Construction Defect, the Subcontractor Exception, and Resulting Water Damage
Riverside Builders, a general contractor in Portsmouth, NH, completes a three-story addition. It subcontracted the exterior envelope to Summit Waterproofing. Eighteen months later, the owner reports water intrusion through a second-floor window opening. An engineer finds Summit installed flashing backward and omitted a sill pan; water has saturated wall cavities and damaged drywall, insulation, hardwood floors, and cabinetry in the amount of $140,000. Repairing the defective flashing itself will cost $35,000. Riverside's CGL policy is an occurrence form with a $1 million each-occurrence limit, a $25,000 deductible, and the standard 'your work' exclusion with the subcontractor exception. The policy also has an impaired property exclusion. Riverside tenders the claim. The carrier's examiner notes that the drywall and flooring were installed by another subcontractor after Summit finished. The owner has not sued yet but has demanded $175,000. Riverside's owner says, 'It's all one occurrence and all from Summit's work, so it's covered.'
1. Does the CGL policy respond to the $35,000 cost to repair Summit's defective flashing? Explain.
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No. The $35,000 is the cost of repairing or replacing the defective work itself. The 'your work' exclusion bars coverage for property damage to that work, and the subcontractor exception does not restore the cost of correcting the subcontractor's defective workmanship. The exception is designed to restore coverage for damage to other property caused by the subcontractor's work, not to convert the CGL policy into a performance bond or warranty for the contractor's product. The adjuster should separate the flashing repair from the water damage to the interior finishes. If the flashing repair also requires opening walls, the cost of accessing the defect may need allocation, but the core repair of the flashing remains excluded. Riverside's argument that everything came from Summit's work is too broad; the policy focuses on the nature of the damaged property, not just the source of the defect.
2. Does the policy respond to the $140,000 damage to drywall, insulation, floors, and cabinetry? Analyze the subcontractor exception and impaired property exclusion.
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The $140,000 is damage to property other than Summit's defective flashing. The drywall, insulation, hardwood floors, and cabinetry were installed by another subcontractor and were physically damaged by water, so they are not the defective work itself. The 'your work' exclusion would otherwise bar damage to the insured's work, but the subcontractor exception restores coverage for property damage caused by work performed on Riverside's behalf by a subcontractor. The impaired property exclusion does not apply because the interior finishes are physically injured, not merely unusable because of a defect in another component. The loss may qualify as an occurrence if the water intrusion was accidental and unexpected from Riverside's standpoint, even though the defective flashing was faulty. Coverage is therefore likely for the $140,000, subject to the $25,000 deductible, policy limits, and investigation of when the damage began and whether any later policy period is triggered.
3. How should the adjuster allocate the $175,000 demand and document the occurrence/trigger analysis?
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The adjuster should not treat the $175,000 demand as a single covered loss. It breaks into $35,000 for repair of the defective flashing, which is excluded, and $140,000 for resulting damage to other property, which is potentially covered. Applying the $25,000 deductible to the covered occurrence yields a maximum of $115,000 for the covered property damage, subject to limits and any allocation for uninsured periods. The file should document the date of loss or continuing damage, the policy period in force, the absence of known prior damage, the engineer's causation report, and the ownership and installation sequence for each damaged component. The adjuster should also obtain Summit's insurance information, review any additional-insured or contractual indemnity provisions, and preserve subrogation against Summit. If the damage continued across multiple policy periods, the adjuster should explain the trigger theory used and why the deductible was applied once to the single occurrence.