How to Draft Lawsuits to Trigger Insurance Coverage

Vol. 15 No. 3


While every construction dispute is different, most complaints – especially those disputes involving construction defects or design claims – should be drafted with an eye towards invoking any and all potentially applicable insurance policies.  As Forum Members know, construction lawsuits have the potential to trigger numerous insurance issues under a contractor’s commercial general liability (“CGL”) policy.  In most instances, reaching these insurance policies should be a primary goal for the plaintiff’s lawyer to increase the likelihood of obtaining a satisfactory result in the end.

I. Are the Damages Caused by an “Occurrence”?

A threshold question when analyzing insurance coverage issues is whether the alleged damages were caused by an “occurrence” as defined in the contractor’s insurance policy.  State courts are split into three camps on this issue. Further, four states have enacted legislation to define the term.

In many states, such as Pennsylvania, damages caused by a construction defect are never recoverable under a standard CGL policy because defective construction is never an occurrence as a matter of law.  Other states, including Ohio, agree with the general concept that defective construction is never an occurrence but allow coverage for damages that are “fortuitous and unintended,” which generally means damage to property other than the defectively constructed component.  The final group of state courts, including Texas, have concluded that all defective construction is accidental and therefore constitutes an occurrence under a CGL or property insurance policy.             

Four states – Arkansas, Colorado, South Carolina, and Hawaii – have attempted to legislate how the term “occurrence” is defined in CGL policies.  These attempts have been met with varying degrees of success in clarifying the law on this issue in their respective states, as one commentator for the ABA Section of Litigation noted in 2012.  More legislation along these lines is likely to be proposed; indeed, a bill proposed in the New Jersey Legislature would require the term “occurrence” in certain insurance policies to include coverage for faulty workmanship.

II. Drafting a Pleading to Trigger Multiple Insurance Policies           

Assuming the damages implicated in a construction dispute can be considered an “occurrence” in some way, the facts of the case may trigger multiple insurance policies.  For example, assume that damages from defective/leaky windows began in December of Year 1 after a project’s substantial completion and the leaks continued through June of Year 2 before they could be addressed.  The leaks damaged the windows themselves, as well as the drywall and expensive carpet inside the building.  If the contractor responsible for the damages had a policy which covered losses which occurred during the policy period only, it is possible that the insurance policies for both Year 1 and Year 2 could be triggered to address the project owner’s losses.   Further, a rain event causing damage in Year 1 (assume it rains heavily on December 28) could be viewed as a separate occurrence from a rain event taking place in Year 2 (assume a second downpour on January 15).

In the scenario above, certainly the project owner is limited to only one recovery.  However, if the damage sustained was substantial enough, it is possible the owner may be able to recover under both policies (such is not the case, however, if the contractor’s insurance policy is a “claims-made” policy versus an “occurrence-based” policy).  Under a “claims-made” policy, the insurer is responsible for losses based on a claim made only during the policy period.  Thus, if a claim is sent to the contractor for this loss during Year 3, and the relevant policy is a claims-made policy, the insurer issuing the Year 3 policy has, at least potentially, responsibility for the loss. 

III. Pleading to Avoid the Professional Services Exclusion in a CGL policy

The “exclusions” found in a contractor’s insurance policy can be critical.  For example, most standard CGL policies exclude coverage for damages stemming from an insured’s errors or mistakes of a professional nature – e.g., damages which would likely be covered by an Errors & Omissions (“E&O”) or other similar malpractice-type insurance policy.  This can be problematic for the project owner’s attorney.

For example, what if a construction defect is such that the cause is either an architectural or engineering error or omission or, alternatively, resulted from defective construction?  For example, a ramp compliant with the Americans with Disabilities Act (“ADA”) may not be longer than thirty feet in one direction if the slope of the ramp is between 1:12 and 1:16.  If the design appears to be correct, but does not provide sufficient room for appropriate construction tolerances and therefore does not comply with the ADA, is this a design flaw or a contractor error?  This is a question for experts, but the answer is one of judgment for a fact-finder to determine.  Similarly, if the contractor had design-build responsibility on a project, the CGL policy would not cover the failure to design a portion of the project in accordance with the appropriate architectural standard of care.  Thus, the contractor and project owner must tender the claim under an E&O policy. 

In either of the above cases, the owner’s attorney must be mindful of the insurance issues involved.  In many respects, if there is a question regarding whether the defect at issue was the result of substandard design or substandard construction, the best practice is to plead these issues in the alternative in the same lawsuit against both the architect and the contractor.  If that is not possible – say, for example, one of the parties has an arbitration clause in its contract and the other does not – then knowing how to plead the issue based on the relevant insurance policy is vital to maximizing the owner’s recovery.

IV.  Pleading to Avoid the “Your Work” or “Your Product” Exclusion

In addition to the foregoing, the typical CGL policy excludes coverage for damage to “your work” or “your product.”  Thus, in the leaky window scenario discussed above, the CGL policy will not cover the costs associated with the repair or replacement of the windows if the contractor merely installed the window and nothing more.  Rather, the policy would only cover the repair or replacement of the drywall and carpet.  

Taking this analysis one step further, there may be an exception that applies to the “your work” exclusion: if the damage to “your work” causes damage to the work of a subcontractor.  Generally, this exception may lead to coverage if the defective construction was performed by a subcontractor.  For example, if the project owner with the leaky window sues its general contractor and the window had been installed by a subcontractor, the subcontractor exception to the “your work” exclusion may apply.  In recent years, however, insurance companies have issued new policy forms to eliminate this exception through an endorsement issued in the middle part of the past decade, the CG 22 94 10 01 endorsement.  This endorsement, as one court noted, essentially removes all insurance coverage for allegedly defective workmanship performed on a project.  After all, if the entire project is performed by the general contractor through its subcontractors, the entire project is the “work” of the general contractor.  As such, it is important to obtain and review the relevant CGL policy to determine whether this new endorsement is a part of the policy and, therefore, whether there is a possibility of recovery as a result.

V.  Pleading to Avoid Intentional Torts

Nearly every insurance policy relevant to construction defects or errors and omissions excludes coverage in some way for certain intentional torts.  While some intentional actions may be covered by an insurance policy (as this law review article points out), most intentional torts relevant to construction likely fall outside of an insurance policy’s coverage provisions due to the “intentional acts” exclusion, which, as the name suggests, excludes coverage for damages stemming from an insured’s deliberate actions.. 

Allegations that a contractor committed fraud on a project in some fashion may open the door to punitive damages, but it may close the door on insurance coverage.  For example, if an attorney alleges that damages resulted from the contractor’s decision to use a certain process or particular type of design or material, the contractor’s decision could be interpreted as an intentional act rather than a negligent action performed intentionally.  In this case, coverage might be denied due to the lack of an “occurrence” – typically defined as an “accident” – and coverage might also be denied under the “intentional acts” exclusion.  

VI.  Pleading in Good Faith

Of course, all claims set forth in a pleading must be asserted in good faith. There will be times when an attorney cannot draft allegations sufficient to trigger insurance coverage simply because the facts do not support the allegations. For example, an attorney cannot assert allegations against a subcontractor in an effort to avoid triggering the application of the “your work” exclusion if no such subcontractor actually exists. 

However, in many instances, a complaint can be pleaded properly and in good faith to trigger an insurer’s broad duty to defend and corresponding duty to indemnify.  For example, as mentioned above, if you represent an owner suing a general contractor, you may be able to avoid issues regarding the “your work” and “your product” exclusions by including allegations that the defendant’s negligence caused damage to the work and/or product of another contractor(s) or caused damage to the owner’s property.  Sometimes, you must be creative; however, being creative can require you to take a close look at your allegations because they must be asserted in good faith and without violating your ethical obligations.

VII. Conclusion

When you are drafting a complaint, it is important to draft it in a fashion which triggers an insurer’s duty to defend, if at all possible; some contractors are judgment proof so, in the absence of insurance and from a practical standpoint, your client might not otherwise have any recourse.  While every dispute is different, most if not all complaints should be drafted with an eye towards insurance coverage.  It is much easier to draft a broad complaint and trigger coverage than it is to sue a contractor, find out its insurer denied coverage, and then try to amend the complaint to trigger the insurance policy.  Insurance can be a game-changer, so plead the complaint correctly the first time.


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