There are few endorsements on a Contractor’s General Liability more confusing policy than a Prior Works Exclusion. It is an exclusion of coverage, that upon hearing about it – only after a claim, of course – typically induces a sense of confusion which shortly thereafter converts to anger or rage.
Contractors! The Prior Works Exclusion is a deadly endorsement and I strongly recommend reviewing your policy to see if you have it, so you can get rid of it.
What It Is
A Prior Works Exclusion is a piece of verbiage added to your Commercial General Liability policy (called an “Endorsement”) that modifies coverage on your policy. It is specific to Contractors. It says the policy will not pay for any Bodily Injury or Property Damage claims made against you where the damage occurred during the current policy period that arose out of any project you completed prior to the first day you got your General Liability policy with the company you’re currently with.
How It Works (An Example to Explain)
Pretend you’re a plumbing contractor and from 2014 to 2018 you had your General Liability policy with ABC Insurance Co. You installed a plumbing system in a house in 2017. In 2019, after an unprecedented rate increase, you do some Google research and find a new insurer, CCC (Cheap Crappy Coverage) Insurance Co, that will cover you for less than what you were paying before. In 2019 you move your insurance to CCC Insurance Co. CCC’s policy has a Prior Works Exclusion.
In 2020 you get a letter from All-State-Farmers-Bureau Insurance Co notifying you that they just paid a $50,000 water damage claim on the house whose plumbing system you installed in 2017. The letter describes how in 2020 two copper pipes you soldered together by the upstairs bathroom suddenly came apart causing water to leak into the wall it was encased in, flowing down through the floor, flooding the living room below it. Not only did the wall, ceiling, and flooring have to be repaired, but the furniture, including the TV, was destroyed and had to be replaced. Since you were the one that installed the plumbing system, All-State-Farmers-Bureau believes you to be the liable party and is subrogating (making a claim against you for) the $50,000 they already paid to the homeowner over to you.
This is of course upsetting news, but you’ve had General Liability insurance since the Carter Administration, and as far as you know, that’s the policy that would pay for this type of thing.
Who do you call? ABC or CCC? Most people would call ABC, so we’ll go with that for our example.
You call ABC and file the claim. The adjuster’s first question is “when did the damage occur?” “2020,” you tell him. The adjuster then informs you there is no coverage because the damage occurred after you left them and ABC’s policy only would have paid for damage that occurred during the time period you were insured with them (2014 to 2019). This is surprising, so you fight back. “You were my insurer when I installed the plumbing system. You should be the one to cover me, you slimy weasel. Now pay up before I report you to the Department of Insurance!” The adjuster replies “Sorry, that’s not how it works,” and then mutters something how about the occurrence has to occur during the policy period, tells you to try your new insurer CCC, and leaves you with a “good day, sir.”
It seems to defy logic, but out of desperation call your new insurer CCC. The CCC adjuster asks the same question: “When did the damage occur?” You give him the answer which apparently is becoming important. “Oh, OK, great!” he says, but then he asks a follow up question, “When did you complete the project?” “2017,” you tell him. Mr Adjuster then furrows his brow, folds his arms, and says, “I’m very sorry – your policy has a Prior Works Exclusion, and since your plumbing project finished up in 2017 before you were insured with us, that’s a Prior Work and you therefore have no coverage. We’re now closing this claim with $0 paid out. Thank you for placing your insurance with CCC. We appreciate your business and look forward to helping you next time.”
And there it is. You’ve been insured the whole time, you have a claim that definitely falls within the scope of what General Liability is meant to cover, yet you have two denials and $0 coming your way. Starts with confusion, converts to rage.
Why It’s Confusing / Why People Are Confused
As mentioned above, most people would think the 2017 is the rightful policy to pay. They think this because they think that the insurance covers the project they’re working on, both during and after the project is complete. Why? I don’t know. Maybe that’s how warranties work? But that is not how insurance policies work. Insurance policies are not project-based policies. Insurance policies – specifically General Liability policies for Contractors – are “Occurrence” policies which means they pay as long as the loss occurred during the policy period. (side note; there are other types called “Claims-Made” policies that are not Occurrence based, but they’re rarely if ever used for Contractor’s General Liability policies). Back to the story: It does not matter when the project was completed. It does not matter when they claim is made against you or when you report to your insurer. It only matters when the loss occurs.
If the loss occurred in 2020, the policy that pays is the one in place in 2020. It is therefore irrelevant if the damage arose from a project you completed in 2017, 2010, 1999, 1976, 1888 or 1776. It’s irrelevant, that is, unless there’s a Prior Works Exclusion because a Prior Works Exclusion says that it will NOT cover any loss that it would normally would have paid for in the event that the damage arose out of a project that was completed prior to when you got your insurance with them.
That’s why you had no coverage in the example above, and that’s why CCC Insurance costs less. You got less for less.
When It’s Unavoidable
Even though you should never have a Prior Works Exclusion, there are times when it may be mandatory. Times such as:
*When you had a lapse in coverage and want to get covered again
*When you’re a new venture and want to get coverage for the first time
*When you’ve previously placed your insurance with an insurer that has proven to be financially unsound
*When you’ve previously placed your insurance with a non-insurance arrangement like a Risk Retention Group or Self Insured Group
Why is this the case? I don’t know for sure. Insurance companies don’t like to take the time to explain the reasons for their rules, but I can take a guess, which could be right, at least part of the time. In all these situations maybe the risk to the insurer is that you could sandbag them, meaning you have an uninsured claim during a period of no coverage or period of coverage through an alt-insurer, and you hold out reporting it until you get a new policy in place. The Prior Works Exclusion then, is like a big roadblock, which helps them deny these types of claims fast and easy.
Notice I said there are times when it may be mandatory. There are lots of insurance companies out there and they all have different rules. You could get lucky and find an insurer that does not have a Prior Works Exclusion attached to it even if you fall into one of those above categories.
When It’s Avoidable and Should Be Deleted Immediately
Most of the time Prior Works Exclusions are optional but added by default by the insurers in the quoting phase because it makes the policy cost less and look more attractive to a buyer. And many insurance agents don’t know about Prior Works Exclusions, don’t understand how Occurrence policies work, aren’t aware of the gaping hole that the Prior Works Exclusion creates, and are relying heavily on having the lowest price to earn your business.
The solution? Do a little research on your own. When you get a quote, ask for a copy of it. Ask if the policy has a Prior Works Exclusion. It will not always be called a Prior Works Exclusion. Sometimes it’s called the “Past Projects or Products Exclusion,” the “Prior Completed Operations Exclusion,” the ” Prior Completed Work Exclusion” or something similar, but they all do the same thing and they’re always just as deadly.
And if you have a policy with a Prior Works Exclusion, call your insurer or your agent and ask them to remove it. Should be doable.
Good luck out there, contractors!
Gillespie Insurance Services helps people and businesses in California, Arizona and Nevada.