This paper addresses the issue of whether coverage exists to repair, for example, walls, ceilings or other parts of a building in order to gain access to an insured's defective work after the work is completed. Carriers have argued, for the most part unsuccessfully, that these damages are not covered as these damages do not meet the definition of property damage and occurrence, or that the "your work," "impaired property" or "sistership" exclusions preclude coverage.

Introduction
The purpose of Commercial General Liability ("CGL") insurance policies is to protect insureds against losses arising out of business operations. See Couch on Insurance 3d, Section 129; 2 (1997). The typical Insurance Services Office ("ISO") CGL policy contains a broad coverage grant and exclusions which circumscribe coverage. CGL policies are intended to insure policyholders for bodily injury or property damage other than the work itself for which the insured may be found liable. They are not intended to cover the insured's contractual liability for economic loss. As the New Jersey Supreme Court noted in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788, 791 (N.J. 1979):

The policy in question does not cover the accident of faulty workmanship but rather faulty workmanship which causes an accident.

The typical coverage grant of the 1992 ISO CGL policy provides:

We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.

The insurance agreement also states that the policy covers property damage during the policy period that are caused by an occurrence. The typical definition of property damage is:

b. Loss of use of tangible property that is not physically injured.

The typical definition in an ISO CGL policy of occurrence is "an accident, including continuous or repeated exposure to substantially the same general harmful condition."

Does the removal of walls, ceilings or other building components which are not physically injured in order to repair and replace defective work constitute property damage?
The physical injury requirement was added by ISO to the standard CGL policy in 1973 to reinforce the drafters' intent that CGL policies cover only physical harm or impairment. See Donald S. Malecki & Arthur L. Flitner, Commercial General Liability (3d Ed. 1990). CGL policies do not cover economic loss such as increased construction expenses, lost profits or diminution of value of a project without some sort of physical injury to tangible property that is not owned by the insured or is not part of the insured's work, as such losses do not fit within the definition of property damage. See Transcontinental Ins. Co. v. Ice Sys. of America, Inc., 847 F. Supp. 947, 950 (M.D.Fla. 1994); SLA Property Management v. Angelina Cas. Co., 856 F.2d 69, 72-73 (8th Cir. 1988); Gulf Ins. Co. v. L.A. Effects Group, Inc., 827 F.2d 574, 577 (9th Cir. 1987); Hommel v. George, 802 P.2d 1156 (Col.Ct.App. 1990). In the absence of physical injury to tangible property, the failure for example, of an HVAC system which resulted in lost rent, lost productivity of workers in the building and excessive electrical consumption, does not constitute property damage and therefore does not fall within the coverage grant of a CGL policy. Bituminous Cas. Corp. v. Gust K. Newberg Constr. Co., 218 Ill. App. 3d 956, 578 N.E.2d 1003 (Ill. App. Ct. 1991); Diamond State Ins. Co. v. Chester-Jensen Co., Inc., 243 Ill. App. 3d 471, 611 N.E.2d 1083, 1091-92 (Ill. App. Ct.1993). However, where there is physical injury to property, not only is the cost to repair or replace that damage potentially covered (if it is not the insured's own work), but so are the economic damages as well.

In those cases where the underlying complaints merely allege an economic loss without some sort of physical injury, coverage does not exist as the allegations of the complaint do not allege property damage. However, if the insured's defective work caused actual damage to another's property or necessitated removal, for example, of walls or ceilings in order to repair or replace of the defective work, those complaints allege property damage. See Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1187-89 (2d Cir. 1995); LaFarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 394 (5th Cir. 1995); Hartford Cas. Co. v. Cruse, 938 F.2d 601, 604 (5th Cir. 1991); Missouri Terrazzo Co. v. Iowa Nat'l Mut. Ins. Co., 740 F.2d 647 (8th Cir. 1984); <>Dayton Indep. Sch. Dist. v. National Gypsum Co., 682 F. Supp. 1403, 1407 (E.D.Tex. 1988), rev'd. on other grounds, W.R.Grace & Co. v. Continental Cas. Co., 896 F.2d 865 (5th Cir. 1990).

Of course, not all courts agree. In New Hampshire Ins. Co. v. Vieira, 930 F.2d 696, 701-02 (9th Cir. 1991), New Hampshire insured Vieira, a drywall subcontractor. When the project was completed, an investigation revealed that Vieira's work was improper as he failed to nail the drywall properly to the interior wall, did not use enough nails, used nails that were too small, and failed to install drywall in the attics to prevent fire from spreading. Vieira argued that the separate damage caused by cutting holes in the roofs to install drywall in the attics was covered by New Hampshire's policy. New Hampshire responded that the nature of repairs cannot convert uncovered damage into covered damages. The 9th Circuit agreed. In reaching its decision, the court distinguished St. Paul Fire & Marine Ins. Co. v. Sears, Roebuck & Co., 603 F.2d 780 (9th Cir. 1979). In that prior case, the 9th Circuit held that if repair to an insured's product resulted in damage to another part of the building, that damage was covered. Vieira argued that under St. Paule damage caused by cutting holes in the roof is property damage covered under the policy. The New Hampshire court disagreed, noting that St. Paul was factually distinguishable because the repairs in that case required removing the defective material while, in the present case, repairing the defective installation required adding drywall, not removing it. The New Hampshire court held that "the nature of the repairs cannot create coverage where none exists. Diminution in value and cost of repair are not two separate harms -- they are two different ways of measuring the same harm."

Next, Vieira argued that the repairs should be covered because they are remedial measures designed to diminish the risk of fire. Once again, the 9th Circuit disagreed, holding that the cost of preventive measures, in the absence of property damage, would transform Vieira's CGL policy into a performance bond. Vieira was hired to install drywall to reduce risk of fire. He failed to do so. To require New Hampshire to now assume this cost would be to reward Vieira for his poor workmanship. New Hampshire, 930 F.2d at 702.

The definition of property damage also includes loss of use of tangible property which has not been physically injured or destroyed. Some courts, however, treat loss of use caused by physical injury as simply a consequential loss flowing from the physical injury. Thus, if the physical injury is excluded from coverage, the loss of use claims are excluded as well. See Thermex Corp. v. Firemens Fund Ins. Co., 393 N.W.2d 15 (Minn. Ct. App. 1986). Other courts, however, look to physical injury and loss of use claims as distinct forms of covered property damage. Under this view, even if the physical injury damages are excluded, coverage would still be available for loss of use damages. Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751 (Minn. 1985). These courts take the view that the phrase "to which this insurance applies" in the insuring agreement modifies the word "damages" and not "property damage." Thus, consequential damages are covered even if damages for the underlying property damage is excluded.

Timing Issues
In order to find "property damage," some courts have adopted the "incorporation" doctrine. Under the incorporation doctrine, property damage occurs at the time the insured's defective work was incorporated into the building. Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. 1992); Maryland Cas. Co. v. W.R. Grace and Co., 23 F.3d 617 (2d Cir. 1993) ("Incorporation of a defective product into another product inflicts property damage"). The court in Eljer rejected the insurer's interpretation of the definition of property damage that physical injury means a harmful physical alteration. Rather, the court relying on the drafting history held that the definition of property damage must include items that must be removed, at some cost, in order to prevent the danger from materializing. Eljer, 972 F.2d at 810. See also W.E. O'Neil Constr. v. National Union Fire Ins., 721 F. Supp. 984, 991 (N.D.Ill. 1989); Marathon Plastics, Inc. v. International Ins. Co., 161 Ill. App. 3d 452, 514 N.E.2d 479 (Ill. App. Ct. 1987).

The problem with this approach is that the incorporation doctrine does not define what constitutes property damage, but rather when that property damage occurs. In addition, Illinois appellate courts have refused to follow Eljer. For example, in Travelers Ins. Co. of Illinois v. Eljer, 307 Ill. App. 3d 872, 718 N.E.2d 1032 (Ill. App. Ct. 1999), that court found that there was nothing ambiguous about the definition in post-1981 ISO CGL policies. The court held that for coverage to be triggered, there must be an injury to tangible property and that the injury must be a physical one. Other courts agree. See, e.g., Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253 (Or. 1978); American Home Assurance Co. v. Libby-Owens-Ford Co., 786 F.2d 22 (1st Cir. 1986); Kartridge Pak Co. v. Travelers Indem. Co., 425 N.W.2d 687 (Iowa Ct. App. 1988); Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751 (Minn. 1985); Border Bolt Co. v. Twin City Fire Ins. Co., 1998 U.S. App. LEXIS 13579; 198 Colo. J.C.A.R. 3348 (10th Cir. 1998).

Policies which are in effect when damage to property other than the work itself, for example, walls or ceilings removed or replaced in order to fix the defective work, would be "triggered." Border Bolt, supra; Travelers Ins., 17 N.E.2d at 1041; Baugh Constr.v. Mission Ins. Co., 836 F.2d 1164, 1170 (9th Cir. 1988). However, in those jurisdictions which have adopted the incorporation doctrine, property damage which results from the installation or incorporation of defective products can constitute "a continuous and ongoing injury to property," and all policies issued from the time of the installation until the time of removal . . . are jointly and severally liable for the property damage." Lac D'Amiante Du Quebec Ltee. v. American Home Assurance Co., 613 F. Supp. 1549 (D.N.J. 1985), rev'd. in part on other grounds, 996 F.2d 1534 (3d Cir. 1993); overruled in part on other grounds, 90 F.3d 846 (3d Cir. 1996).

The fact that property damage may be "continuous" or "ongoing" and, thus, spread over multiple policy periods, does not eliminate the fortuity requirement in order to find that there is an insurable risk. Put another way, an insured cannot subsequently insure against a known loss in progress. As stated by the court in Eljer Manufacturing, "once a risk becomes a certainty -- once the large loss occurs -- insurance has no function. The last point at which a Qest [the insured] plumbing system has an insurable risk of being defective and causing harm is when it is installed. When it starts to leak it is to late; the risk has turned into a certainty and cannot be spread by being insured." Eljer, 972 F.2d at 809.

Do Claims for Construction Defects Allege an Occurrence?
As noted above, a comprehensive general liability policy does not cover faulty workmanship. Several courts have held that damages that naturally flow from a breach of contract are conclusively presumed to have been in the contemplation of the parties and therefore do not allege an occurrence. See Hartford Cas. Co. v. Cruse, 938 F.2d 601 (5th Cir. 1991). In Cruse, although the court held that the allegations were sufficient to trigger coverage the court wrote

[a] builder who fails to abide by the specifications of a contract, for example by substituting a weaker building material, may by that breach produce expected property damage to his or her work, and may thus fail to show a covered "occurrence."

Cruse, 938 F.2d at 604-05.

The court reached a similar result in American Fire & Cas. Co. v. Broeren Russo Constr., Inc., 54 F. Supp. 2d 842, 848 (C.D.Ill. 1999). There, the insured contracted to install and deliver an exterior installation finish system. The purpose of the system was to prevent water from leaking to the interior. After the work was completed, the building leaked causing damage to, among other items, drywall and ceiling tile. The court held that the complaint did not allege an occurrence since the damages were caused solely by the insured's breach of contract in failing to properly install the system and in failing to remedy the problem. The court concluded that the damages alleged were a natural and ordinary consequence of the alleged breach of contract, and that it was "inconceivable" that the parties could not have foreseen damage from water leaking into a building as a possible result of the failure of a system designed to prevent such leaks.

Whether a particular complaint alleges an occurrence will hinge upon the nature of the work the insured was contractually obligated to perform and what damage is alleged. For example, under American Fire, an occurrence was not alleged since the contract required the insured to install a water prevention system and as a result of the failure to use proper materials the system failed, causing water to enter the building. However, if the same complaint alleged that the proper materials were used, however, that those materials failed and such failure was unbeknownst to the insured, then that complaint in all probability would allege an occurrence.

Other courts have argued that the definition of "occurrence" is quite broad and that unexpected or unintended results of an insured's breach of its contractual obligations constitute occurrences. See, e.g., Trovillion v. United States Fid. & Guar. Co., 130 Ill.App.3d 694, 474 N.E.2d 953 (1985), overruled on other grounds, 283 Ill. App. 3d 812 (Ill. App. Ct. 1996); Maryland Cas. Co. v. Reeder, 221 Cal.App.3d 961, 270 Cal.Rptr. 719 (Cal. Ct. App. 1990).

In Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 1999 U.S. App. LEXIS 31223 (December 1, 1999), the Fifth Circuit reversed the trial court's holding that a construction defect claim did not allege an occurrence. In that case, the insured admitted that it intentionally performed under its subcontract but denied that it intentionally substituted inferior materials. The court noted the two lines of cases. The first holds that damage which is a natural result of voluntary or intentional acts is not to have been caused by an occurrence, no matter how unexpected, unforeseen and unintended the damages may be. See, e.g., Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). The second holds that damage that is unexpected, unforeseen or an undesigned happening or consequence of an insured's negligent behavior constitutes an accident or an occurrence. See, e.g., Lafarge Corp. v. Hartford Cas. Co., 61 F.3d 389, 395 (5th Cir. 1995); Travelers Ins. Co. v. Bolentine, 578 S.W.2d 501, 503 (Tex. App. 1979).

Other jurisdictions simply hold that complaints which allege claims for construction defect, predicated upon the insured's breach of contract, do not allege an occurrence, since breach of contract or faulty workmanship claims are uninsurable business risks. For example, in Lassiter Constr. Co., Inc. v. American States Ins. Co., 699 So. 2d 768, 770 (Fla. 4th DCA 1997), the court noted that coverage does not exist for claims for defective construction because claims for faulty workmanship do not constitute "an accident." See also Hawkeye Security Ins. Co. v. Vector Constr. Co., 185 Mich.App. 369, 460 N.W.2d 329 (Mich. Ct. App. 1990) ("the fortuity implied by reference to an accident or exposure is not what is commonly meant by failure of workmanship"); McAllister v. Peerless Ins. Co., 124 N.H. 676, 424 A.2d 1033 (N.H. 1984).

Do Any Exclusions Apply?

A. "Your Work" Exclusion
The standard 1992 ISO CGL policy excludes "'property damage' to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.' This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

In most cases, this exclusion should not preclude coverage for "collateral" costs, for example, tearing down and replacing walls to gain access to the insured's work. The reason is that the exclusion does not apply to property damage caused by the defective work as opposed to the repair and replacement of the defective work itself. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (N.J. 1979); Commercial Union Ins. Co. v. R.H. Barto Co., 440 So. 2d 383, 386 (Fla. 4th DCA 1983).

Most cases dealing with the issue of whether the costs associated with gaining access to remove defective work arise in the products liability context. However, these decisions are nevertheless informative. For example, in Aetna Cas. & Sur. Co. v. Monsanto Co., 487 So. 2d 398 (Fla. 1st DCA 1986), the insured, a manufacturer of plastic bobbin sleeves, was sued by a yarn manufacturer for the cost of removing and replacing the insured's defective bobbins from already-spun yarn, reimbursements it made to its customers for excessive yarn breakage, and for the replacement of the defective bobbins themselves. The insured sought coverage and the court held, first, that the cost of replacing the defective bobbins was not covered; however, the cost of removing the defective sleeves and bobbins, as well as the cost incurred by customers which Monsanto had to reimburse, were covered. In Monsanto, the cost of replacing the defective work was excluded, but the cost of gaining access to the defective work so that it could be replaced, was covered. See also United States Fidelity & Guar. Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 578 N.E.2d 926, 933 (Ill. 1991).

However, where the insured is the general contractor and has accepted the subcontractor's work as its own, several courts have held that under those facts, the exclusion would operate to preclude coverage. See Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229, 236-237 (Minn. 1986); Tucker Constr. Co. v. Michigan Mutual Ins. Co., 423 So. 2d 525, 528 (Fla. 5th DCA 1982); Schwindt v. Underwriters at Lloyds of London, 81 Wash. App. 293, 914 P.2d 119 (Wash. Ct. App. 1996). For example, in Tucker, the court wrote:

Both Exclusion (o) of the Original Premises Operations Liability policy and Exclusion (VI A3) [which replaced (o)] of the added coverage for completed operations, exclude property damage to work performed by the named insured. The deletion of the phrase relating to subcontractors in the exclusion and the completed operations policy makes sense because the insured contractor has presumably accepted the subcontractor's work as his own (at least so far as potential tort liability is concerned), and has turned the completed work over to the owner at the time such a completed operations policy is operative.

Tucker, 423 So. 2d at 528.

Likewise, in Schwindt, the court rejected the policyholder's claim that the exclusion did not extend to claims of bad work beyond removal and replacement of the defective work itself. The court wrote:

Washington case law interprets such product exclusion to encompass entire buildings as defective products. This view is consistent with Washington courts' reluctance to interpret such general liability policies as a form of performance bond, product liability insurance, or malpractice insurance.

Schwindt, 914 P.2d at 123.

In at least Florida and Washington, even if the work was performed by subcontractors, the exclusion would still apply, albeit for different reasons. In Florida, the courts have held that these types of losses are uninsurable business risks, and since exceptions to exclusions cannot create coverage, the exclusion applies. Lassiter, 699 So. 2d at 770. In Washington, the court, following Knutson, does not examine whether the work was "done by" or "on behalf of" the general contractor. Rather, the completed product is viewed as a whole, not as a grouping of component parts.

Like Florida, Washington courts also hold that a consequence of not performing well is part of every business venture, and that such costs are business risks to be borne by the contractor. Schwindt, 914 P.2d at 126; see also Blaylock & Brown Constr., Inc. v. AIU Ins. Co., 796 S.W.2d 146, 153 (Tenn. Ct. App. 1990); Ryan Homes, Inc. v. Home Indem. Co., 436 Pa. Super. 342, 647 A.2d 939 (Pa. Super. Ct. 1994).

In summary, the "your work" exclusion should not preclude coverage for "consequential" damages to gain access to an insured's defective work. However, if the insured is a general contractor as opposed to a subcontractor, several states would apply the exclusion, since once the general contractor accepts the subcontractor's work, it is the functional equivalent of his own work and is, therefore, excluded. See Hartford Cas. Co. v. Cruse, 938 F.2d 601, 603-04 (5th Cir. 1991) (the insured "performed work on the foundation only, not the entire house, and this fact distinguishes the present case from those cases where the general contractor undertakes to construct or reconstruct an entire structure and damage is limited to that structure").

The Impaired Property Exclusion
The impaired property exclusion typically provides that the policy does not apply to: "'property damage' to 'impaired property' or property damage that has not been physically injured arising out of: (1) a defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work'; or (2) a delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. This exclusion does not apply to loss of use of other property arising out of sudden and accidental physical injury to 'your product' or 'your work' after it has been put to its intended use."

This exclusion was first added to CGL policies in 1966 and amended in 1973, 1986 and 1990. Its purpose is to narrow coverage for claims involving reduced usefulness or impairment. Malecki & Flitner, at 49-50. The effect of the "impaired" property exclusion is to exclude loss of use claims when the loss of use is caused solely by the insured's failure to provide work of the quality or performance called for by the contract or when there has been no physical injury to property other than the insured's work itself. The exclusion does not apply if there is damage to property other than the insured's work, Imperial Cas. & Indem. Co. v. High Concrete Structures, Inc., 858 F.2d 128, 136 (3rd Cir. 1988) or where the insured's work cannot be repaired or replaced without causing physical injury to other property. Oscar W. Larson Co. v. United Capitol Ins. Co., 845 F. Supp. 445, 448-49 (W.D.Mich. 1993); /U>, 845 F. Supp. 417, 425-26 (W.D.Mich. 1993); Elco Indus. v. Liberty Mut. Ins. Co., 46 Ill. App. 3d 936, 361 N.E.2d 589 (Ill. App. Ct. 1997); Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 972 S.W.2d 1, 9 (Tenn. Ct. App. 1998).

Insurers should not be able to rely upon Exclusion (m) in nearly every jurisdiction as courts have almost uniformly held that the work needed to gain access to repair and replace the insured's defective work constitutes physical injury to other property.

The Sistership Exclusion
The sistership exclusion in a typical CGL policy excludes coverage for "damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of . . . your work, if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it."

This exclusion was first added to CGL policies in 1966 and takes its name from loss of use claims in the aircraft industry relating from the grounding of all airplanes of the same type because one airplane crashed. Malecki & Flitner at 52. The exclusion is designed to shield insurers from liability for the cost associated with unanticipated product recalls. Forest City Dillon, Inc. v. Aetna Cas. & Sur. Co., 852 F.2d 168, 173 (6th Cir. 1988). The exclusion is not designed to apply to claims involving losses relating from the failure of the insured's work or to claims that are not based upon the withdrawal or recall of the insured's own work. Imperial Cas. & Indem. Co. v. High Concrete Structures, Inc., 858 F.2d 128, 136 (3rd Cir. 1988); Fitness Equip. Co. v. Pennsylvania Gen. Ins. Co., 493 So. 2d 1337, 1343 (Ala. 1985).

In almost all cases, the sistership exclusion would not apply since the contractor's "work" is not withdrawn from the marketplace. The only potential time the sistership exclusion may apply is if the insured's own product is installed by the insured in a building and then subject to a general withdrawal from the general marketplace.

Then, the exclusion would apply to those costs associated with the withdrawal and repair or replacement of "sister" products which have not yet failed. The exclusion would not apply to the product that has already failed while in use and caused damage to the property of others. Wilkin, 578 N.E.2d at 933; Honeycomb Sys. Inc. v. Admiral Ins. Co., 567 F. Supp. 1400, 1406 (D.Me. 1983); Aetna Cas. & Sur. Co. v. Monsanto Co., 487 So. 2d 398, 400 (Fla. 1st DCA 1986).

Conclusion
Claims by policyholders for coverage for the cost to gain access to repair or replace defective work are, in all probability, covered. First, in almost all states, the damage caused to gain access to the repair or to repair or replace defective work is property damage as the work, for example, to tear out and replace a wall to gain access to a leaking pipe constitutes physical injury to tangible property. Furthermore, unless the allegations indicate that the damage alleged should have been expected or intended by the insured, an occurrence is also alleged. Thus, absent the applicability of an exclusion, the policy in effect when the defective work is replaced would be triggered. This leaves the your work, impaired property and sistership exclusions, none of which arguably applies. However, in some jurisdictions, if the insured is a general contractor and has already accepted the work, or in jurisdictions where coverage for construction defect claims are severely circumscribed because those courts have decided that CGL policies do not cover these types of business risks, coverage may not be afforded to insureds for "damages" necessitated in order to gain access to defective work.