Coinsurance Penalty, Defective Subcontractor Work, and an Additional Insured Certificate
Ridgeline Builders carries a businessowners policy: building $900,000 (replacement cost of the building is $1,200,000), business personal property $300,000, 80% coinsurance, $5,000 deductible, and $1M/$2M general liability. In April a kitchen fire causes $240,000 of building damage and $40,000 of damage to Ridgeline's tools. Separately, a condominium association sues Ridgeline and its tile subcontractor after the sub's faulty shower-pan work leaked and damaged three units; the association demands $80,000 to redo the showers plus $30,000 for water-damaged drywall and flooring in the units below. Ridgeline holds a certificate naming it as an additional insured on the sub's CGL policy.
1. Compute the payment for the $240,000 building loss under the 80% coinsurance clause.
Read the worked answer
Step 1 - Insurance required to carry. 80% × $1,200,000 replacement cost = $960,000.
Step 2 - Insurance actually carried. $900,000, a shortfall of $60,000.
Step 3 - Coinsurance ratio. $900,000 ÷ $960,000 = 0.9375 (93.75%).
Step 4 - Apply the ratio to the loss. $240,000 × 0.9375 = $225,000.
Step 5 - Apply the deductible. $225,000 − $5,000 = $220,000.
Three things the number hides:
- The insured absorbs the coinsurance penalty plus the shortfall: $15,000 penalty + $5,000 deductible + $60,000 of uninsured value sitting under the limit.
- The $40,000 of tools is business personal property, a separate item - a separate 80% test applies to the $300,000 BPP limit unless the policy is written blanket, in which case one limit and one coinsurance test may cover both.
- The payment is a replacement cost figure; if Ridgeline does not repair or replace, settlement drops to actual cash value and the coinsurance penalty is recalculated on the reduced amount - a second, unbudgeted penalty.
Advisory answer to the client: raise the building limit to at least $960,000 (ideally to full $1.2M) or buy agreed value.
2. The association wants $80,000 to redo the showers and $30,000 for the damaged units below. Which portion, if any, does the CGL policy pay, and whose policy?
Read the worked answer
Split the demand - it is two different claims wearing one caption.
The $80,000 to redo the showers - not covered. This is the cost of repairing the insured's defective work, excluded by the 'your work' exclusion (and, for the subcontractor, by the same exclusion applied to work performed on the insured's behalf). The subcontractor exception to that exclusion is widely misunderstood: it restores coverage for damage to other property caused by the sub's defective work in completed-operations claims; it does not buy back the cost of correcting the defective work itself. The 'impaired property' exclusion reinforces the point.
The $30,000 of drywall and flooring in the units below - potentially covered. That is physical injury to tangible property other than the insured's product or work, arising from an occurrence (repeated leakage). Completed-operations coverage applies, and the subcontractor exception can restore coverage for the GC.
Whose policy answers first? The sub's CGL, where Ridgeline is an additional insured - the claim arises out of the sub's operations, which is the test the AI endorsement applies. Ridgeline's own policy responds to the extent the AI endorsement's scope or the sub's $1M limit leaves a gap, subject to other-insurance language.
Judgment point: a certificate is evidence of insurance, not the contract. Read the actual AI endorsement form to see whether it is limited to vicarious liability or extends to Ridgeline's own negligence, and whether it is primary and non-contributory.
3. Ridgeline's own superintendent was also negligent in inspecting the shower pans. How does additional-insured status treat that?
Read the worked answer
Additional-insured status covers the named insured's liability for the AI's acts - it does not underwrite the AI's own negligence.
The default rule. Standard AI endorsements (e.g., the CG 20 10/20 33 family) limit coverage to liability arising out of the named insured's operations or, in the narrower forms, to vicarious liability for the named insured's acts. If Ridgeline's superintendent independently failed to inspect, that is Ridgeline's own negligence, and the sub's carrier will tender it back.
Where the gap gets filled - or doesn't:
- If the endorsement is drafted broadly (AI's own negligence included), the sub's carrier defends and shares limits with the sub, which can erode the $1M available for the sub's own exposure.
- If it is narrow, Ridgeline's own CGL responds to the direct-negligence theory, and the two carriers allocate - often through 'other insurance' clauses and, in New Jersey, comparative-fault apportionment.
- The contract is the real control: an indemnity agreement plus an AI endorsement with 'primary and non-contributory' wording, plus a sub's own limits high enough to absorb a shared loss, is what actually protects the GC.
Underwriting/agency practice: review the endorsement form, not the certificate; confirm that the AI endorsement applies to completed operations, since the leak surfaced after the showers were turned over - a very common hole in subcontractor paperwork.