Insurance Coverage for Breach of Contract Claims

Authored by John Lockard

Almost all contractors have commercial general liability insurance (“CGL” insurance) to cover claims made by third parties arising out of the performance of construction work. It is possible that CGL insurance policies also provide coverage for claims of defective work and materials, including breach of contract claims.

Normally, insurance does not cover claims that relate to the failure of the contractor to properly perform its contractual requirements. Generally, such claims are excluded by the “your work” exclusion contained in the standard CGL policy. Some courts in Virginia and many other states, however, have ruled that CGL insurance covers claims for damages to non-defective parts of the work caused by defective work performed by subcontractors. For example, there may be insurance coverage if a subcontractor performs defective roofing work that allows water to infiltrate the building envelope resulting in damage to non-defective ceiling tiles or sheetrock. In such instances, there may be insurance available to pay for the cost to repair and replace the ceiling tiles and sheetrock, but not the cost to correct the defective roofing work.

The CGL insurance may also pay the costs of providing the legal defense to a breach of contract lawsuit if the claim involves defective work performed by a subcontractor. The CGL insurance carrier may be responsible to pay these costs even if the court ultimately determines that the work was not defective or did not cause damage to non-defective work. Obviously, such coverage can provide substantial savings to the contractor.

The courts in Virginia have differed over the interpretation and scope of CGL policies for defective work, but it is important for the contractor to provide notice to its insurance carrier as soon as it becomes aware of a potential claim relating to defective work performed by a subcontractor. The insurance carrier may be able to deny coverage if it does not receive timely notice of the claim. Contractors should contact an attorney experienced in construction law if they have any questions regarding possible insurance coverage for any construction claims.

Authored by attorney John Lockard, these articles are meant to bring awareness to these topics and are not intended to be used as legal advice.
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