What is an insurance policy?
An insurance policy is a stack of paper. A very expensive stack of paper. The purpose of that paper is to transfer risk and protect your bottom line... but what happens if the policy fails to fulfill that purpose?
Well, then it's just paper.
If your only interest when it comes to buying commercial insurance is reducing the premium, then boy do I have news for you: there's a sale at Walmart and you can get 500 sheets of copy paper for $5.00. Batteries not included.
Here's a slogan that bears repeating:
The only thing worse than paying for insurance, is paying for insurance that doesn't cover you.
So, how do we avoid paying for 100 pages worth of kindling? Well, for starters, we can read the policy.
Don't worry - I know that you don't have time to pour through a ~100-page document crammed full of legal jargon. In the first few pages of your policy, you should be able to locate the 'policy schedule,' or 'schedule of forms'. This is essentially a table of contents; it includes every definition, every coverage, every endorsement/add-on, and every exclusion in list form. Later on in this article, I'll give a brief summary of standard forms and how to read them (it's not that complicated).
This article's primary focus is on General Liability exclusions and endorsements. These forms exist solely to deny claims by restricting the extent of your coverage and limiting the amount of risk that the carrier is taking on. It should not be surprising to anyone that the use of these forms can be gamified to increase the carrier's profitability for a line of business.
Now, I should clarify, restricting coverage via exclusions isn't an inherently malicious practice. It's not shocking to see an explosion exclusion for a flooring contractor. This actually makes your coverage more affordable at the end of the day by allowing the carrier to avoid factoring in unique/rare risks that would disproportionately affect your premium.
Insurance coverage is also not intended to provide a blank check for absolutely everything that could possibly ever go wrong (despite what your aunt with the two DUI's would have you believe).
The concern comes when common claim scenarios and relevant operations are excluded - things that either were or should have been communicated to the underwriter. These exclusions are sometimes in place due to broker/carrier inexperience or negligence somewhere in the broker/carrier interaction, but they can also be in place so that the broker/carrier can justify offering a significantly below-market rate.
It is good practice to perform your own brief due diligence on your insurance program once a year. At the very least, you should absolutely review the list of forms for any exclusions or coverage-restricting endorsements that seem out of the ordinary. Here's a few of the most common I see:
Excluded Operations
These are often the most frustrating types of exclusions that I come across when reviewing coverage terms. Believe it or not, it is not unheard of for a policy to have an exclusion in place for the exact type of business that it is covering.
Here's a few very common ones:
Roofing operations
Demolition operations
Height Limits (usually work over 3 stories or 35ft)
Residential operations (yes - ALL residential operations)
New Residential Construction
Condos, Townhomes, Apartments & Multifamily (side note: many carriers consider this work residential, even if you and your clients don't. Keep that in mind if you or your subcontractors have a Residential Exclusion or were rated with no residential exposure).
Designated States (prevents working out of State or in certain States)
For a General Contractor, bear in mind that a residential or multifamily exclusion on your subcontractors' policy (more common than you'd think) would also remove any coverage you may have as additionally insured on their policy.
Classification Limitation Endorsements
This is another type of operations exclusion, only a bit more inconspicuous. Classification Limitation Endorsements are endorsements that, in theory, 'tailor' the policy to your specific operations and exposure. At least, that's the sales pitch.
In practice, these limitation forms can be highly restrictive (especially when your operations don't fit neatly in a box), and often nestle multiple, even dozens, of exclusions within them. Additionally, they can even limit the coverage to the information specifically presented in the application you signed & submitted prior to the inception of the policy - further defining (and therefore restricting) your operations.
As a case study, I reviewed a roofing contractor's insurance policy that had classification exclusions in place for open-roof property damage and 'heat-application' roofing. Both of these were major concerns for this client - they worked in an area with unpredictable weather that could result in sudden rain damaging their client's property during a job, and they performed heat-application roofing operations.
The underwriters knew this ahead of time - the Classification Limitation Endorsement they attached stipulated that this type of claim and these operations were excluded unless a very specific series of risk-prevention and safety steps were taken and documented.
This specific client did have steps in place to mitigate open-roof claims and to ensure that heat-application roofing was done safely, but these steps didn't rise to the exact level of scrutiny outlined in the endorsement, and they were not being rigorously documented.
What do you think would have happened if they had filed a claim?
Subcontracted Work
This one is a little technical, but extremely important if you work with subcontractors in any capacity.
Most General Liability policies include an exclusion for damage to 'your work.' This is to prevent you from utilizing the GL like a warranty - the coverage is intended to cover property damage and bodily injury to others, but it will not cover the cost for you to replace or repair that damage. For instance, if you are a roofing contractor performing a roof replacement, and faulty shingle placement results in a water leak, the insurance will cover the damage to the customers property, but it will not cover the cost to replace the roof.
There is, however, an exception for subcontractors that protects you in the event that the subcontractor's work results in damage to your work and/or their work.
That's where this exclusion comes in. The subcontractor exclusion form (specifically CG 22 94/95 and its manuscript form equivalents - more on that later) modify GL coverage to exclude damage caused by subcontractors on your behalf.
If you utilize subcontractors at all, this creates a significant gap in coverage. If you are a General Contractor, this essentially eliminates coverage for your completed work that is not self-performed. Millions of dollars in coverage - effectively gone.
As an additional note - this exclusion is particularly common for GC's that perform residential work.
For example, let's say that you build a house and subcontract 95% of the labor. Two years later, the house burns down due to faulty wiring by your electrical subcontractor.
Under a normal GL policy, the subcontractor exception to the standard GL exclusion for 'your work' (in this case, the entire house) applies, and both the legal costs and property damage are then covered. Your carrier will likely seek reimbursement from the electrical subcontractor's carrier at a later date.
Under a policy with the subcontractor exclusion (CG 22 94/95), the entire house is considered 'your work'. Damage to 'your work' caused by the subcontractor is excluded, and therefore you have no coverage for property damage or legal costs. You will have to hope and pray that the subcontractor had proper coverage in place.
This raises serious issues for General Contractors, and it's not hard to see how this could create problems for subcontractors as well that get pulled into a similar claim scenario.
Now, before we go on, I know what you're thinking - CG 22 94/95? What is that? Math? Is this high school algebra?
Let's take a brief look at carrier forms.
How To Read GL Policy Forms
Below is the list of standard (ISO) form categories in GL coverage. The form will begin with CG (short for Commercial General Liability), and then a sequence of numbers, such as:
CG 21 01 11 85 - EXCLUSION - ATHLETIC OR SPORTS PARTICIPANTS
The first pair of numbers after the CG are key - these denote which category the form falls into (in this case, CG 21, which is reserved for exclusions).
Once you find an exclusion in the schedule of forms, that exact exclusion form and its wording can easily be located by utilizing CTRL + F and selectively targeting the keywords in the title of the form.
If your policy contains 'manuscript forms' (this basically means they are non-standardized and proprietary to that carrier), then they will not be in this exact 'CG XX' format - you will have to read through the schedule of forms more carefully. Here's an article by the Insurance Journal on how you can identify an ISO form.
Here is a list of ISO form categories (with a few to keep an eye out for in bold):
CG 00 | Primary Coverage Forms |
CG 02 | Termination and Suspension Endorsements |
CG 03 | Deductible Endorsements |
CG 04 | Additional Coverage Endorsements |
CG 20 | Additional Insured Endorsements |
CG 21 | Exclusion Endorsements |
CG 22 & 23 | Special Provisions for Certain Types of Risks Endorsements |
CG 24 | Coverage Modification Endorsements |
CG 25 | Amendment of Limits Endorsements |
CG 27 | Claims-Made Endorsements |
CG 28 & 29 | Miscellaneous Coverage Forms and Endorsements |
CG 30 | Underground Storage Tank Endorsements |
CG 31, 33,34, 40& 99 | Miscellaneous Endorsements & Exclusions |
IL | Interline Endorsements |
Side note: be careful with manuscript forms and policies. Carriers try to pitch them as "custom-tailored" to your operations. They are custom-tailored - usually by a team of lawyers - but not always in a way that benefits you.
The EIFS Exclusion
Most contractors should be familiar with EIFS - short for External Insulation and Finish Systems. EIFS is a type of multilayered wall cladding that provides an insulated finish for buildings exteriors. Whether due to improper installation or product defects, water has been known to penetrate EIFS systems and become trapped - typically resulting in extensive wood rot and mold (especially on wood frame construction). Any trade that can potentially be tied to the penetration of water (HVAC, Roofing, Plumbing, etc. etc.) is very likely to have an EIFS exclusion in place. The biggest issue with the EIFS exclusion is that it is very broad in scope, and therefore extremely restrictive. The ISO form (CG 21 86 12 04) excludes coverage for virtually all claims related to an exterior fixture on a building if EIFS is present anywhere on the structure (Hickman, 2024).
You read that right - your claim does not have to be related to your installation or involvement with EIFS, nor does it have to be related to damage caused by EIFS - if EIFS is merely present on the structure, coverage technically does not apply.
On a well written policy that contains this exclusion, there should be an endorsement that amends this exclusion to fit your operations more appropriately. Otherwise, well... let's just hope the claims adjuster isn't having a case of the Mondays.
The Prior Works Exclusion
The Prior Works Exclusion simply excludes coverage for work that took place prior to the inception date of the policy. To the uninitiated, this seems fine. As long as you had coverage in years prior, you should be okay, right? Wrong.
This exclusion is particularly notorious because it obliterates the continuity of your insurance coverage. To understand why, let's look at how GL policies respond to claims.
Your General Liability policies are typically written on an 'occurrence' basis. This means if an insured event occurs during a policy's term, it is covered by that policy.
Let's say you are a roofing contractor with a GL renewal date on January 1st of every year. If you install a roof in 2024, and it leaks in 2025, your 2025 policy will cover that claim. This is because the 'occurrence' (the leak) took place during 2025, even though 'your work' (roof installation) took place in 2024.
The Prior Works Exclusion removes coverage for all work that began prior to the policy term it is attached to. In the above example, if the 2025 policy had a Prior Works Exclusion in place, then that 2025 leak would be denied - even though the claim was made during the policy term. The carrier would tell you that since the work took place in 2024 and you have a Prior Works Exclusion, the coverage therefore does not apply.
If you attempt to go back to your 2024 policy to make the claim, that carrier will simply tell you that since the 'occurrence' (roof leak) took place in 2025, you should go to your 2025 carrier. And just like that, you have 0 coverage, and a useless stack of paper. A stack of paper that just put you out of business.
There's an article by Dwight Kealy in the Insurance Journal with a very clever analogy that explains Prior Work Exclusions in more detail. You can give that a read here.
Side note: if you had a previous extended lapse in coverage, there is a very good chance that you will have this exclusion on your policy.
The Subsidence / Earth Movement Exclusion
Some of the largest property damage claims in construction are related to earth movement and subsidence. As such, it should come as no surprise that a very broad and notorious exclusion for claims related to earth movement should exist. This is a complex exclusion that comes in many forms and has a lengthy history, but what you need-to-know is that it effectively removes protection for claims related to virtually any form of earth movement, oftentimes both natural and man-made.
Foundation cracked, moved or slid? Declined.
Trench collapsed? Declined.
Excavation resulted in a 3rd party's property shifting? Declined.
This is a major coverage gap for GC's, developers, contractors performing work on foundations, contractors excavating, moving, grading, or compacting dirt, laying utility lines, performing site development... the list goes on and on.
Subsidence can be defined as landslides, mudflows, collapses, movement of fill, and earthquakes - but it can crucially also be defined as virtually any form of earth sinking, setting, settling, eroding, tilting, or rising, due to natural or man-made causes. Sounds ambiguous? That's because it is.
In one case, a developer was sued for a sinkhole in a development roadway that injured a bicyclist. The claim was denied due to the subsidence exclusion. When this was challenged, the court found that the subsidence exclusion was so broad that the wording would apply to the "mere act of putting a shovel in the ground, digging a hole, and failing to cover it up" (qtd. in Stanovich, 2022).
That exclusion ultimately wasn't held up in court on the grounds that the insured's operations were within their 'reasonable expectations' as a policyholder and the exclusion (which was severely limiting) should therefore not apply. While a small victory against the subsidence exclusion in this specific case, consider the fact that this headache of a claim was declined and had to be contested at all.
Conclusions
The major driving force behind the increased use of coverage-limiting forms is construction defect litigation. The impact of these trends is that there is a greater number of claims, and these claims have higher payouts. As a result, insurance premiums continue to rise, and these exclusion/endorsement forms allow insurers to offset the severity of their increases by reducing the amount of risk they are taking on.
There is an economic concept that has been around for a while called 'shrinkflation'. The idea is that rather than passing increased costs on to consumers, you reduce the size or quantity of a good to keep the price the same. If the change is minor enough, the consumer doesn't notice. For example, in 2022, Dove soap bars reduced from 100g to 90g in size - but generally sold for the same price at retail. There are thousands of examples of this, from toilet paper to beverages and from chocolate bars to pharmaceuticals.
My general intuition is that liability insurance for construction has been facing a similar phenomenon. Only instead of the policies shrinking in size... they're getting longer (and doing less).
Ultimately, if you take anything away from this, it should be that it can't hurt to dive into your policy once a year. If something looks odd, ask your broker/agent about it. If there is some ambiguity that concerns you, at least try to get something in writing from your broker/agent or the underwriters.
Otherwise, consider buying some copy paper from Walmart. It won't protect you, but it's cheap!
Disclaimer:
This article is the opinion of the author. It does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
References:
Stanovich, C. (2022). Subsidence Exclusion in the CGL Policy. IRMI, https://www.irmi.com/articles/expert-commentary/subsidence-exclusion-in-the-cgl-policy
Enriquez, F. (n.d.). Signing Off on a General Liability Policy? Beware of Exclusions. CFMA, https://cfma.org/articles/signing-off-on-a-general-liability-policyquestion-beware-of-exclusions#:~:text=Exclusions%20which%20are%20common%20in%20general%20liability%20policies
Kealy, D. (2014). The Impact of Prior Work Exclusions and Sunset Provisions in CGL Policies, Insurance Journal, https://www.insurancejournal.com/magazines/mag-features/2014/09/08/339304.htm#:~:text=The%20Prior%20Work%20Exclusion.%20Many%20CGL%20policies%20for
Hickman, A. (2024). Construction Defect Trend Produces Coverage-Restricting Endorsements, IRMI, https://www.irmi.com/articles/expert-commentary/construction-defect-trend-produces-coverage-restricting-endorsements#:~:text=Damage%20to%20Work%20Performed%20by%20Subcontractors%20on%20Your
Wilson, B. (2024). How Do You Know If It’s an ISO Policy Form? Insurance Journal, https://www.insurancejournal.com/magazines/mag-features/2024/03/18/764934.htm#:~:text=If%20it%E2%80%99s%20a%20pure%20ISO%20form,%20then%20you
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