Insurance Companies will often raise multiple exclusions that are contained in a standard Commercial General Liability (CGL) policy to deny coverage for a claim arising from a construction project. The most frequently raised issues in construction disputes are the group of exclusions known as the “business risk” exclusions, and are designed to eliminate coverage for risks that are within the normal consequences of an insured’s business activities. Although insurers tend to cite every possible exclusion as a bar to insurance coverage for construction claims, this blog will focus on the ongoing operations exclusion and how courts have interpreted the language.
Ongoing Operations Exclusion
The ongoing operations exclusion, also referred to as the work-in-progress exclusion, states the CGL policy does not apply to property damage “to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations.” The ongoing operations exclusion is drafted in the present tense (“performing”), and applies only to property damage where construction is still in progress. Further, the exclusion applies only to “that particular part” on which the operations are actually being performed at the time of the property damage. Although this issue is heavily debated, if a contractor completed performance on one area of work, such as framing, and damaged that framing while performing other work, such as roofing, the exclusion should not apply.
Courts generally apply the ongoing operations exclusion “to bar coverage for the work being done by a contractor when claims arise at the time the work is being performed.” Erie Ins. Exchange v. Colony Dev. Corp., 2003-Ohio-7232, ¶ 73 (Franklin Cty. 2003). In Interstate Priorities v. Prasanna, Inc., 9th Dist. No. 22734, 22757, 2006-Ohio-2686, May 31, 2006), the Ohio Ninth District Court of Appeals considered the application of the ongoing operations exclusion to property damage during the building of a hotel. After first finding that the exclusion unambiguously included work performed by others on behalf of the insured (i.e. subcontractors), the court held that the insured failed to establish that the damages suffered by the third-party plaintiff were not the direct result of excavation while construction was in progress. Id. at ¶ 40. The insured asserted that the damage was covered because the contractor was on adjoining property, and not the worksite, when sand and gravel broke loose. The court rejected this argument, and ruled that the insured was not entitled to coverage since damage stemmed from property on which the contractor was still working. Id. at ¶43.
Conversely, in Beaverdam Contracting Inc. v. Erie Ins. Co., 2008-Ohio-4953, the court held that the ongoing operations exclusion did not apply when damage arises from work that is completely outside the contracted project. In that case, the insured was sued for clearing land beyond the boundaries of its customers, leaving the property of the customer’s neighbors barren of any trees or vegetation. The insurer sought to avoid its duty to defend through the ongoing operations exclusion, arguing that the insured was still performing work, even if the work had been performed on the wrong property. In rejecting this contention, the court found that the damage was not caused during the operations the insured should have been performing. Id. at ¶ 47. Moreover, the third-party plaintiffs did not allege poor workmanship—i.e. that their property had been poorly cleared of trees—but rather that the removal of vegetation was wrongful in the first instance. Id. at ¶ 48. Accordingly, the exclusion did not apply.
Insurers regularly contend that the ongoing operations exclusion prevents coverage for property damage on a construction project, because the damage began while the contractor or subcontractor was performing work on the property. However, the policyholder is not without a defense to this limitation of coverage. Policyholders can:
• Separate the project into sections to bolster a claim that the damage occurred to work already completed.
• Be clear about the scope of work that the contractor is performing.
• Remove the exclusion through an endorsement. This is the easiest way to make a finding of coverage likely, particularly if the insured is a general contractor and responsible for the completion of the whole project.