Every industry needs knowledgeable professionals. C&R Magazine’s commitment to keeping professionals informed inspired the monthly column “Dear David.” This will provide C&R subscribers with knowledge in an area that touches almost every aspect of the work they do–Insurance.
“Dear David” gives readers the opportunity to ask insurance and risk management related questions to someone who is not selling insurance products. These questions can focus on all manner of claims, the structure of an insurance program, risk management techniques, safety, various aspects of compliance, and so much more.
As an example, the latest issue of C&R Magazine contained an article called “CASE STUDY: Apartment Fire in the Bronx” by Michelle Blevins. The article tells the story of Maxons Restorations amazing work as they balanced the needs of seventy stakeholders while working quickly and efficiently in March of 2020 to restore the building’s function and people’s homes. Insurance likely had a big role, but the only indication came towards the end, “The bill was paid in full in less than 30 days.”
Clearly, Maxons Restorations understood the importance of documentation, securing approvals, scoping the work accurately, and keeping parties informed. But what if this did not go well? What if the insurance policy had challenges in the coverage afforded? What if the adjuster was not so agreeable? What if an accident happened during the restoration? It is here, at the crossroads of real life and insurance, that the C&R reader should look to ask their questions, seek advice or share their experience. The value “Dear David” provides is going to come from your questions, concerns, or comments, so don’t be shy. But for now, lets explore a common misconception.
Speaking broadly, a Commercial General Liability policy promises to provide coverage under part A for property damage arising from negligence in the on-going or completed operations of an Insured. The policy has exclusions, which are the things that fall outside of the insurance companies promise to pay. One of those exclusions is the “Your Work” exclusion. Generically speaking, this is the exclusion that removes coverage for things that are in the scope of work that are self-performed.
What is the importance of the scope of work and its impact on a Commercial General Liability policy? We need a few facts to explore this question. Using this photo from the “CASE STUDY,” here are the fake facts: the soot and dirt on the tile floor is in the self-performed scope of work and the tile floor is damaged by an alleged negligent act of the contractor self-performing the cleaning.
The probable expectation of most C&R readers could be their Commercial General Liability policy should cover the damages to the floor. But most will be surprised that it is likely excluded from coverage. Why?
The Commercial General Liability Policy, in one respect, is looking for direct physical damage to things that are outside of the self-performed scope of work. While insurance terms and conditions can vary greatly between Insurance Companies, a fair amount of them use Insurance Services Office, Inc. materials as a starting point in crafting their own policy language. These foundational documents look to make a distinction between what is work or operations self-performed in the scope of work and the physical damage to tangible property that is outside of the scope of work. These terms attempt to make the distinction clear but the clarity can be blurred by the way various courts have interpreted and applied the insurance contracts to a set of facts. However, the guiding principle in these distinctions is often the Economic Loss Doctrine.
The Economic Loss Doctrine is a legal concept that separates tort liability from that of contractual liability. Think of it this way, the scope of work (the contract) says the floor will be cleaned. This is what the parties bargained for and agreed to. When the work is performed and the only thing damaged is the floor, this is a contractual liability arising out of the contractor’s alleged failure to perform as bargained. The exclusion in a Commercial General Liability policy conveys this message by excluding the physical damage to a property to which the insureds work, or operations is self-performed.
So how would damage to the floor be covered? By Professional Liability Insurance. This is the type of insurance protecting one from the risk of loss arising to the work or operations they are self-performing. If one were to look at their profit and loss statement to see how much re-work is hitting the bottom line, this is an indicator that Professional Liability Insurance could be a wise investment. Likewise, if one looks at their largest contract written—this too is a solid indicator that Professional Liability Insurance could be a wise investment. Why? Because the operative assumption could be that if one is self-performing and the damaged property is in your scope of work—it is not covered by a Commercial General Liability policy.
Here is a way to visualize the distinction. Assume the total scope of work for the project to clean the floors was $100,000. While cleaning the floors a fire is alleged to be negligently caused by the contractor. The $100,000 scope of work could be a coverage gap in the Commercial General Liability policy as this was the scope of the work being self-performed. The other resulting damages could be covered by the Commercial General Liability policy, but the $100,000 scope of work—could be excluded and a Professional Liability policy would be needed to address these damages.
What is the practical lesson here? First, when writing a self-performing scope of work for a project being specific is better than being overly broad. A scope of work that says “clean building” just created the potential that no coverage could exist under a Commercial General Liability policy should a negligent event cause damage to any part of the building. Second, is to check the overall insurance program and see if it has Professional Liability Insurance.
One more important note, at Advocate Claim Service we do not sell insurance. If you are looking to get a quote—sorry. Our primary mission is the strategic presentation of claims to get policyholders the benefits owed under an insurance policy. We provide claim consulting services to Policyholders, Brokers, and Attorneys. As licensed insurance professionals, we have over 35 years of insurance claims experience across a wide array of coverage lines. In addition, our Insurance and Risk Management consulting practice is well suited to remove the mystery from your own insurance program by providing you with a deep dive review of the coverages. We look forward to supporting the professionals of C&R Magazine.