Insurance Coverage in Construction Defect Cases — What’s Covered, and What’s Not

The Basics: What a CGL Policy Is Meant to Cover

Most California contractors carry a Commercial General Liability (CGL) policy –  typically the standard ISO form. It’s meant to protect contractors against liability for accidents that cause bodily injury or property damage to others.

Under the standard ISO policy, the insurer agrees to 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,” but only if the injury or damage was caused by an “occurrence.”

An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” So, in most construction defect cases, the critical question is whether the alleged damage was the result of an accident — as opposed to faulty workmanship alone

The Key Point: Defective Work Itself Is Not “Property Damage”

California courts generally hold that the cost to repair or replace the contractor’s own defective work is not covered. The CGL policy is not a performance bond — it doesn’t insure against the contractor’s failure to do the job right.

As one court put it, the purpose of these exclusions is to “make the contractor stand its own replacement and repair losses while the insurer takes the risk of injury to the property of others.” (Western Employers Ins. Co. v. Arciero & Sons, Inc. (1983) 146 Cal.App.3d 1027, 1031)

Common Exclusions Insurers Rely On

Here are the most commonly invoked exclusions in defective construction cases:

1. Damage to “That Particular Part” of Property (j)(5)

No coverage for property damage to “that particular part” of real property the insured or its subcontractors are actively working on.

• Applies to damage during construction, not after.

• Does not apply if defective work causes damage to other portions of the project. (Armstrong World Industries, Inc. v. Aetna Cas. & Sur. Co. (1996) 45 Cal.App.4th 1)

2. Faulty Workmanship (j)(6)

Bars coverage for property damage to “that particular part” that must be repaired because the insured’s work was done incorrectly.

• Applies during construction.

• The exclusion doesn’t apply to damage covered under the “products-completed operations hazard” (i.e., damage discovered after completion).

• For a general contractor, “your work” usually means the entire project. (George F. Hillenbrand, Inc. v. Ins. Co. of N.A. (2002) 104 Cal.App.4th 784)

3. The “Your Work” Exclusion (l)

Bars coverage for damage to the insured’s own completed work — but not if the damage was caused by a subcontractor’s work.

• This is often called the “subcontractor exception.”

• It’s why general contractors sometimes have coverage for post-completion property damage caused by their subs. (Maryland Cas. Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712)

4. The “Your Product” Exclusion (k)

Bars coverage for damage to goods or products made or sold by the insured. In most construction contexts, homes or buildings are not considered “products.” (Maryland Cas. Co. v. Reeder (1990) 221 Cal.App.3d 961)

5. “Impaired Property” Exclusion (m)

Eliminates coverage for property that’s not physically damaged but is less useful because it incorporates defective work.

• No coverage for mere loss of use when the problem can be fixed.

• But coverage exists when there’s physical injury to other property. (Watts Industries, Inc. v. Zurich American Ins. Co. (2004) 121 Cal.App.4th 1029)

When Coverage Does Exist

Despite these exclusions, many construction defect claims are still covered — especially when:

• A subcontractor’s defective work causes property damage to other parts of the project after completion.

• The insured purchased a “broad form” endorsement, expanding coverage for subcontractor-caused damage.

• The claim involves accidental consequential damage (e.g., water intrusion or fire) rather than the cost to redo the defective work itself.

This is where the Products-Completed Operations Hazard coverage applies — covering bodily injury and property damage that occur after the project is finished, as long as the damage arises out of the contractor’s or its subcontractor’s work and not uncompleted operations

Practical Takeaway

CGL insurance provides vital protection, but its limits are often misunderstood. Contractors should:

• Review their policies carefully — especially the “your work” and “subcontractor” provisions.

• Work with knowledgeable brokers to ensure they have Products-Completed Operations coverage and subcontractor exceptions.

• Notify their carrier promptly if a defect claim arises — coverage often turns on timing and how the claim is presented.

Homeowners and property owners should also recognize that CGL policies are not warranties — they don’t guarantee perfect work, but they can provide important protection when defective work causes real damage.