Defective Waterproofing, a Certificate, and a Tender
Rio Grande Builders (RGB) completed a 40-unit condominium in San Antonio in 2023. Its CGL is an occurrence form with $1,000,000 each occurrence, a $2,000,000 general aggregate, and a $1,000,000 products-completed operations aggregate. Balcony waterproofing was performed by a subcontractor, SureSeal. Within a year, water intruded through the balcony decks, ruining drywall and flooring in 12 units. The association sued RGB for $430,000: $180,000 to remove and redo the defective waterproofing, and $250,000 to repair the damaged interiors. SureSeal's certificate of insurance listed the association as an additional insured, but no endorsement was ever issued. Separately, a SureSeal employee broke his wrist on the site and has demanded that RGB pay his medical bills.
1. Must the CGL carrier defend RGB, given that the defective work itself may not be covered?
Read the worked answer
Yes - the duty to defend is broader than the duty to indemnify, and it is decided from the allegations.
Apply the four corners rule:
- Occurrence? Accidental water intrusion through balcony decks is an accident from the standpoint of the insured. No intentional act is alleged.
- Property damage? Ruined drywall and flooring is physical injury to tangible property.
- Potential coverage is enough. If the petition alleges facts that potentially fall within coverage, the carrier defends the entire suit - including the breach of contract count - until every covered theory is eliminated.
The classic error is refusing the tender because the "your work" exclusion might defeat indemnity. Exclusion analysis governs payment, not defense. Even a strong expectation of a coverage defeat does not suspend the duty to defend if any claim could be covered.
Practical steps: accept the tender in writing, appoint counsel, and issue a reservation of rights letter identifying the "your work," impaired property, and contractual liability issues. A reservation letter preserves the right to recoup defense costs allocated to uncovered claims and protects the carrier if it later seeks a declaratory judgment. Silence or a delay while "investigating coverage" is the fastest route to a Chapter 541 bad-faith allegation.
2. If the carrier ultimately owes indemnity, how should the $430,000 be allocated?
Read the worked answer
Split the claim by what was damaged, then test the exclusions.
1. The $180,000 to redo the defective waterproofing. This is the cost of correcting the insured's own defective work. The "your work" exclusion bars damage to the insured's work, and repairing defective workmanship is generally not "property damage" at all - it is the cost of making the contractor's product conform. Deny this portion.
2. The $250,000 of resulting damage to the owner's interiors. This is damage to other property caused by the insured's work, and the key fact is that the waterproofing was installed by SureSeal, a subcontractor. The standard "your work" exclusion contains a subcontractor exception: the exclusion does not apply to damaged work or to work out of which damage arises when that work was performed on the insured's behalf by a subcontractor. That exception restores coverage for the resulting interior damage.
3. Limits and aggregates. This is completed-operations loss. The $1,000,000 products-completed operations aggregate and the $1,000,000 each-occurrence limit both absorb $250,000 without difficulty; the $2,000,000 general aggregate is unaffected if the loss is properly coded to completed operations. Coding it to the wrong aggregate is a common error that can create a phantom shortfall later in the policy year.
4. Watch the impaired property exclusion for any units that were not physically damaged but became unusable - those claims are likely excluded.
3. What is the effect of the certificate naming the association as an additional insured, and how should the injured SureSeal employee's demand be handled?
Read the worked answer
The certificate is not coverage. A certificate of insurance is an informational document that evidences that a policy exists; it does not amend, extend, or create coverage. Additional-insured status exists only if the policy itself carries an endorsement - typically CG 20 10 for ongoing operations and CG 20 37 for completed operations. A water-intrusion claim arising a year after completion is a completed-operations exposure, so CG 20 37 is the form that matters, and no endorsement was ever issued.
Consequences:
- The association has no additional-insured rights under SureSeal's policy; the certificate is a representation, and the failure to issue the endorsement is a breach of the subcontract's insurance requirement by SureSeal.
- The association's recourse runs to RGB, which is why RGB's own CGL is defending. RGB can pursue SureSeal for the insurance it promised to obtain.
- Going forward, RGB should require the actual endorsement, not a certificate, at project closeout.
Injured SureSeal employee: the CGL excludes bodily injury to the insured's own employees and obligations arising under workers' compensation, but this worker is not RGB's employee. The sub's workers' compensation is primary. RGB's CGL can respond to RGB's liability - including its contractual indemnity to SureSeal - through the insured contract exception, if the indemnity is a covered contract and Texas anti-indemnity limits do not void it. Confirm the subcontract's indemnity language and obtain the sub's WC carrier position before paying anything.