Products-Completed Operations Coverage

Your business could be sued if someone is injured by a product you make or sell, or by work you have completed. This article will explain how claims arising from your products or completed work are covered under a general liability policy.

Manufacturers and Sellers

If your company manufactures or sells a product, your firm could be the subject of a product liability claim. It means that someone could file a claim against you alleging that a product you made or sold is defective, causing injury to that party or damaging his or her property.

For example, suppose that you own Chic Chairs, a company that manufactures ergonomic chairs. Your company was recently sued by a customer named Chuck. Chuck claims that he was sitting in a Chic chair he purchased when it unexpectedly tipped backward. He alleges that the defective chair caused him to fall and sustain a head injury. Chuck is seeking $25,000 in damages.

Contractors and Service Providers

Perhaps your firm doesn’t make or sell a product but performs work for someone else. In this case, your company could be the subject of a completed operations claim. That is, someone could claim that work you completed is faulty and that your faulty work injured him or her or damaged his or her property. Here is an example:

Capital Concrete performs concrete work for general contractors and commercial property owners. Capital was recently sued by a customer, Prime Properties. Last year Prime Properties hired Capital Concrete to construct an elevated walkway at an upscale apartment building Prime owns. The walkway connected the parking garage to the building's side entrance. Two months after Capital Concrete completed the work the walkway collapsed. The broken concrete damaged a stone patio and some expensive statuary. Prime Properties is demanding $30,000 from Capital Concrete to cover the property damage.

Negligence, Strict Liability or Breach of Warranty

Some claims involving products or completed operations are based on negligence. Others are based on strict liability or breach of warranty. When strict liability applies, you may be held liable even if the claimant cannot prove you were negligent. In a breach of a warranty claim, the claimant typically alleges that you violated a warranty (guarantee) you made at the time of sale.

For example, Tom works for a retailer that sells Chic Chairs. Tom is trying to sell a chair to Bill. He tells Bill that a Chic Chair can withstand 500 pounds. In fact, an elephant could sit on one, and it wouldn't break. Bill, who weighs 295 pounds, purchases a chair based on Tom's guarantee. Bill takes the chair home and sits in it. The chair collapses, injuring Bill. Bill sues the furniture store for bodily injury, alleging breach of warranty.

Products-Completed Operations Coverage

Claims arising out of your products or completed work are covered under your general liability policy. Coverage for such claims is included under Bodily Injury and Property Damage Liability. The latter is designated Coverage A under the standard ISO commercial general liability form (CGL), on which most liability policies are based. Claims arising out of your products or completed operations are covered unless they are specifically excluded by an endorsement.

The CGL does not cover every claim or suit involving your product or completed work. For a claim to be covered, all of the following criteria must be satisfied:

• The claim must allege bodily injury or property damage. If no bodily injury or property damage has occurred, the claim will not be covered.
• The claimant must contend that the bodily injury or property damage arose out of your product or completed work. In other words, there must be a direct connection between your defective product or work and the injury or damage.
• The bodily injury or property damage must take place away from premises you own or rent. It must also occur when the product is no longer in your physical possession or after your work has been completed.

While a claim that doesn’t meet the above criteria is not a products-completed operations claim, it may still be covered by your policy. For example, suppose you are giving some visitors a tour of your Chic Chairs factory. A visitor is injured when he sits in a defective chair. The visitor demands compensation. The claim will likely be covered under Bodily Injury and Property Damage Liability. However, the injury occurred on your premises so that the claim will be covered as a premises liability claim, not a product liability claim.

Similarly, suppose that Capital Concrete is in the process of constructing the elevated walkway when the partially-completed structure collapses. The damage to Prime Properties’ statuary and stone patio will likely be covered by Capital Concrete’s general liability policy under Coverage A. However; the damage has arisen from Capital Concrete's ongoing operations, not its completed operations.

Policy Limits

Claims arising out of your products or completed work are subject to both the Each Occurrence limit and the Products-completed Operations Aggregate limits in your policy. The aggregate limit is the most your insurer will pay under your policy for damages or settlements arising from your products and/or completed operations.

Exclusions

If your product or completed work is faulty or is not what you promised, your liability policy will not cover the cost to remake or redo it. The following three exclusions make this clear. They are located in the “exclusions” section under Coverage A.

Damage to Your Product

Your liability policy does not cover claims based on damage to your product or a part of your product. For a claim to be covered, it must involve damage to property other than your product. For instance, suppose that a customer purchases a chair made by Chic Chairs from a retailer. The customer then files a claim against Chic Chairs, alleging that the chair he bought was broken when he took it out of the box. Because no property other than the product has been damaged, the claim will not be covered under Chic Chair’s liability policy.

Damage to Your Work

Likewise, your policy will not cover claims for property damage to your completed work. In the first Capital Concrete example, the elevated walkway collapsed after Capital completed it. Suppose that Prime Properties sued Capital Concrete for the damage to the walkway only. The walkway was Capital’s completed work; thus, the claim would not be covered under Capital Concrete’s liability policy. If Prime Properties sought compensation for damage to other property (like the statuary and the patio) that was damaged by the collapsed walkway, that damage would be covered.

The Damage to Your Work exclusion contains an exception for work performed by subcontractors. This exception is designed to protect contractors from claims stemming from defective work performed by subcontractors. If Capital Concrete had hired a subcontractor, Crazy Concrete, to build the walkway, and Capital was sued because of Crazy Concrete’s faulty work, the claim would probably be covered.

Damage to "Impaired" Property

This exclusion can be confusing. Essentially, it excludes damage to property that is defective or unusable because it contains your defective product or defective work. Such property can be restored to use by removing your defective work or product. For example, Capital Concrete was hired by a general contractor to construct the concrete foundation of a new building. Other contractors constructed the remainder of the building. Unfortunately, Capital used the wrong type of concrete, and the foundation has cracked. The building is now unusable. If the building owner demands that Capital Construction repair the foundation, Capital's liability insurer is unlikely to pay the cost of the repairs.

No Coverage for Product Recalls

Finally, if you are forced to withdraw a faulty product from the market, your policy will not cover the costs of the recall. You can insure your firm against some of those costs by purchasing Limited Product Withdrawal Expense Coverage. If your company manufactures or sells food, you should consider purchasing food contamination coverage.