Claims for Faulty Work - Are They Covered?

Crack in red brick wall
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Contractors are often sued based on allegations that they performed faulty work. Are such suits covered by a contractor's general liability policy? As this article will explain, the answer is it depends.

Example

Ed owns Ed's Electrical, an electrical contracting business. Ed has been hired by a property owner, Prime Properties, to install new lighting in an office building Prime owns. Two of Ed's employees complete the work.

Several weeks later Prime Properties complains to Ed that the lights aren't working properly. Ed's crew makes several trips back to the job site to fix the problems. Unfortunately, Prime isn't satisfied. The company claims that Ed's employees failed to install the switches correctly and that the fixtures were placed in the wrong location.

Prime Properties sues Ed's Electrical for breach of contract and demands compensation. Ed's Electrical has purchased a standard general liability policy. Ed forwards the lawsuit to the insurer, which quickly denies coverage. Ed is stunned. Why isn't the claim covered?

Breach of Contract Versus an Occurrence

In its lawsuit against Ed's Electrical, Prime Properties contends that the electrical contractor failed to fulfill the terms of its contract. Ed's company didn't do what it had promised to do and now the property owner wants restitution.

Ed's liability policy covers damages that Ed's company is legally obligated to pay because of bodily injury or property damage caused by an occurrence.

Prime's lawsuit does not cite any bodily injury or property damage, nor does it mention an accident. Thus, the breach of contract claim does not qualify for coverage under Ed's liability policy.

As a general rule, lawsuits based only on breach of contract are not covered under general liability policies.

Liability policies do not guarantee that your work will be done in accordance with a contract. A project owner may require you to guarantee your work will be completed as promised in your contract by purchasing a completion bond (a type of surety bond). The quality of your work is under your control. Thus, the chance that your work may be faulty is a risk you undertake as a business owner.

In some cases, a lawsuit may seek damages for breach of contract and for bodily injury or property damage. In the Ed's Electrical example, suppose Ed's employees have installed the lighting fixtures. Shortly thereafter, a wire leading to one of the lights overheats. The hot wire ignites a fire that causes $10,000 in property damage.

Prime Properties sues Ed's Electrical for breach of contract and for fire damage caused by the faulty wiring. Ed's liability policy should cover the property damage portion of the claim.

Faulty Work Exclusions

As noted above, liability policies cover claims or suits because of bodily injury or property damage caused by an occurrence. Policies contain exclusions that eliminate coverage for certain suits arising from your faulty work. These exclusions are complex, and courts don't anyways interpret them in the same way.

Here are some basic concepts to keep in mind. These are general rules, and exceptions may apply in some circumstances.

  • If your work is faulty, your policy won't cover the cost of redoing it. For example, you are hired to install a concrete walkway. Unfortunately, you used the wrong kind of concrete. The portion of the walkway you have completed buckles and the property owner demands that you redo it properly. Your liability policy refuses to pay the cost of redoing your faulty work.
  • If you are working on part of a building and accidentally cause damage to the specific part you are working on, your policy won't cover that damage. For example, you are an electrical contractor. You have been hired by a property owner to install a new electrical panel. While working on the panel you accidentally start a fire and the panel is destroyed. If the property owner demands compensation for the damage to the panel, your insurer will not cover the loss.
  • If work you have completed sustains property damage, your policy won't cover that damage. For example, suppose you operate a masonry business. You are hired by a homeowner to install a brick wall. Because you used the wrong type of mortar, the brick wall collapses after it is completed. If the homeowner demands that you redo the wall (or pay the cost of hiring another contractor), the claim will not be covered by your liability policy.

Exceptions

The three exclusions listed above generally don't apply if your faulty work causes bodily injury to a third party or damages property other than your work. For instance, in the electrical panel scenario described above, suppose that the fire spreads from the panel to an adjacent wall. The wall is badly damaged. Because property other than the electrical panel has been damaged due to an occurrence, the damage to the wall should be covered.

Likewise, if damage to your completed work injures a third party or causes damage to other property, the injury or damage should be covered. For instance, suppose that the brick wall described above collapses onto the homeowner's car, damaging the vehicle. Your liability policy should cover the damage to the car.

Damage to work you have completed may also be covered if the damaged work was performed for you by a subcontractor. For example, suppose that you have hired a subcontractor to construct the brick wall rather than doing the work yourself. The subcontractor performs shoddy work, the wall collapses and you are sued for property damage by the homeowner. Because the work was performed by a subcontractor, the property damage claim may be covered.