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Consultants in Risk Management |
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All rights reserved, Rivkin, Radler & Kremer, LLP. I. INTRODUCTION Over the past decade, there have been countless lawsuits filed by property owners against contractors, subcontractors and others who have worked on construction projects (collectively, "contractors") alleging damages arising from construction defects. These contractors have often tendered such claims to their insurers under commercial general liability f/k/a comprehensive general liability ("CGL") policies in an attempt to obtain insurance coverage for their construction defect liabilities. These insurance claims have spawned much coverage litigation in which courts have grappled with the question of whether construction defect claims fall within a CGL policy. From this coverage litigation, there is an emerging body of sometimes conflicting and very often confusing construction defect insurance coverage law. This article will cut through this law and get back to basics by providing the general framework for analyzing a claim for insurance coverage for construction defects under a CGL policy, including an identification of the recurring coverage issues. As will be seen, the unnecessarily confusing body of case law is developing for two primary reasons. First and foremost, CGL policies were not designed to provide coverage for most types of construction defect claims. One court described the policy reasons as follows: If insurance proceeds could be used to pay for the repairing and/or replacing of poorly constructed products, a contractor or subcontractor could receive initial payment for its work and then receive subsequent payment from the insurance company to repair and replace it. Equally repugnant on policy grounds is the notion that the presence of insurance obviates the obligation to perform the job initially in a workmanlike manner.1 Insureds' attempts to shoe-horn such claims into CGL policies that were not designed to cover them have sometimes resulted in confusing, result-oriented decisions. Second, courts have grappled with the effects of the changes in the "standard" CGL policy language in 1973 and 1986, as well as the effect of various endorsements on construction defect coverage claims.2 Because CGL policies generally are "triggered" by property damage during the policy period, contractors typically tender their construction defect claims under their CGL policies dating from when the construction took place through manifestation of the damage. Accordingly, such claims have been and will continue to be made under multiple policy years with varying insurance contract language. This, too, has created a body of decisional authority that is less than a model of clarity. While every construction defect coverage claim must be resolved based upon the particular insurance contracts and facts at issue, the general framework for the analysis is the same as any coverage analysis under a CGL policy. Assuming the insured has met the conditions precedent to coverage such as timely notice, the first question is whether the claim falls within the coverage grant of the policy. If so, the question then becomes whether one or more exclusions in the policy operate to preclude coverage. When this analysis is performed under a typical CGL policy, it yields a number of potential coverage defenses. While this article does not purport to exhaustively address every coverage issue that arises with respect to construction defect claims, it will identify a number of coverage defenses that have frequently arisen with respect to such claims. In light of the nature of the typical construction defect claim and the design of the CGL policy, there are a number of potential reasons that such a claim may fall outside the scope of CGL coverage or may be otherwise excluded. II. DOES THE CONSTRUCTION DEFECT CLAIM FALL WITHIN THE COVERAGE GRANT OF THE CGL POLICY? Coverage under a CGL policy is generally limited to claims against the insured for "property damage" resulting from an "occurrence." In turn, "property damage" is generally defined as "[p]hysical injury to tangible property . . . or . . . [l]oss of use of tangible property that is not physically injured." Moreover, coverage under a CGL policy is generally not "triggered" unless the property damage results "during the policy period." An "occurrence" is generally defined as an "accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."3 Accordingly, a construction defect claim does not fall within the coverage of a typical CGL policy unless, at a minimum, it involves the following:
One issue that frequently arises with construction defect coverage claims is whether the claim involves "physical injury to or destruction of tangible property" within the definition of "property damage."4 Because the injury to or destruction of tangible property must be "physical," claims for intangible injury do not fall within this definition.5 As such, , where the construction claim against the insured, contractor does not involve tangible, physical injury, courts have found no covered "property damage."6 Such situations arise where, for example, the claims against the contractor are limited to misrepresentation, breach of contract or indemnity without tangible, physical injury to property. Courts have also held that claims limited to fixing or replacing all or part of defective construction and/or claims of diminution in value because of defective construction work or materials with no physical injury are not claims for "property damage."7 Defective work or materials in and of itself does not constitute "property damage." As explained by one court: Generally liability policies, such as the ones in dispute here, are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather, liability coverage comes into play when the insured's defective materials or work cause injury to property other than the insured's own work or products. . . . [W]e do not believe inferior materials or workmanship themselves constitute "property damage." We concede it is possible for a manufacturer or contractor to use inferior materials or methods without causing any property damage . . . . However, where the defect in fact has caused either physical injury to or the lost use of tangible property, liability coverage has been found.8 Applying these principles, another court held that there was no covered "property damage" where the insured supplied and installed defective molds in a cement block manufacturing plant. The molds were used to manufacture interlocking concrete blocks. The manufacturer subsequently received complaints from some of its purchasers that blocks were not properly sized, and the manufacturer reimbursed one such customer for economic losses suffered by the customer through increased labor costs associated with cutting the blocks to make them fit properly. The manufacturer sued the insured for these losses and damages for loss of anticipated profits from unused blocks and loss in business reputation. The court held that there was no coverage because the manufacturer's suit against the insured did not involve "property damage" within the meaning of the policy, reasoning as follows: The inclusion of the word "physical" in this policy was designed to preclude recovery for consequential or intangible damages such as diminution or depreciation in value. . . . . The CGL policy was not intended to protect the insured against contractual liability for defective goods (i.e., the molds and liners used to form the blocks), workmanship or design . . . ."9 Likewise, in another case, the court held that the insured, building contractor's incorporation of defective workmanship and materials into a home that it constructed did not constitute covered "property damage." While "the defective materials and workmanship concededly produced an inferior home," the court held that this is not "property damage" within the meaning of the CGL policy.10 As illustrated by these cases, the very nature of many construction defect claims lend themselves to close scrutiny as to whether they involve "property damage" as defined in the CGL policy. If not, the claim is not covered. B. Property Damage During the Policy Period There is no coverage under a CGL policy unless the property damage results "during the policy period." Courts, therefore, have agreed that resulting property damage, not the preceding negligent or causative act, "triggers" coverage under a CGL policy.11 Courts have had a more difficult time agreeing when "property damage" occurs for purposes of triggering coverage where "long-tail" claims involving multiple years are involved. While this issue has been most frequently litigated in the context of environmental and asbestos claims, it also arises in the context of construction defect claims because there is often a question of whether the property damage occurred when the construction took place, when the property damage manifested, or sometime in between. In resolving when property damage occurs for purposes of triggering coverage for such long-tail claims, courts throughout the country have not been consistent. However, the approaches they have taken may be categorized into four general "trigger" theories, as follows:
There is no coverage under a CGL policy without an "occurrence," which is generally defined as an accident resulting in property damage "neither expected nor intended" by the insured. If the insured, contractor reasonably should have expected or intended the property damage, there is no coverage. Stated differently, CGL policies cover only fortuitous events. The "occurrence" issue is necessarily dependent upon the particular facts and circumstances of a construction defect claim. Where the facts demonstrate that there was no accident or that the insured should have reasonably expected damage, courts have found that coverage is precluded.18 For example, in one case, the insured, contractor performed brick and masonry work on a new office building, but the building owner refused to pay for the allegedly unworkman-like work..19 The Minnesota Supreme Court held that there was no "occurrence" because the property damage, which resulted from obvious violations of contract standards of workmanship, was expected.20 Similarly, the Appellate Court of Illinois held that the natural results of the negligent and unworkman-like construction of a building do not constitute an "occurrence" within the meaning of the CGL policy.21 The court explained that "the cracks in the floor and the loose paint on the exterior of the building are the natural and ordinary consequences of installing defective concrete flooring and applying the wrong type of paint."22 Hence, the facts of any construction defect claim should be examined to determine whether the insured, contractor reasonably expected damage from its conduct. If so, there is no "occurrence" and no coverage.23 III. DOES AN EXCLUSION PRECLUDE COVERAGE FOR THE CONSTRUCTION DEFECT CLAIM? Even where the insured, contractor has fulfilled the conditions precedent to coverage and the construction defect claim falls within the coverage grant of the policy, an exclusion may operate to bar coverage. Discussed below are the exclusions that most frequently arise in the context of construction defect coverage claims. A. Completed Operations Exclusion In evaluating a construction defect coverage claim, it is important to determine whether the CGL policy provides coverage for claims falling within the "completed operations hazard." The completed operations hazard generally includes property damage that occurs "away from premises" owned by or rented to the named insured after the insured's work has been "completed or abandoned."24 Where the contractor purchases CGL coverage including coverage for claims falling within the completed operations hazard, such coverage is generally provided subject to the other terms, conditions and exclusions in the policy, including those discussed in this article. Where the contractor does not purchase such coverage or such coverage is specifically excluded, this becomes a significant defense to many construction defect coverage claims. Indeed, while the particular contract language needs to be applied to the particular claim, where completed operations hazard coverage is excluded, this generally means that there is no coverage for property damage that occurs away from the insured, contractor's premises after the contractor's work is completed.25 For example, in State Farm and Casualty Company v. Avant,26 coverage was sought under a brick mason's CGL policy that specifically excluded property damage included within the completed operations hazard which included property damage that "occurs after . . . operations have been completed or abandoned and occurs away from premises owned by or rented to the named insured." The brick mason built a defective fireplace in a new home, which resulted in fire damage after the brick mason completed his work. The Louisiana appellate court held that the "property damage which was sustained after completion of the work . . . falls squarely within the definition of the exclusionary completed operations hazard clause, and coverage is excluded."27 The court explained as follows: The coverages provided by [the contractor's] policy were designed to cover [the contractor's] liability for losses which occur during the actual period of construction. Where completed operations and products hazards are excluded from coverage as they were in [the contractor's] policy, losses which occur subsequent to completion of the construction are not covered.28 Where the property damage at issue occurs after completion of the contractor's work, therefore, the question of whether the contractor's policy covers completed operations is a critical part of the coverage analysis. B. Business Risk Exclusions There are several exclusions in the CGL policy that courts have generally referred to collectively as the "business risk" exclusions. Individually, they are commonly known as the "insured's products," the "work performed" and the "faulty workmanship" exclusions. They have been referred to as "business risk" exclusions because they exclude coverage for various types of risks that are generally thought of as risks of doing business. 1. The Insured's Products Exclusion Pre-1986 CGL policies generally exclude coverage for "property damage to the named insured's products arising out of such products or any part of such products." Along these same lines, the 1986 CGL form excludes coverage for "'[p]roperty damage' to 'your product' arising out of it or any part of it[,]" but the definition of "your product" does not include "real property."29 A significant issue that has arisen with respect to this exclusion is whether a general contractor's completed construction project is the general contractor's "product," thereby precluding coverage to the general contractor for property damage to such construction project arising out of such project, or any part of such project. While there is a line of cases holding that a completed construction project is considered the general contractor's product for purposes of the insured's products exclusion,30 there is also a line of cases holding that it is not to be considered as such.31 For example, one New York appellate court addressed the question of whether a general contractor was covered for claims against it arising from the construction of, among other things, a school building.32 The underlying claimant alleged that the roof constructed by the insured's sub-contractor leaked, causing damage to the roof and the school building. Stressing that "it can hardly be contended here that the parties intended these liability policies to operate as performance bonds for the work performed by [the insured] or his subcontractors," the court held that the claims come within the insured's products exclusion because the school building was the insured's "product."33 In support of its holding, the court pointed out that Webster's Dictionary defines "product" as "something produced by physical labor or intellectual effort," which would include a general contractor's building project.34 One California appellate court disagreed with such reasoning in a case arising from claims against insured, general contractors alleging that condominiums they built were damaged by soil subsidence.35 The insurer argued that the insured's products exclusion barred coverage because the entire condominium project was its insured's product, but the court disagreed. Acknowledging that the insurer's interpretation is supported by a number of jurisdictions outside California, the court found that California decisions support the holding that the construction of the condominium project was a "service" not covered by the exclusion. The court further explained that "the distinction arises and coverage exists when services, as opposed to discrete, tangible components, have caused injury."36 In light of the above, the particular jurisdiction's law to be applied may make a difference in resolving the question of whether the insured's products exclusion operates to bar coverage.. Work Performed Exclusion Another so-called "business risk exclusion" is the work performed exclusion. Under the 1973 CGL form, this exclusion bars coverage for "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." By its plain terms, therefore, this exclusion precludes coverage for claims against contractors alleging defective workmanship by the contractor without damage to work or property of others.37 This exclusion has been applied to deny coverage to contractors for claims arising from a wide array of allegedly defective construction work, such as defective water supplies,38 defective stucco,39 a defective retaining wall,40 and defective insulating panels.41 Indeed, the New York Court of Appeals very recently described the breadth of the work performed exclusion, especially when read in conjunction with the insured's products exclusion, as follows: The insurance policy contains an exclusion for "property damage * * * arising out of [the insured's] products" or out of the "work performed by or on behalf of the named insured." That exclusion, commonly termed a "work product" exclusion, exists to exclude coverage for business risks, including claims that the insured's "product or completed work [was] not that for which the damaged person bargained." The "work product" of a residential land developer such as plaintiff includes not only the mortar, bricks, wiring and pipes that comprise its houses, but also the numerous discretionary choices that must be made in the course of erecting those houses. The builder's site choice, a choice that necessarily includes consideration of its access to a water supply, is clearly part of that work product. Thus, under the terms of plaintiff's insurance policy, liability arising from siting this development so as to be dependent upon a contaminated water supply is excluded from coverage.42 Significantly, the work performed exclusion in the 1973 CGL policy specifically applies not only to property damage to work performed by the insured, but also to property damage to work performed "on behalf of" the insured. As such, courts have held that this exclusion clearly precludes coverage for claims against general contractors arising from the defective workmanship of their subcontractors.43 For example, in one case, a general contractor for a condominium project was sued for both damage to the condominium units resulting from the collapse of a retaining wall which was installed by subcontractors and damage to the retaining wall.44 The court held that the work performed exclusion precludes coverage, stating that it "not only applies to the insured's defective work but also applies to the insured's satisfactory work that is damaged by the work [of its subcontractor] that fails." The court noted that its holding was consistent with the "purpose" of such polices, as follows: "The risk intended to be insured is the possibility that the . . . work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself . . . ." The policy is neither a performance bond nor "all risk" policy. Rather, the effect of the policy is to make the contractor stand its own replacement and repair losses while the insurer takes the risk of injury to the property of others.45 The 1986 CGL form deleted the words "on behalf of" within the work performed exclusion making clear that it will no longer generally apply to the work of the insured's subcontractor. Specifically, the 1986 exclusion precludes coverage for "'property damage' to 'your work'46 arising out of it or any part of it and included in the 'products-competed operations hazard.'"47 This exclusion further provides, however, that it "does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."48 While the 1986 CGL form somewhat narrows the scope of the insured's products and work performed exclusions found in the 1973 CGL form, it expands the scope of the exclusions for "business risks" by adding the so-called "faulty workmanship" exclusions. As discussed below, the 1986 form largely puts back in what it takes out of the 1973 form and sometimes excludes more, depending upon the particular circumstances. 3. Faulty Workmanship Exclusions in 1986 Policy Although the insured's products exclusion in the 1986 CGL form carves out an exception for damage to "real property," and the work performed exclusion in the 1986 form is limited to claims falling within the products-completed operations hazard, the 1986 CGL form goes on to add a number of construction-related exclusions that are sometimes referred to as the "faulty workmanship" exclusions. These exclusions clearly apply to "real property" and include ongoing operations. Specifically, exclusion "j" of the 1986 form precludes coverage for property damage to: (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." 49 Generally speaking, therefore, the "faulty workmanship" exclusions preclude coverage for property damage to the real property on which the contractor or its subcontractor is performing operations, or the particular part of any property requiring restoration, repair or replacement because the work of the contractor or its subcontractor was incorrectly performed on it. Subsection "5" specifically applies to "subcontractors," and subsection "6" so applies through its reference to "your work" which is defined as including work "performed by you or on your behalf ." While there are not many cases dealing with these faulty workmanship exclusions, the Court of Appeals of Texas addressed the exclusions in a case involving the negligent application of linseed oil to wooden doors and door frames of a building, causing discoloration.50 The court held that both subsections "5" and "6" precluded coverage. The court opined that subsection "5" applied because the damage was to "that particular part of real property on which" the insured is "performing operations," and the damage "ar[ose] out of those operations." Inasmuch as the insured had not yet completed its service contract with the underlying claimant, the court rejected the insured's argument that the damage did not arise out of "performing operations." The court also rejected the insured's argument that the doors and door frames were not "real property" within the meaning of subsection "5" because they were "annexed to realty as to become part of the realty."51 The court found that subsection "6" applied because such provisions "exclude coverage for damage to the insured's work or product, as a result of faulty workmanship."52 The court explained that the "completed operations hazard" exception did not apply because the insured had an "ongoing service contract with the underlying claimant such that the insured's 'work' was not complete at the time of the damage."53 A California appellate court examined the faulty workmanship exclusions in connection with a claim arising from the insured's supplying of defective siding for houses which resulted in loss of value of the houses.54 The court held that the exclusions were inapplicable because they "differentiated between damage to the product of the insured, and damage to other property caused by that product."55 The court further explained that, as the supplier of the siding, the exclusion would have operated to preclude coverage for damage to the siding, but it did not apply to damage to the houses, inasmuch as the insured did not perform any faulty workmanship on the houses. The court noted that the exclusion would have applied if the insured "had itself performed work on the houses, or if such work was done on its behalf."56 The faulty workmanship exclusions in the 1986 policy are, therefore, yet additional exclusions with potential applicability to construction defect coverage claims.57 C. Contract Liability Exclusion Both the 1973 and 1986 CGL forms also contain an exclusion known as the "contract liability" or "contractual liability" exclusion which also has potential applicability to construction defect claims. This exclusion generally precludes coverage for contractually assumed liability by the insured, contractor, with certain exceptions as set forth in the exclusion itself and as elaborated upon in the "Definitions" section of the policy. Specifically, the contract exclusion in the 1973 form precludes coverage for "liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner." The 1973 form contains an exception for liabilities assumed by the insured under "incidental contracts," but the definition of "incidental contracts" does not include the typical construction contract, whereby the contractor agrees to indemnify the owner for liabilities to third-parties arising from the contractor's work, or the subcontractor agrees to indemnify the general contractor for liabilities to third-parties arising from the subcontractor's work.58 Accordingly, under the 1973 form, the contract liability exclusion generally precludes coverage for liabilities assumed by the insured under such an indemnity agreement.59 To partially fill the gap in coverage under the 1973 CGL form for liabilities assumed under construction indemnity agreements, some contractors paid additional premiums for endorsements covering "designated contracts" or the endorsement known as the "broad form" endorsement, which extended coverage for liability assumed by the insured under a wider array of business contracts.60 The contract liability exclusion contained in the 1986 policy form merged, in part, the contractual liability exclusion found in the 1973 CGL form with the expanded coverage made available by the broad form endorsement. Specifically, the 1986 CGL form precludes coverage for "'bodily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Pursuant to its terms, however, "[t]his exclusion does not apply to liability for damages: . . . (1) [a]ssumed in . . . an 'insured contract;' or [t]hat the insured would have in the absence of the contract." Significantly, "insured contract" includes "[t]hat part of any other contract or agreement pertaining to your business under which you assume the tort liability of another to pay damages because of 'bodily injury' or 'property damage 'to a third person or organization, if the contract or agreement is made prior to the 'bodily injury' or 'property damage,'" and "tort liability means a liability that would be imposed by law in the absence of any contract or agreement."61 By virtue of this exception in the 1986 contract exclusion, therefore, the exclusion does not generally preclude coverage where the insured, in a business contract, "assume[s] the tort liability of another to pay damages because of 'bodily injury' or 'property damage'" to another. Such an assumption of liability may be included in certain construction indemnification agreements. Because the contract exclusion's exception applies only to the assumption of tort liability, one issue that has arisen is whether the contractually assumed liability for which the insured seeks coverage sounds in tort or in contract.62 When confronted with this issue, certain courts have attempted to determine the nature of the "liability underlying the [damages] award."63 For example, in Bernstein v. Consolidated American Insurance Co.,64 a general contractor sued and recovered against the issuer of a performance bond for a violation of the bond's conditions. The issuer of the bond, in turn, brought suit against a subcontractor, seeking reimbursement for the monies it paid pursuant to the bond, on the basis of an indemnity agreement whereby the subcontractor agreed to indemnify the issuer of the bond. The subcontractor then brought suit against its insurer seeking reimbursement of any damages, but the court held that the contract exclusion precluded coverage. The court rejected the insured, subcontractor's argument that the contract exclusion was inapplicable because the general contractor, in essence, sought tort damages from the bond issuer. The court explained that the "relevant inquiry is not the nature of the damages" sought by the general contractor.65 "Rather, the question is on what basis does the [general contractor] claim a right to recover from [the bond issuer]?"66 The court found that the "sole premise for [the bond issuer's] liability to [the general contractor] was the performance bond, a contractual obligation," not tort liability.67 That is to say, "but for [the bond issuer's] contractual agreement to be liable to [the general contractor] under the conditions set forth in the performance bond, [the general contractor] would have no cause of action against [the bond issuer]."68 While 1986 modifications to the 1973 CGL form have reduced the applicability of the contract exclusion to certain types of liability assumed in construction contracts, it may still apply to preclude coverage under certain circumstances. D. Sistership Exclusion Another exclusion found in both the 1973 and 1986 CGL forms is the so-called "sistership" exclusion. The sistership exclusion found in the 1973 CGL policy form precludes coverage for: damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the named insured's products or work completed by or for the named insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein . . . . Although this exclusion is sometimes raised in the context of construction defect coverage claims, including when insured, suppliers are sued because of defective construction materials, courts have not been particularly receptive to the application of the exclusion in this context.69 Certain courts have limited the application of the sistership exclusion to damages arising from the insured's recall or withdrawal of products or materials from the marketplace which have not yet caused damage, but which the insured anticipates may cause damage in the future.70 Such courts have opined that when a third party incurs costs to remove the insured's product from the market (and to replace it with a comparable product), the sistership exclusion does not apply.71 They have also concluded that the sistership exclusion does not exclude coverage for damage sustained as a result of a product which has already malfunctioned.72 These principles were relied upon by a court to find coverage, despite the existence of a sistership exclusion, where a third party withdrew the defective products after they malfunctioned.73 The insured in that case manufactured wood panels which it sold to a "concrete form" manufacturer which incorporated the panels into its forms. The concrete form manufacturer subsequently sold its forms to a number of contractors. The contractors began to complain to the forms manufacturer that the forms were warping and the manufacturer recalled the defective forms and offered to replace them with a similar product made with wood obtained from another supplier. Both the forms manufacturer and the contractors sued the manufacturer of the defective wood panels, seeking reimbursement for, amongst other things, the costs incurred to replace the defective forms. The court rejected the insurer's argument that the sistership exclusion applied, reasoning as follows: First, no defective "sister" panels were withdrawn from the market because of anyone's fears that they, too, would prove defective after the defects first came to light. Panels were withdrawn and replaced only after customers complained of defects in the panels delivered to them. Second, it was third parties - [the forms manufacturer and the contractors] - who withdrew the products, not the insured party . . . . 74 The 1986 sistership exclusion is similar to the 1973 exclusion, but it specifically applies to withdrawals or recalls by "any person," making clear that the withdrawal or recall need not be undertaken by the insured.75 Although there are very few reported cases dealing with the 1986 exclusion, it may apply under appropriate circumstances to construction defect coverage claims. E. Owned or Leased Property Exclusion CGL policies provide coverage for third-party, not first party, liability. As such, property damage to the insured's property or property over which the insured exercised care, custody or control is not covered. These fundamental principles are effectuated through the so-called "owned or leased property," "care, custody or control" and "alienated premises" exclusions in the 1973 and 1986 CGL forms. These exclusions apply in the context of a construction defect claim if the alleged property damage is to the insured, contractor's property or property in its care, custody or control. More specifically, the 1973 CGL form precludes coverage for: (k) . . . property damage to: (1) property owned or occupied by or rented to the insured, (2) property used by the insured, or (3) property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control . . . . [or] (l) . . . property damage to premises alienated by the named insured arising out of such premises or any part thereof . . . . The 1986 policy form contains a modified version of the exclusion which provides that there is no coverage for property damage to: (1) Property you own, rent or occupy; (2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises [this paragraph (2) "does not apply if the premises are 'your work' and were never occupied, rented or held for rental by you."]; (3) Property loaned to you; (4) Personal property in your care, custody or control . . . . 76 Significantly, the 1986 exclusion limits the "care, custody or control" clause to "personal property," meaning that it only operates to preclude coverage for damage to "personal property" within the "care, custody or control" of the insured.77 Where, the insured, contractor owned or leased the damaged property, the application of this exclusion is quite straight-forward.78 It is sometimes less clear-cut if the damaged property was in the "care, custody or control" of the insured so as to trigger the application of the exclusion. In resolving this issue, courts have generally considered one or more of the following factors to determine if the contractor exercised sufficient control over the property to bring the claim within the scope of the exclusion:
Differing CGL policy language and differing manners in which courts have dealt with such language have created a confusing body of construction defect coverage law. The jurisdiction's law to be applied may very well make a difference between coverage and no coverage for a construction defect claim. Once the choice-of-law issue is resolved, however, the framework for the analysis is rather straight-forward. Assuming the conditions precedent to coverage have been met, the first question is whether the construction defect coverage claim falls within the coverage grant of the CGL policy. If it does, the second question is whether one or more of the policy exclusions operate to preclude coverage. In light of the nature of construction defect coverage claims and the design of the CGL policy, such a claim may very well fall outside the scope of the CGL coverage or may be otherwise excluded.
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