What happens when a “your work” exclusion collides with a “product completed operations” clause in a CGL policy?

A CGL policy typically defines “your work” as the work performed by or on behalf of the insured and the materials, parts, or equipment furnished in connection with such work. “Product-completed operations” coverage usually protects the insured against liability for property damage or bodily injury caused by the insured’s product or work after the work is completed.

In Pavlicek v. American Steel Systems, Inc., JRC installed a concrete floor and floor drain. 970 N.W.2d 171 (N.D. 2022). Another subcontractor installed the in-floor heating system for the concrete floor. Throughout the project, JRC maintained a CGL policy. After JRC completed the floor drain, it failed to properly install the concrete floor, and its attempts to repair the concrete damaged the drain. The Owner sued JRC for the defective work and was awarded the full replacement cost of the concrete floor, drain, and in-floor heating system. JRC, in turn, sued its insurer for indemnification.

As part of its decision, the North Dakota Supreme Court was tasked with determining the outcome of a “your work” exclusion colliding with a “product-completed operations” clause in a CGL policy. The CGL policy contained several exclusions to coverage, including for “Damage To Your Work” which stated the insurance does not apply to: “‘Property Damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

On the other hand, the declarations page of the CGL policy provided coverage for “Products-Completed Operations” in the aggregate limit of $2,000,000. The policy included an endorsement stating: “The most we will pay for ... [a]ll ‘bodily injury’ or ‘property damage’ that is included in the ‘products-completed operations hazard’ arising from all ‘occurrences’ during the policy period is the amount of the Products-Completed Operations Aggregate limit stated in the Declaration.”

Based on those clauses, the Court held that, with respect to the floor drain, the policy can be construed in both ways: it can be construed to provide coverage because the drain was a completed product, and can be construed to exclude from coverage because the drain was JRC’s work. Exclusions from coverage in an insurance policy, however, must be clear and explicit and are strictly construed against the insurer. Consequently, the Court concluded that since the CGL policy can be read both to include and exclude coverage for the damage to the floor drain, it must be construed to provide coverage for the cost to repair and replace the floor drain.

The key takeaway here is that, although the general rule is that CGL policies will not cover faulty workmanship performed by the contractor itself, if part of the contractor’s work has been completed and put to its intended use before being damaged, then coverage may apply if there is completed operations coverage. This has been a hotly contested issue in various states for years. Any contractor/subcontractor purchasing a CGL policy should pay close attention to the wording of both the “your work” exclusion and the “product completed operations” clause as they can be outcome determinative.