The Subcontractor's Defective Roof
A property management company, Corvus, hires a roofing subcontractor, Bellerose, to replace the roof on a 60-unit apartment building in Montreal. Bellerose's work is defective: the membrane is improperly sealed, and after a heavy rain, water penetrates and damages $150,000 of interior finishes and tenants' property in 12 units. Corvus carries a commercial property policy with a $2.5 million building limit and a $25,000 deductible. The policy excludes damage caused by faulty workmanship but has an ensuing-loss exception. Corvus also has a CGL policy. The building's owner, Valmont, demands payment from Corvus, which in turn looks to Bellerose, whose CGL insurer denies the claim.
1. Analyze whether Corvus's property policy responds to the water damage.
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The analysis hinges on the faulty workmanship exclusion and its ensuing-loss exception.
- The defective roof itself: the cost of correcting Bellerose's poor workmanship is excluded. The policy does not pay to redo the roof.
- The resulting water damage: the ensuing-loss exception generally restores coverage for damage to other property caused by the excluded peril. The $150,000 in interior finishes and tenants' property damage is the kind of ensuing loss the exception is designed to cover.
- Tenants' property: Corvus's policy covers Corvus's interest. Tenants' personal property is insured under the tenants' own policies, and Corvus should not claim for it under its own policy. The adjuster should separate the components.
- Deductible: the $25,000 deductible applies to the covered loss.
- Conclusion: the interior damage is likely covered; the roof repair is not.
2. Explain why Bellerose's CGL insurer may have validly denied the claim, and what recourse Corvus has.
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The CGL is not a performance bond.
- 'Your work' exclusion: the CGL excludes damage to the insured's own work and, in many forms, the cost of repairing it. Bellerose's defective roof is its own work.
- Property damage to others: if the water damaged other property (interior finishes, tenants' goods), the CGL may respond to that portion - unless the 'impaired property' or 'your work' exclusions apply. The denial should be reviewed carefully; a blanket denial may be wrong.
- Recourse: Corvus can pursue Bellerose directly in contract or in warranty. Bellerose may have a construction warranty or a performance bond.
- Subrogation: if Corvus's property insurer pays, it may subrogate against Bellerose. Corvus should preserve the contract and all correspondence.
- Practical step: obtain Bellerose's certificate of insurance and confirm whether additional-insured status was required.
3. What should Corvus's broker advise about future risk transfer?
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The loss reveals a contract and insurance gap.
- Additional insured status: Corvus should require subcontractors to name it as an additional insured on their CGL, with a waiver of subrogation.
- Hold-harmless clause: the roofing contract should include an indemnity obligation running from Bellerose to Corvus.
- Certificate verification: the broker should verify certificates at each renewal, not just at signing.
- Warranty: require a workmanship warranty and retention of a holdback until inspection.
- Documentation: keep inspection reports and photos to support any future subrogation.