A Word to the Wise Contractor

Current GCL Coverage Issues – Subcontractors

 A dispute is raging in Texas state and federal courts over the extent to which if at all the general contractor’s CGL policy will protect him against construction defects caused by the negligence of a subcontractor.  Specifically, the issue is whether the CGL carrier must defend the contractor where the owner sues the contractor for defects caused by a subcontractor.  Typically, the obligation to defend is determined from the four corners of the plaintiff’s pleading which, if it contains allegations of negligence, ordinarily would fall within the scope of coverage.  However, insurance companies are looking for ways to avoid paying the costs of defense and using all manner of arguments to avoid those obligations, i.e., pleading the definitions of “occurrence,” “accident” and, most recently, the “economic loss rule.” 

Texas CGL polices have an exclusion for damages caused to “your work,” but also have an exception to that exclusion that allows coverage where the subcontractor has performed the negligent work.  Since the insurance companies have been losing a few of these cases, they have decided upon a more direct approach by issuing an endorsement to the policy deleting the subcontractor work exception to the “your work” exclusion.  Therefore, contractors BEWARE when your CGL policy comes up for renewal, make sure there is no endorsement deleting the subcontractor’s  work exception.

In the meantime, the Texas Supreme Court has the matter before it on certified questions from the Fifth Circuit in the Lamar Homes case, 428 F.3d 193 (5th Cir. 2005), which has been submitted and argued to the Court.  We are awaiting the Court’s decision and opinion. Keep an eye on this space.