The Ins And Outs Of The 'Impaired Property' Exclusion In Commercial General Liability Policies

1. INTRODUCTION

   Contractors generally bear two main types of risks. First, the risk of being liable for providing deficient, shoddy or incomplete work or products, and second, the risk of being liable for bodily injury or property damage resulting from providing shoddy work or products.1 Broadly speaking, Commercial General Liability (CGL) insurance only protects against the second type of risk, as the first is a "business risk" within the control and responsibility of the contractor.

   Modern CGL policies exclude coverage for these "business risks" in many ways, including by the impaired property exclusion. This particular exclusion clause is notoriously complex, spawning a body of case law, mostly in the United States, dealing with its interpretation and exclusion.

2. AN OVERVIEW OF CGL POLICIES

   1. A Brief History

      Commercial liability insurance is a creature of the 21st century. Developed in the 1930's, Comprehensive General Liability Insurance - later renamed Commercial General Liability insurance - responded to North America's rapid post-war industrialization and manufacturers' increased liability beyond their factory floors.2

      While liability insurance is recognized as a type of insurance under the Insurance Acts of the respective provinces and territories in Canada, CGL policies are not subject to the same level of statutory regulation as the other recognized forms of insurance.3 As such, there is no mandatory uniform CGL policy for Canadian insurers and brokers. The same is true in the United States. Practically speaking, this means each insurance company providing CGL coverage is free to issue its own policy wording, subject only to approval of the Superintendent of Insurance for the province.4 It bears emphasizing then, that each CGL policy should be carefully read, as its interpretation will ultimately turn on its own, unique wording.

      That being said, insurance industry organizations in Canada and the US create standard form CGL contracts as model policies, and update them from time to time.5 The standard form language is commonly adopted by insurers and brokers. The Insurance Services Office (ISO) in the US published the first standard form CGL in 1955, which was revised in 1966 and 1973.6 The Insurance Bureau of Canada (IBC) followed suit by producing standard 'Form 2100' in 1978, which largely adopted the wording of the 1973 ISO policy.7

      The ISO overhauled its standard form CGL in 1986 to add a number of new exclusions, including the impaired property exclusion.8 The standard form's most recent modernization occurred in 2013.9 Once again, the IBC played copycat by making similar changes to its standard form in 1987 (Form 2001). The most recent standard form CGL policy in Canada is Form 2100, updated and issued by the IBC in 2005.10

   2. What is Covered?

      CGL policies are only intended to protect the insured in the event its performed work or provided products accidentally cause damage to someone else's person or property. The contractor's liability for its deficient, shoddy or incomplete work is generally not covered by CGL insurance. This risk allocation and cost sharing between the insured and the insurer is an underlying or organizing principle of CGL policies, oft-cited by courts when tasked with interpreting these particular contracts of insurance.11

      In order to claim indemnification under a CGL policy, an insured must generally establish the following elements on a probability basis:12

      The claim must be with respect to the named insured or an entity coming within the definition of "persons insured"; The claim must have occurred during the policy period and within the coverage territory; The claim must be due to an "occurrence" as defined; The insured's liability must constitute a legal obligation to pay compensatory damages with respect to "property damage" or "bodily injury" as defined. C. What...