The "your work" exclusion in a general commercial liability policy

In seeking indemnification for damages caused by a subcontractor’s work, a general contractor or upstream subcontractor should understand the “your work” exclusion typically contained in commercial general liability (CGL) insurance policies, as well as the “subcontractor exception” to that exclusion. For all contractors, understanding those two concepts can be a key part of the company’s risk management.

Simply put, the “your work” exclusion in a CGL policy generally bars coverage when the only damages claimed are repairs to the work performed by the named insured. The exclusion, as it appears in the policy, may use wording such as this:

"This insurance does not apply to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith." [Emphasis added.]

Thus, if a new roof leaks because of a workmanship defect, and the roofer submits a claim under their CGL policy, repairs to the roof are probably not covered due to the “your work” exclusion, but the flatscreen TV and oriental rug damaged by the leak would be covered.

However, many policies include a “subcontractor exception,” which states that the “your work” 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.” But, as discussed below, if a subcontractor’s work causes damage, and the GC makes a claim as an “additional insured” on that sub’s CGL policy, the GC cannot rely on the “subcontractor exception” to force the sub’s carrier to cover the loss.

The "Your Work" Exclusion in an Arizona Case

A 2016 Arizona Court of Appeals opinion, Double AA Builders v. Preferred Contractors Insurance, provides the most recent Arizona case law specific to the “your work” exclusion.

The dispute dates back to 2007, when Harkins Theatres hired Double AA Builders as general contractor on the construction of a theater complex. Double AA subcontracted with Anchor Roofing to install the roof, and Anchor added Double AA as an “additional insured” to its CGL policy issued by Preferred Contractors Insurance.

After construction was completed, a leak in the theater’s roof resulted in damage to work performed by other subcontractors. The leak also caused Harkins to lose business, and Harkins asked Double AA to replace the roof, which it did.

Double AA then filed a lawsuit seeking indemnification from Anchor Roofing, Preferred Contractors Insurance, and Westfield Insurance (Double AA’s insurance company). In its suit, Double AA sought to recover the cost of replacing the roof but, significantly, not to recover the cost of repairing other leak-related damage to the theater.

Double AA settled with Westfield and obtained a default judgment against Anchor Roofing. That left Double AA to do battle with Preferred over whether replacing the roof was a covered loss under Anchor’s policy.

At trial, the judge ruled in favor of Double AA and against the insurance company, finding that the leak constituted an occurrence that resulted in covered property damage and that the “subcontractor exception” clause removed the claim from the policy’s “your work” exclusion.

Preferred appealed the trial court’s ruling to the Arizona Court of Appeals, which interpreted the “your work” exclusion differently. In its opinion, the Court of Appeals found that, because Double AA’s lawsuit was limited to recovering only the cost of replacing the roof and did not include other damages caused by the leak, the work performed by Anchor Roofing did in fact qualify for the “your work” exclusion.

More important, the Court held that Double AA could not rely on the “subcontractor exception” to the “your work” exclusion because the work was not performed by a subcontractor to the named insured, Anchor. In other words, only first-party claims trigger the “subcontractor exception,” leaving GCs and upstream subcontractors who make claims as “additional insured” with no way around the “your work” exclusion.

Takeaway

While GCs and upstream subcontractors should always require their subcontractors to name them as additional insured on the sub’s CGL policy, that offers only limited risk management. If a subcontractor whose work is defective will not submit a first-party claim to its carrier, thus forcing the GC or upstream subcontractor to make a claim as “additional insured,” any repairs to the subcontractor’s work are probably not covered.