The construction defect fiasco in California led to the creation,
by the specialty insurers, of the subsidence exclusion for
attachment to the commercial general liability policies of
homebuilders. Originally the exclusion applied only to completed
operations property damage and was limited to subsidence generally
caused by foundation failures. It has
evolved into the contractor's worst nightmare.
Many companies have extended the subsidence exclusion into an
"absolute earth movement exclusion" including earthquakes
and are using it for all contractors. Most no longer limit the
exclusion to either the property damage or completed operations
hazard. One admitted regional insurer puts the exclusion on every
policy it issues. Since the exclusionary language is so broad, it
would be strictly interpreted against the finding of
coverage. The courts in California have been of no help in
mitigating the negative effects. (See Blackhawk Corp. v Gotham Ins.
Co., 54 Cal App 4th 1090.)
This problem is no longer limited to California nor to specialty
insurers. A major national insurer specializing in contractors has
recently added an absolute subsidence exclusion for use in Arizona,
Colorado, and Nevada. Insurers may use this endorsement wherever
market conditions allow.
Why the big concern for most contractors?
- No coverage for
bodily injury arising out of a trench collapse on an ongoing job.
- Possible coverage
problems arising out of equipment upset.
- Any earthquake
induced bodily injury or property damage is excluded.
- Subcontractors may
have this exclusion on their policies.
What can you do to eliminate or
mitigate the problem?
- Use a different
insurer -- even California has A-rated insurers with minimum
exclusions.
- Request the exclusion
be deleted -- especially for premiums over $35K.
- Obtain separate
subsidence coverage where available.
- Require your subs to
disclose all exclusionary endorsements during bid
process.
- Obtain a side letter
from the insurer limiting the areas where the
exclusion applies.
Large general contractors and
public entities, such as Caltrans, are becoming more and more
sensitive to the use of exclusionary endorsements on policies where
they are named as additional insureds. There is a requirement on
both the Caltrans insurance specifications and the AGC of California
standard form subcontract that exclusionary endorsements be set
forth in the insurance certificates.
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