Costs of ripping out and replacing defective work was held to be potentially covered as property damage under a CGL policy issued by Zurich American Insurance, where employees of the insured contractor caused a leak in steam pipes by improperly unpacking the pipe prior to installation.  The contractor claimed that ripping out work of its various subcontractors, including the backfill subcontractor, and the concrete subcontractor, the landscape subcontractor was all work performed on its behalf by subcontractors and, therefore, covered under the policy despite the defective workmanship exclusion that excludes coverage for property damage to “your work.”  The trial court ruled the damage was excluded but this was reversed on appeal.

Summary of the Facts

Limbach Company, LLC (Limbach) had a contract with Morse Diesel/Essex to perform mechanical work on a project at Howard University in Washington , D.C.   Limbach was responsible for installing a prefabricated, insulated, underground steam line.  It subcontracted the production of the steam line to Thermacor Process, Inc. (Thermacor).  It subcontracted the excavation and backfilling of the trench for the line to Legacy Builders.

A leak was discovered in the steam line after it was installed.  The leak damaged the insulation covering the pipe, the backfill placed around the steam line, and the landscaping in the area surrounding the leak – including concrete walkways.  In order to excavate and repair the damaged pipe, Limbach had to remove concrete that was installed by a third party.  As a result, Limbach had to hire a company to perform concrete replacement.

Limbach filed a claim with it commercial general liability (CGL) carrier, Zurich American Insurance, for the costs of replacing the damaged steam line and repairing the work damaged by the leak.  This included the cost of repairing the backfill, the cost of replacing the steam pipe, the cost of repairing the landscaping, the cost of replacing the concrete, and the cost of a temporary steam boiler.  Zurich agreed only to cover the cost of the temporary steam boiler and part of the cost of the landscaping.  The balance of the claims were denied by Zurich on the basis of policy exclusions.

Relevant Insurance Policy Language

The Zurich policy provided that Zurich “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’  to which this insurance applies.”  The policy applied to completed operations, as defined by the policy under “products-completed operations hazard.”  This terms was defined in the policy as follows:

“ Products completed operations hazard: (a) Includes all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ ….”

The definition of “your work” is “work or operations performed by you or on your behalf” and includes “materials, parts or equipment furnished in connection with such work or operations.”

Exclusions to the policy included what is known as the “your work” exclusion.  This excludes “’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

An exception to this exclusion provides:  “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.    Making this exception key to its argument for coverage, Limbach argued that its insurance claim covers the cost of repair or replacing damaged work performed by subcontractors and third parties.  Thus, Limbach argued that the damaged work was not excluded from coverage.

Choice of Law.

As in initial matter it is important to note that although the project was in Washington, D.C. and the court that decided the case was located in Virginia, the law the Court applied was applied was the law of the State of Pennsylvania because that is where the insurance policy was delivered.

Backfill Claim:  The parties agreed that the backfill was damaged by the leak.  The backfill work had been performed by a subcontractor.   Zurich maintained that the “your work” exclusion precluded coverage for the damage to the backfill because it was performed on the insured’s behalf.  As work performed “on your behalf” Zurich argued this made it subject to the exclusion.   The court rejected Zurich ’s argument because, “The exclusion specifically states that it ‘does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.’”   In reaching that conclusion, the court reviewed the history of the Insurance Services office (ISO) exclusion on which this policy was based.   The court quoted a decision from a Pennsylvania court that had analyzed the same exclusion and reached a “holding that the ‘unambiguous terms’ of the ‘your work’ exclusion do not eliminate coverage for harm done to a subcontractor’s work.”

In the present case,  the court concluded that since the backfill was performed on Limbach’s behalf by a subcontractor, the “your work” exclusion does not preclude coverage for the cost of repair to the damaged backfill and that “to hold otherwise would be to ignore the unambiguous terms of the exclusion’s exception for work performed by a subcontractor.

The damaged pipe.  With regard to the damaged pipe, Limbach argued that the damage was not excluded from coverage because the pipe was manufactured by a subcontractor, Thermacor.  The lower court determined that Thermacor was a “materialman” rather than a subcontractor, and that the damaged steam pipe was therefore excluded from coverage by the “your work” exclusion.  Again the appellate court disagreed.  The court found that Thermacor’s role was highly distinguishable from that of a supplier because it had custom manufactured the steam pipe in accordance with shop drawings and project specification for this particular project, and one of Thermacor’s representative visited the work site, reviewed the installation drawings with Limbach, and provided specific instruction regarding the installation of the pipe.

Replacing concrete and repairing damaged landscaping

The lower court applied the “your work’ exclusion to preclude coverage for Limbach’s costs of replacing the concrete and repairing the damaged landscaping that resulted from removing the damaged pipe.  The appellate court reversed this and held that the exclusion does not exclude coverage for damage to a third party’s work.  “Since the landscaping and concrete work were performed by third parties, the “your work” exclusion does not preclude coverage for the costs of repairing and replacing the landscaping and concrete.”

For these reasons, the appellate court reversed and remanded the district court’s award of summary judgment that had been granted to Zurich .  Limbach Company, LLC v. Zurich North American (CA-03-685-A, 4th Cir. U.S. Ct. App., Jan 2005).

Commentary. This decision may have been decided differently by another court applying the law of a different state.  When underwriting and pricing insurance policies, it is important for insurance carriers to consider differences in how courts in various states interpret the sample language to reach very different results.  It is important to consider where the insured will be performing its work and what state’s law will apply.  Many companies include a choice of law provision in the policy itself dictating that disputes between insureds and the insurance company will be decided in a particular jurisdiction and will apply the law of that jurisdiction.  The decision in this case does not explain whether the policy included such a provision.  One might conclude that when the court says the policy was “delivered” in Pennsylvania , it is also saying that it was issued pursuant to the law and regulations of Pennsylvania applicable to policies issued in that state.

Insured firms, such as construction companies, may also benefit from understanding differences in how the law of different states may affect the interpretation of both their insurance policy and their construction contract.    It is interesting to compare court decisions that reach opposite conclusions concerning the intent of policy language.  For a lengthy journal article analyzing in some detail issues and decisions surrounding coverage for construction defects, see John Lennes & Kent Holland, Insurance for Construction Defects, re-printed in Construction Risk Management Law and Case Notes, available at

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of Report and may be reached at or by calling 703-623-1932.  This article is published in Report, Vol. 7, No. 4 (Jul/Aug 2005).

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