December 11, 2013

Differences in Additional Insured for Ongoing vs. Completed Operations

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When things go wrong, all insurance endorsements must be right. If not, additional insured coverage under the named insured’s commercial general liability (CGL) policy can be in doubt. One major pitfall of additional insured endorsements comes from language regarding operations as “ongoing” or “completed.” These two little words make a big difference in how and when subcontractor insurance policies can extend coverage to additional insureds. Understanding how these clauses affect coverage and adjusting accordingly is good for shoring up any risk management strategy. 

What do the terms mean?

Ongoing operations applies to work considered in progress. Standard CGL policies apply only to a named insured’s “ongoing operations,” which provides coverage to themselves and their additional insureds for property damage and injury as work is actively underway on a project. 

Completed operations extends coverage beyond a contract or project’s conclusion. Should a loss occur after a subcontractor has finished the work, their CGL policy covers property damage and injury suffered by the additional insured or entity which hired the subcontractor for the project. A clause for “product-completed operations” applies the say way including a physical product as well as a service. 

Why does this matter?  

Essentially, ongoing and completed operations sets a duration for the coverage, which is extremely important. Here’s why: 

Very Good Building and Development Company hires Energy Electricians for electrical work on a construction project. Energy Electricians follows Very Good’s contract requirements and adds the general contractor as an additional insured on its policy. The subcontractor then completes the job over the next two weeks and moves on to a new project for a different contractor. Two months later a fire breaks out at Very Good’s new building causing $75,000 in damage. Inspectors find the fire started because of faulty wiring performed by Energy Electricians. Very Good files a claim against Energy’s policy only to find it included the standard clause for “ongoing operations” and the insurance company denies the claim. Very Good Building is left to file the loss against their own policy or pay the costs directly. 

In this scenario, the standard CGL policy covering ongoing operations only applied for two weeks while the subcontractor actively worked on their portion of the project. However, in many cases, faulty work or negligence is not found immediately. It could take months or even years for poor workmanship to appear. Had the contractor’s work agreement required the additional insured endorsement include “completed operations,” it would have had coverage for the loss under the subcontractor’s policy. 

Is a subcontractor’s work ever really finished? 

Much debate surrounds this topic regarding how long a subcontractor is responsible for a project. Many states have stepped in to define the required duration of completed operations coverage. However, additional insureds should be aware of policy cancellation dates. CGL policies are not cheap and subcontractors may cancel them at the completion of a job, especially third parties offering more seasonal services. If the state does not specify a duration of coverage, define the requirement in the  subcontractor’s agreement. Should the third party not maintain coverage for the required term, the general contractor then has the option to file a breach of contract lawsuit.

Any upstream entity hiring subcontractors should check the requirements of their contract and ensure it specifies “completed operations.” Not sure if your insurance requirements protect you? Chat with the team at myCOI. We have the certificate of insurance tracking technology and industry pros to help keep you covered.

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