Opinion ID: 616452
Heading Depth: 3
Heading Rank: 4

Heading: Rationale and History of CGL Policies

Text: Our interpretation of accident, occurrence, and the business-risk exclusions are consonant with the rationale and history of CGL policies. National contends the cost to repair and replace the damage caused by faulty workmanship is a business risk not covered under a CGL policy. It also asserts that adopting the appellants' interpretation would effectively make an insurer the guarantor of the policyholders' work product. These arguments are unconvincing. First, we note that even though CGL policies initially provide coverage for some traditional business risks, the policies' exclusions effectively eliminate coverage for many of these business risks, including (in some instances) the cost of repairing damage to the contractor's own work. See Sheehan, 935 N.E.2d at 169. This structural aspect of CGL policies mitigates much of National's concern that a broad interpretation of occurrences and accidents would inappropriately provide coverage for business risks. In addition, the evolution of CGL-policy language shows that the current standard-form policy, which was used in the present case, was specifically designed to provide general contractors with at least some insurance coverage for damage caused by the faulty workmanship of their subcontractors. For example, the 1973 version of the standard-form CGL policy contained expansive business-risk exclusions that, unlike those in the current version, did not include an exception for damage resulting from a subcontractor's work. See French, 448 F.3d at 700. Because subcontractors were becoming increasingly integral to the completion of construction projects, however, many contractors became unhappy with the standard provisions. See Am. Girl, Inc., 673 N.W.2d at 83; see also 9A Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 129:18 (3d ed.) (Due to the increasing use of subcontractors on construction projects, many general contractors were not satisfied with the lack of coverage provided under [the 1973 CGL] commercial general liability policies where the general contractor was not directly responsible for the defective work.). As a result, in the mid-1970s, insurers introduced policies whereby contractors could pay a higher premium to obtain a specific endorsementknown as the Broad Form Property Damage Endorsement (BFPD)that effectively extended coverage to damage arising out of a subcontractor's work. Id. at 701. Still, before 1986, the CGL business-risk exclusions precluded coverage for damage to construction projects caused by subcontractors. In 1986, however, the subcontractor-exception aspect of the BFPD was directly added to the body of standard-form CGL policies, in the form of the subcontractor exception to the your work exclusion. Id. This resulted both because of the demands of the policyholder community (which wanted this sort of coverage) and the view of insurers that the CGL was a more attractive product that could be better sold if it contained this coverage. 2 Jeffrey W. Stempel, Stempel on Insurance Contracts § 14.13[D] (2007). Accordingly, the language included in the 1986 revision to CGL insurance policies covered some construction-defect claims arising from the work of subcontractors. See, e.g., Clifford J. Shapiro, Point/Counterpoint: Inadvertent Construction Defects Are an Occurrence under CGL Policies, 22 Constr. Law., Spring 2001, at 44 (The better-reasoned decisions give effect to the actual intent of CGL insurance by holding that construction-defect claims allege an `occurrence'. . . .). Indeed, as the Supreme Court of Texas observed, [b]y incorporating the subcontractor exception into the `your-work' exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor's defective performance. Lamar Homes, 242 S.W.3d at 12. Thus, the degree of business risk that is covered by a CGL policy is a negotiated agreement between contractual parties, which should not be disturbed by a court's view of whether business-risk coverage is appropriate. Insurers are of course free to amend CGL agreements or offer riders so as to reallocate the risk of subcontractor negligence. See, e.g., J.S.U.B., 979 So.2d at 891 ([I]f the insurer decides that this is a risk it does not want to insure, it can clearly amend the policy to exclude coverage, as can be done simply by either eliminating the subcontractor exception or adding a breach of contract exclusion.); Lamar Homes, 242 S.W.3d at 12 (More recently, the Insurance Services Office has issued an endorsement that may be included in the CGL to eliminate the subcontractor exception to the `your-work' exclusion.). Finally, we note that interpreting a CGL policy so as to provide coverage for a subcontractor's faulty workmanship does not transform the policy into a performance bond. [A]n insurance policy spreads the contractor's risk while a bond guarantees its performance. An insurance policy is issued based on an evaluation of risks and losses that is actuarially linked to premiums; that is, losses are expected. In contrast, a surety bond is underwritten based on what amounts to a credit evaluation of the particular contractor and its capabilities to perform its contracts, with the expectation that no losses will occur. Unlike insurance, the performance bond offers no indemnity for the contractor; it protects only the owner. Id. at 10 n. 7. And even if the CGL policy does share some characteristics of a performance bond, that alone is an insufficient reason to ignore the plain language and intent of the policy. For all of these reasons, we find the property damage alleged here may result from an occurrence triggering a duty to defend the policyholder.