Construction Defect: Which CGL Year, the Subcontractor Exception, and a Defective Additional-Insured Endorsement
In 2018 a Huntsville general contractor completed a 40,000-square-foot retail center, subcontracted the exterior stucco to a subcontractor that carried its own CGL with $1,000,000 per occurrence and a $2,000,000 aggregate, and asked the sub to name it as additional insured. The compliance file shows the endorsement used was CG 20 10 11 85. In March 2024 the owner sued for water intrusion. An engineer found the weather barrier behind the stucco was installed improperly, allowing water in since at least 2020. Repair costs are $2,500,000: $600,000 to remove and replace the defective stucco, and $1,900,000 of damage to interior framing and tenant improvements. The general contractor's own CGL is the standard occurrence form, $1,000,000 per occurrence/$2,000,000 general aggregate, written by the same insurer and renewed every year since 2018.
1. Which of the general contractor's policy years respond, and does any single year's $2,000,000 aggregate cap the total recovery?
Read the worked answer
Use the injury-in-fact/continuous trigger: property damage occurs when the structure is first damaged, not when the owner sues. Water entered beginning in 2020 and continued until repair, so every policy year in which damage-in-fact progressed is triggered - 2020 through 2024 (and 2019 if the barrier defect caused damage earlier).
Consequences:
- Each triggered year provides its own $1,000,000 occurrence limit and its own separate $2,000,000 aggregate, so no one year caps the total.
- The triggered insurers share the loss; each year's deductible or self-insured retention applies separately, which is often the practical dispute.
- Defense costs are supplementary payments outside the limits on the standard form, so defense does not erode the $1,000,000.
- The pre-2020 years that saw no damage-in-fact are not triggered.
This is why occurrence-form coverage is valuable for progressive damage and why aggregate limits must be bought high on construction risks.
2. Allocate the $2,500,000 between the defective stucco itself and the interior damage under the standard CGL exclusions.
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$1,900,000 interior damage: this is physical injury to tangible property other than the insured's work - damage to framing and tenant improvements caused by water passing through the defective envelope. It is covered property damage; the impaired-property exclusion targets loss of use of property restorable by repairing your work and does not reach direct physical injury to other property.
$600,000 stucco: exclusion j.(6) (particular part of property that must be restored because your work was incorrectly performed) does not apply post-completion, because j.(6) carves out damage within the products-completed operations hazard. That leaves exclusion l., damage to your work, which bars property damage to "your work" arising out of it - but the subcontractor exception puts it back: the exclusion does not apply if the damaged work, or the work out of which the damage arose, was performed on the insured's behalf by a subcontractor.
So the form as written reaches all $2,500,000, subject to limits. Expect the insurer to argue the cost of correcting the defect is not an "occurrence" (no accident) or is betterment; that argument frequently prevails in jurisdictions applying an impaired-property/no-accident analysis, so advise the insured that the $600,000 is contested while the $1,900,000 is clearly covered.
3. The owner's complaint alleges the general contractor is vicariously liable for the sub's work. Does the subcontractor's policy provide defense and indemnity as additional insured for a 2024 completed-operations claim?
Read the worked answer
No. CG 20 10 11 85 is the restricted Form B endorsement: it grants additional-insured status only with respect to liability arising out of the named insured's ongoing operations performed for the additional insured. The word "ongoing" is exactly what the 11/85 revision added, and it eliminates completed-operations coverage. Stucco installed in 2018 is completed operations by 2024.
What would have worked: CG 20 37 (Additional Insured - Owners, Lessees or Contractors - Completed Operations), or CG 20 10 04 13 combined with CG 20 37. Also verify the sub's policy was still in force with an intact aggregate and that the sub's policy was primary and non-contributory by endorsement.
Practical result: the general contractor's own triggered CGL years are the primary source of defense and indemnity; the sub's insurer owes nothing as additional insured, and the GC's only recovery from the sub may be a contractual indemnity claim. This is a contract-review failure, not a coverage failure, and should be flagged for future subcontracts.