Waterproofing Failure: Subcontractor Exception, Additional Insured, and Late Tender
Kona Builders is the general contractor on a $3.5 million oceanfront home. It subcontracted the lanai waterproofing to Aloha Coatings. Two years after completion, the coating fails, water intrudes, and the owners sue Kona Builders for $390,000: $60,000 to remove and redo the coating, $250,000 for ruined interior finishes and flooring, and $80,000 for mold remediation. Kona Builders carries an occurrence-form CGL with $1M each occurrence / $2M general aggregate, and its policy contains a standard “your work” exclusion with the subcontractor exception. Aloha Coatings' policy names Kona Builders as an additional insured. Kona Builders received the owners' demand letter in January but did not tender the claim to either insurer until September.
1. Analyze Kona Builders' own CGL for each of the three damage components, and say what the insurer must do about defense.
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$60,000 to redo the coating - not covered. This is the cost of correcting the defective work itself. Even with the subcontractor exception restoring coverage for damage to other property, the expense of removing and replacing the failed work is treated as the insured's work (work performed on its behalf by a subcontractor) rather than damage to other property. Expect the insurer to carve this out.
$250,000 interior finishes - covered, subject to the exception. Water intrusion damaging flooring and finishes is property damage to property other than the work itself, and because the defective work was performed by a subcontractor, the subcontractor exception to the “your work” exclusion applies. This is the core of the claim.
$80,000 mold - check specific exclusions. Many CGL forms contain a fungus/mold exclusion or a small sublimit. If a sublimit exists, that figure caps the mold component regardless of the $1M occurrence limit. Pollution exclusions are generally not the right hook for mold, but the fungus exclusion is.
Defense: the duty to defend is broader than the duty to indemnify. Because at least part of the suit is potentially covered, the insurer must defend the entire action, including the uncovered coating component, until the uncovered portions are resolved. Defense costs are typically outside the limits.
2. Should Kona Builders tender to Aloha Coatings' additional insured endorsement, and what determines whether that tender succeeds?
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Yes - tender to both carriers simultaneously and let them sort priority. Whether Aloha's endorsement responds turns on scope, not on the label “additional insured”:
- Ongoing operations vs. completed operations. Many AI endorsements cover only the named insured's ongoing operations. This loss surfaced two years after completion, so a completed-operations grant is required. If the endorsement is ongoing-only, Aloha's carrier will deny and Kona Builders' own policy carries the claim.
- The subcontract's insurance specification. The endorsement form should match what the subcontract promised - often primary and non-contributory, with a waiver of subrogation. If the subcontractor's certificate shows the broader form but the actual endorsement is narrow, that discrepancy is a certificate-versus-policy issue worth documenting.
- Who is an insured for what. AI status typically attaches only for liability arising out of the named insured's work - here, the waterproofing - which fits this claim.
Priorities: if Aloha's coverage is primary and non-contributory, Kona Builders' insurer pays excess, which preserves Kona Builders' aggregate. That matters given a $2M aggregate and a $390,000 claim. Also confirm Aloha Coatings still has coverage in force; a dissolved or nonrenewed subcontractor leaves only the AI evidence and a potential claim against the agent who issued the certificate.
3. Kona Builders waited eight months to tender. What is the exposure, and how should the agent advise the client?
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Late notice is a coverage condition, and the answer is not automatic forfeiture. Analysis:
- Read the notice condition and any claims-made features. This is an occurrence policy, so the trigger is the occurrence, not the report - but the policy still requires prompt notice of the claim or suit.
- Prejudice is the battleground. In most jurisdictions an insurer must show it was substantially prejudiced by the delay to deny coverage. Eight months between a demand letter and tender, with no suit filed and no default judgment, is a real argument for the insurer but often a hard one to prove as prejudice if evidence was preserved and the subcontractor's carrier is still available.
- The insurer still owes a defense while it investigates the late-notice issue; the duty is not suspended by a coverage question.
- Do not let the client talk to the claimant or fund anything. Any voluntary payment or settlement without insurer consent jeopardizes the claim.
Advice to Kona Builders: tender to both carriers in writing immediately, provide a full chronology including the January demand letter, and explain the delay honestly rather than manufacturing a reason. Simultaneously, notify the agent's own errors-and-omissions carrier only if a coverage denial actually arises from agency handling - but preserve the file, because a denial on late notice will produce a claim against whoever held the letter. Going forward, the agency should set a standing rule that any demand letter is forwarded to all carriers within 48 hours.