Clear As Mud: An Update on CGL Policies

In recent years, there has been much confusion over what is and what is not covered by most commercial general liability (CGL) policies. The federal district courts in Arkansas ruled that an “occurrence” under a CGL policy did not include faulty workmanship or damages resulting from faulty workmanship. Therefore, neither was covered under a CGL policy. For example, those cases held that repairs needed to correct the leaks in a poorly constructed roof would not be covered under a CGL policy and neither would the cost of replacing the water-logged carpet. This is no longer the case now that the Eighth Circuit Court of Appeals and the Arkansas Legislature have weighed in on the issue. Their efforts to clarify the law, however, have raised more questions for construction firms and insurance companies alike. Here’s why:

The case of Lexicon, Inc. v. Ace American Insurance Company concerned a silo which collapsed due to alleged faulty welds performed by a subcontractor. The trial court in the Lexicon case held that the collapse of the silo was not covered and neither was the damage to the products stored in the silo, damage to adjacent silos, and damage to other equipment. The ruling was appealed. The Eighth Circuit applied Arkansas law and clearly affirmed past Arkansas cases which denied coverage for damage to “the work product itself” which arose from faulty work – here, the collapsed silo – but reversed as to resulting damage. The court held that Lexicon was covered for all property damage other than to the silo itself. In its analysis, instead of examining the accidental nature of an “occurrence” as past courts had done, the Eighth Circuit examined the accidental nature of the damages. In other words, it was foreseeable that faulty subcontractor work would damage the silo, but not foreseeable that faulty subcontractor work would cause millions of dollars in collateral damage. The court’s reliance on the nature of the damages essentially side-steps the definition of “occurrence” included in CGL policies in order to reach a result which is not actually supported by the language of most CGL policies, but which is to the advantage of construction companies. Now, in the example cited above, the poorly constructed roof is still not covered under a CGL policy but the water-damaged carpet is covered.

In March of this year, Governor Beebe signed Act 604 of 2011 into law which takes effect on July 8, 2011, and was apparently an attempt by the Arkansas Legislature to codify the holding in Lexicon. The new law references the recent uncertainty caused by Arkansas court decisions over coverage for damages from faulty workmanship. The Act states that CGL policies sold in Arkansas shall contain a definition of “occurrence” that includes accidents and also “property damage or bodily injury resulting from faulty workmanship”. At first reading the new law would act as the Lexicon opinion holds: damage to the work product itself (i.e., the leaky roof) is not an occurrence but damage resulting from the faulty workmanship (i.e., the water-damaged carpet) is an occurrence and covered by the CGL policy. However, it is likely that challenges to the law will be made by insureds, or those making a claim against them, which argue that damage to the work product itself (i.e., the leaky roof) is included in the statutory language. Should such challenges prove successful, this may actually not be a win for construction firms because carriers may raise premiums or pull out of the market.

Significantly, the new law specifically states it is not intended to restrict or limit the nature or types of exclusions from coverage that an insurer may include in a CGL policy. As such, construction firms may be faced with expanded or altered “property damage”, “damage to your work”, or “damage to your product” exclusions when they renew their CGL policies - - perhaps a “your work” exclusion which no longer contains the subcontractor exception that affords coverage for certain property damage resulting from faulty subcontractor work.

Despite the recent court holding and legislation, questions persist. If carriers remain in the market, construction companies may still face a fight with their own insurance company over their CGL policies: whether over expanded exclusions, raised premiums, or declinations based on interpretations of the new law. While construction firms should hope for the best, they should work with their insurance agents – and lawyers if necessary – to ensure that their companies are not left exposed.

Cynthia W. Kolb is a member of the Barber Law Firm’s Construction Law Practice Group and Insurance Coverage Practice Group. Her practice focuses on civil litigation with an emphasis on insurance coverage disputes. She can be reached at
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