Property Damage Hazard

Summary: Under the comprehensive general liability policy, property damage included within the explosion hazard, the collapse hazard, or the underground property damage hazard was specifically excluded. Under the current Commercial General Liability Coverage Form (CGL), such property damage is not excluded by the form itself; rather, the insurer must use an endorsement modifying the CGL form to exclude coverage for explosion, collapse, or underground property damage. This discussion focuses on these endorsements—CG 21 42 12 04, which specifically excludes coverage, and CG 21 43 12 04, which provides an exception to the exclusion.

Topics covered: Introduction XCU exclusion — specified operations XCU exclusion — specified operations excepted

Introduction

Certain risks—such as excavation, tunneling, subway construction, landscaping, and demolition—carry with them exposures that present problems for an insurer. Among these are risks that relate to blasting and other explosion, collapse, or structural injury to property from various operations, and damage to certain underground property. The CGL form automatically provides coverage for the explosion, collapse, and underground property damage hazards. This is in stark contrast to the comprehensive general liability policy, and it means that the burden of policing such exposures has fallen upon the insurers. If a potential insured engages in operations that might even remotely include the hazards of explosion, collapse, or underground property damage, the insurer must recognize the exposure and underwrite the risk accordingly. To do so it is necessary to do more than use a standard ACORD application form. Whenever a construction risk is considered, the underwriter should require answers to additional questions, such as the following:

1. Do you ever use explosives in your business?

a. If so, describe in detail.

b. If so, detail the number of times in the last twenty-four months you used explosives.

c. If so, detail the percentage of your earnings you attribute to use of explosives.

2. Do you ever demolish structures of any kind?

a. If so, describe your demolition activities in detail.

b. If so, detail the number of times you were involved in demolition in the last twenty-four months.

c. If so, detail the percentage of your earnings you attribute to demolition activities.

3. Do you ever work underground?

a. If so, describe your underground activities in detail.

b. If so, detail the number of times you were involved in underground activities in the last twenty-four months.

c. If so, detail the percentage of your earnings you attribute to underground activities.

4. Do you ever treat the earth?

a. If so, describe your earth treatment activities in detail.

b. If so, detail the number of times you were involved in earth treatment in the last twenty-four months.

c. If so, detail the percentage of your earnings you attribute to earth treatment activities.

5. Do you ever excavate earth?

a. If so, describe your excavation activities in detail.

b. If so, detail the number of times you were involved in excavation in the last twenty-four months.

c. If so, detail the percentage of your earnings you attribute to excavation activities.

There are currently two standard endorsements that can be used by insurers to exclude explosion, collapse, and underground property damage hazards. CG 21 42 is an exclusion endorsement for specified operations and CG 21 43 is a general exclusion endorsement that allows specified operations to be covered. As a point of reference in the following discussion, the definitions these two forms add to the CGL are as follows:

1."Collapse hazard" includes "structural property damage" and any resulting "property damage" to any other property at any time.

2."Explosion hazard" includes "property damage" arising out of blasting or explosion. The "explosion hazard" does not include "property damage" arising out of the explosion of air or steam vessels, piping under pressure, prime movers, machinery or power transmitting equipment.

3."Structural property damage" means the collapse of or structural injury to any building or structure due to:

a.Grading of land, excavating, borrowing, filling, back-filling, tunneling, pile driving, cofferdam work or caisson work; or

b.Moving, shoring, underpinning, raising or demolition of any building or structure or removal or rebuilding of any structural support of that building or structure.

4."Underground property damage hazard" includes "underground property  damage" and any resulting "property damage" to any other property at any time.

5."Underground property damage" means "property damage" to wires, conduits, pipes, mains, sewers, tanks, tunnels, any similar property, and any apparatus used with them beneath the surface of the ground or water, caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, borrowing, filling, back-filling or pile driving.

XCU Exclusion — Specified Operations

CG 21 42 can be used when an insurer has an insured that may only occasionally engage in operations that could be included in the explosion, collapse, or underground property hazard category. For example, the activity of landscape gardening may once in a while include the collapse or underground property damage hazard, particularly with many new office buildings adding park-like settings to their grounds that incorporate manmade ponds. Irrigation or drainage system construction may call for the use of explosives in certain situations. If the insurer wants to insure the general operations of a company, but shy away from certain activities, then CG 21 42 can be endorsed onto the CGL form to exclude the scheduled hazard.

The three hazards are defined by the endorsement as follows:

"Collapse hazard" includes "structural property damage" and any resulting "property damage" to any other property at any time.

"Explosion hazard" includes "property damage" arising out of blasting or explosion. The "explosion hazard" does not include "property damage" arising out of the explosion of air or steam vessels, piping under pressure, prime movers, machinery or power transmitting equipment.

"Underground property damage hazard" includes "underground property damage" and any resulting "property damage" to any other property at any time.

This endorsement states that the insurance does not apply to property damage (bodily injury is not mentioned) included within the explosion hazard, the collapse hazard, or the underground property damage hazard if any of these hazards is entered as an excluded hazard on the schedule. The form then defines those hazards.

The collapse hazard includes structural property damage and any resulting property damage to any other property at any time. This definition is expanded to show that structural property damage means the collapse of or structural injury to any building or structure due to grading of land, excavating, tunneling, pile driving, or moving, shoring, raising, or demolition of any building or structure. This part of the endorsement seems to attempt an all-encompassing exclusion of property damage caused by the collapse hazard. As it is defined, the collapse hazard means not only collapse but any structural damage arising out of the activities of the insured. For example, if the insured is operating a pile driver or jack hammer in one area and that activity causes the building across the street to crack, or in any way suffer structural damage, this endorsement would be available to allow the insurer to deny coverage for a claim if it can prove that the operation of the pile driver or jack hammer caused damage to the neighboring structure.

The underground property damage hazard includes underground property damage and any resulting property damage to any other property at any time. Considering the breadth of the definition, this exclusion seems to be unsure of its own scope. For instance, the definition applies to any resulting property damage to any other property at any time.

The endorsement defines "underground property damage" as:

"Underground property damage" means "property damage" to wires, conduits, pipes, mains, sewers, tanks, tunnels, any similar property, and any apparatus used with them beneath the surface of the ground or water, caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, borrowing, filling, backfilling or pile driving.

However, since the definition states that the damage must be caused by the use of mechanical equipment and must be caused during the use of that equipment, an insured could reasonably argue that if the insured digs a tunnel or trench by hand and causes damage to adjoining property, the damage is not excluded. Or the insured may require coverage for a loss if the insured digs a tunnel using mechanical equipment but the damage occurs only after the job is done, and is, therefore, not excluded.

If a dispute over a claim should arise based on this exclusion, it will raise a question of fact that the adjuster or claims manager must be certain before using it to deny coverage—if presented to a judge or jury it would be found that coverage did not apply. If not convinced that the facts establish the severely limited portion of the exclusion, the insurer should consider immediate coverage for the loss. Insurers and insureds should be aware of the issue raised by the limited nature of the exclusion. Insurers should consider, if they wish to limit coverage more thoroughly, creating a manuscripted endorsement that more accurately excludes the risks presented by the hazard.

There are two exceptions on the endorsement that apply to all of the hazards. The exclusion of explosion, collapse, and underground property damage hazards does not apply to operations performed for the named insured by others or to property damage included within the products-completed operations hazard. If a general contractor has a subcontractor blasting or pile driving for him, any resulting claim against the contractor for property damage is not going to be excluded by this endorsement but may be excluded by the policy carried by the subcontractor.

XCU Exclusion — Specified Operations Excepted

This endorsement, CG 21 43, is worded exactly as CG 21 42 when it comes to the exclusions and the definitions. The difference is that CG 21 43 applies when the insurer chooses to insure a specifically described operation that otherwise would have been excluded by the endorsement.

The exclusion will not apply to any operation described in the schedule on the endorsement if any of the hazards is entered as a covered hazard. For example, if the named insured is a subcontractor that has taken on the job of bulldozing an area for a project and must take the precaution of shoring up nearby walls or foundations, the subcontractor needs specific coverage for the risk raised by a single job and will seek it from his insurer. The insurer may choose to cover that single operation for any or all of the hazards listed on the endorsement as long as it receives an adequate premium for the risk it agrees to take.

If the insured, while bulldozing, causes a foundation on the property across the street to collapse or sag, the insured will have coverage if a claim is made and the applicable hazard is listed as covered on CG 21 43.