Westfield Insurance Co. v. Sheehan Construction Co., Inc., 564 F.3d 817 (7th Cir. 2009), presents the rather prosaic question of whether coverage extends to the defective work of an insured contractor under a CGL policy. Sheehan was the general contractor for a residential subdivision in which owners began noticing moisture in places that should have been dry. An investigation traced the problem to defective work by one of Sheehan’s subcontractors. Sheehan sought indemnification from its liability insurer, Westfield Insurance Company.
The Westfield policy excluded “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘product-completed operations hazard.’” The exclusion applied to “the cost of repairing or replacing . . . ‘Your work’ defectively or incorrectly done by you.”
In the opinion, Judge Easterbrook limned the rationale that informed the “your work” exclusion:
Westfield’s policy covers commercial general liability—that is, bodily injury and property damage attributable to accidents. The policy would indemnify Sheehan for loss caused by construction machinery that damaged adjacent property or for an injury to a passerby caused by a misplaced nail. But indemnifying a general contractor for negligent work performed by a subcontractor is something else again. The moral hazard would be considerable: the prospect of indemnity would lead the general contractor to save money by hiring substandard contractors, then turning to the insurer to fix the customers’ homes.
Id. at 818.
Sheehan attempted to evade application of this exclusion on the grounds that the defective work was the work of a subcontractor. Sheehan rested its argument on the fact that the insurance industry’s standard-form CGL policy was revised in 1986 to remove subcontractors’ work from the definition of “your work” in the exclusion. The 1986 form adds the phrase “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.” The insuperable obstacle to Sheehan’s argument was that the Westfield Insurance policy was not on that form. In fact, as the court noted, the Westfield policy includes a definitional clause that defines “your work” to encompass “work or operations performed by you or on your behalf.” The court concluded that “the italicized phrase means that subcontractors’ work is included in the scope of ‘your work.’” Id. at 818.
The court further held that the “products-completed operations hazard” excluded coverage for the water damage. The policy defined the “products-completed operations hazard” as comprising “all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ except” for “products that are still in your physical possession.” The “‘products-completed operations hazard’ definition is designed to ensure that the policy covers accidents that occur while construction is under way, but not property damage caused by poor workmanship in a completed building.” Id. at 819.
