exclusive remedy commonly prohibits not only direct suits by an employee against an employer, but often prohibits tort-based action over claims.

The reason for the prohibition is that exclusive remedy is intended to relieve the employer from employee injury tort claims – whether brought directly by the employee or by third parties. However, if the common law tort claim was allowed to proceed, Employers’ Liability insurance, found in the Workers’ Compensation and Employers Liability insurance policy, that would have, subject to all its terms and conditions, defended the tort claim and paid damages on behalf of Knight if Knight was found legally obligated to pay damages for Jonathon’s injuries.

Conclusion

This article is intended to illustrate the importance of the “insured contract” exception to the Employers’ Liability exclusion in the CGL policy. Accordingly, attempts to amend this exclusion should be a red flag for any policyholder.

However, it is not unusual for an insurer to try and avoid this exposure entirely by removing the “insured contract” exception to the Employers’ Liability exclusion. Because the exception is but one sentence in a much longer exclusion, removal of the exception may go entirely unnoticed or unappreciated. Of course, as in the illustration above, this one sentence may be the difference between payment of damages and an uncovered claim.

Therefore, beware of changes to the Employers’ Liability exclusion of the CGL policy – and any similar changes to this exclusion in an excess or umbrella policy.

Sources

¹ A tort usually alleges a breach of duty, claiming the breach of duty caused the employee’s injury. The employee seeks damages that result from the injury. Negligence is the most common tort.

² Most workers’ compensation statutes allow the workers’ compensation insurer to place a lien on the damages recovered from third parties by the injured worker, but only to the extent of the workers’ compensation payments received. The intent is to prevent double recovery by the injured employee.

³ Additional insured status is also a very common way to manage the risk of the injuries to the employees of others. However, additional insured status does not apply to a demand for contractual indemnification. In other words, additional insured and contractual indemnification are independent remedies.

⁵ Id.

⁶ Id.

⁷ The pertinent portion of the definition of “insured contract” is part f. “That part of any other contract or agreement pertaining to your business…under which you have assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization.” © Insurance Services Offices, Inc., 2012, CG 00 01 04 13 – 9. Insured contract means:

⁸ 9. Insured contract means: part f. “Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

This article was originally published by AmWINS Group, Inc. Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.