The construction defect fiasco in California led to the creation, by the specialty insurers, of the subsidence exclusion for attachment to the commercial general liability policies of homebuilders. Originally the exclusion applied only to completed operations property damage and was limited to subsidence generally caused by foundation failures. It has evolved into the contractor’s worst nightmare.

Many companies have extended the subsidence exclusion into an “absolute earth movement exclusion” including earthquakes and are using it for all contractors. Most no longer limit the exclusion to either the property damage or completed operations hazard. One admitted regional insurer puts the exclusion on every policy it issues. Since the exclusionary language is so broad, it would be strictly interpreted against the finding of coverage. The courts in California have been of no help in mitigating the negative effects. (See Blackhawk Corp. v Gotham Ins. Co., 54 Cal App 4th 1090.)

This problem is no longer limited to California nor to specialty insurers. A major national insurer specializing in contractors has recently added an absolute subsidence exclusion for use in Arizona, Colorado, and Nevada. Insurers may use this endorsement wherever market conditions allow.

Why the big concern for most contractors?

  • No coverage for bodily injury arising out of a trench collapse on an ongoing job.
  • Possible coverage problems arising out of equipment upset.
  • Any earthquake induced bodily injury or property damage is excluded.
  • Subcontractors may have this exclusion on their policies.

What can you do to eliminate or mitigate the problem?

  • Use a different insurer — even California has A-rated insurers with minimum exclusions.
  • Request the exclusion be deleted — especially for premiums over $35K.
  • Obtain separate subsidence coverage where available.
  • Require your subs to disclose all exclusionary endorsements during bid process.
  • Obtain a side letter from the insurer limiting the areas where the exclusion applies.

Large general contractors and public entities, such as Caltrans, are becoming more and more sensitive to the use of exclusionary endorsements on policies where they are named as additional insureds. There is a requirement on both the Caltrans insurance specifications and the AGC of California standard form subcontract that exclusionary endorsements be set forth in the insurance certificates.

Robert G. Mahan Esq. is Managing Member of Mahan Insurance LLC, with offices in Anaheim, CA, and Mystic, CT. This article first appeared in California “Constructor” / Volume 32, Number 1 / January 2001. Report, Vol. 4, No. 2 (Feb 2002).