Plumbing Contractor Insurance Exclusions You Should Understand

The short version

Every insurance policy follows the same architecture: an insuring agreement that makes a broad promise, a set of exclusions that take parts of it back, and endorsements that change either one. The marketing summary describes the promise. The claim is decided by the exclusions and endorsements. For a plumbing contractor, the exclusions are not fine print; they are the parts of the contract that determine whether a sewage backup, a mold remediation, a stolen jetter or a condominium repipe is paid or not.

What follows is a tour of the exclusions that come up most often for plumbing companies, across the four lines of coverage most of them carry. Everything here describes common market practice on standard and contractor-specific forms, and every statement is subject to the actual policy's terms, exclusions and endorsements. The point is not to memorise the list but to know which questions to ask before a loss, because that is the only time the answers can be changed.

A realistic scenario

This is a hypothetical. A plumbing company in the San Fernando Valley with eight employees does mostly residential service and small remodels. A property manager offers it a whole-building repipe on a 24-unit condominium: copper to PEX, about $210,000 of work over six weeks. The owner subcontracts the drywall patching to a handyman he has used before and brings in a two-person crew from another plumbing company to keep pace.

Eight months after completion a fitting in a third-floor unit fails over a weekend. Water runs through three units below. The HOA's carrier pays the units out and comes after the plumbing company for about $96,000. A mold assessment follows and adds another $31,000 in remediation.

The company's general liability policy, when actually read, contains four endorsements the owner had never looked at: a residential exclusion that removes condominium and multi-family projects above ten units; a subcontractor warranty endorsement requiring every subcontractor to carry its own liability insurance and name the company as additional insured; a fungi and bacteria exclusion; and a classification limitation endorsement listing residential plumbing service and repair. The carrier reserves its rights on all four. Whether anything at all is covered is now a question for lawyers, and the mold is out regardless.

Nothing about the plumbing was unusual. The gap was in the endorsements, and the time to have found it was the week the owner bid the job.

General liability exclusions

Damage to your work

A standard commercial general liability (CGL) form excludes property damage to "your work" arising out of it and included in the products-completed operations hazard. In plain terms, the policy pays for what the failed fitting did to the building; it does not pay to replace the fitting or redo the repipe. Standard forms generally carry an exception where the damaged work, or the work that caused the damage, was performed on your behalf by a subcontractor, which is one reason the subcontractor warranty endorsement discussed below matters so much: carriers often remove or condition that exception. Does general liability insurance cover water damage caused by a plumber? covers the your-work line in detail.

Damage to property: the j exclusions

The "damage to property" exclusion on the standard form has several parts, and three decide plumbing claims. Personal property in your care, custody or control. "That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations." And "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The first keeps a customer's fixture you took to the shop out of the liability policy. The second and third draw the line between damage to the thing you were working on (excluded) and damage that spreads from it (generally covered).

Timing matters here. The "performing operations" wording reaches damage while the job is under way, and on the standard form the "incorrectly performed" part does not apply to property damage included in the products-completed operations hazard. Once the work is complete, the your-work exclusion above is the one that usually draws the line. Arguments over how large "that particular part" is, or what counts as your work, are a frequent source of coverage disputes in plumbing property claims.

Fungi or bacteria

Many contractor GL policies carry an endorsement removing coverage for damage, testing, remediation and cleanup related to fungi or bacteria, however the moisture got there. After a slow leak behind drywall, mold is often the most expensive line on the estimate. Some carriers offer a limited buy-back with a sublimit. In the scenario, the $31,000 remediation is the clearest loss of the four.

Pollution and sewage

Contractor policies commonly carry a total pollution exclusion. Carriers have taken the position that raw sewage, and some drain-cleaning chemicals, are pollutants within that exclusion, and courts have reached different results depending on the wording and facts. A drain, sewer, septic or grease-trap business should treat this as a first-order question: ask the carrier's position in writing, or ask for an endorsement that addresses sewage backups specifically.

Contractual liability

The CGL form excludes liability you assume under a contract, with two exceptions: liability you would have had anyway without the contract, and liability assumed in an "insured contract." On the standard form, that definition includes the part of a contract relating to your business under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person, which is how the indemnity clause in a typical subcontract gets coverage. Some policies narrow or delete that part of the definition by endorsement (ISO's contractual liability limitation endorsement, CG 21 39, deletes it), which can leave the indemnity you signed uninsured. Ask whether your policy carries one.

California also limits what a subcontract can make you take on. Civil Code §2782 voids provisions in construction contracts that would make you indemnify the other party for its sole negligence or willful misconduct. For most commercial subcontracts entered into on or after January 1, 2013, Civil Code §2782.05 goes further: an obligation to defend or indemnify a general contractor, construction manager or other subcontractor is void to the extent the claim arises from that party's active negligence or willful misconduct, from design defects it furnished, or does not arise from your scope of work. Residential construction, direct contracts with owners and public agencies, and wrap-up programs are handled under separate rules. Have unusual indemnity clauses read by an attorney before signing.

Professional services

A professional services exclusion, common on contractor policies, removes coverage for losses arising from design, engineering, inspection or consulting. A plumber who sizes a system, specifies a backflow assembly or signs off on a design-build scope may be doing something the endorsement describes. If design is part of your work, ask whether a contractor's professional liability policy or a limited design endorsement is available.

Prior work

A prior work or prior completed operations exclusion removes coverage for work completed before the policy's inception, sometimes before a specified retroactive date. On an occurrence policy this matters when you switch carriers: the old policy covers damage that occurred during its term, but a leak that starts after the switch from work you finished under the old policy may be caught by the new policy's prior work exclusion. Completed operations coverage for plumbing contractors explains how to avoid that gap.

Residential, multi-family and condominium exclusions

In a hard contractor market, carriers attach exclusions for residential construction, tract or condominium work, multi-family projects above a unit count, or conversions. The wording ranges from narrow (new construction of tracts above a number of units) to broad (any residential work). A service plumber whose policy carries the broad version is uninsured for most of its revenue. In the scenario, the 24-unit condominium is squarely inside the endorsement's reach.

Subcontractor warranty endorsements

These endorsements condition or remove coverage for work performed by subcontractors unless specified requirements are met: the subcontractor carries its own general liability with stated limits, names you as additional insured, and signs a written indemnity agreement, with certificates on file. Where the conditions are not met, the endorsement may remove coverage for that subcontractor's work entirely or impose a large deductible. The handyman and the borrowed crew in the scenario are exactly what the endorsement targets. Are plumbing subcontractors covered by your insurance? covers the paperwork that satisfies these.

Classification limitation endorsements

A classification limitation endorsement restricts coverage to the classifications and operations described on the policy. If the policy describes residential plumbing service and the loss arises from commercial new construction, the carrier may deny on that basis alone. Tell your broker when the work changes, and make sure the described operations match what the company actually does.

Commercial auto

The gap that catches plumbing companies most often is not on the commercial auto policy but on the personal one. Personal auto policies are written for personal use. The standard personal auto form does not exclude every business use of a private passenger car, pickup or van, but carriers' own forms and eligibility rules vary, many restrict business use, and an employee's pickup used to carry parts to a job, or an owner's SUV with the company logo on the door, is a business vehicle when it is doing business. A personal policy is not built to answer for the company's liability. Owned vehicles belong on a commercial auto policy. Employees' own vehicles used on company errands are addressed by hired and non-owned auto coverage, which responds to the company's liability when an employee has a crash in their own car on a parts run. Beyond that, commercial auto forms carry their own standard exclusions: expected or intended injury, damage to property in the insured's care, custody or control, and pollution arising from cargo, among others. Commercial auto insurance for plumbing service fleets covers the fleet side.

Tools and equipment

Inland marine or contractor's equipment policies insure the tools, jetters, cameras and locators that a plumbing company carries. Two exclusions and one condition decide most claims:

• Mysterious disappearance. Many forms exclude loss where the equipment is simply missing with no evidence of theft. A camera reel that is not in the van at the end of the week and cannot be tied to a break-in may not be covered.
• Wear and tear, mechanical breakdown and gradual deterioration. A jetter pump that fails from use is a maintenance cost, not an insured loss.
• Theft from an unattended vehicle conditions. Some forms require visible signs of forced entry, a locked vehicle, or exclude theft from vehicles overnight unless garaged.

Scheduled items, agreed values, and the deductible per item matter as much as the exclusions. Tools and equipment insurance for plumbing contractors covers how the policies are built.

Workers' compensation and employers' liability

A workers' compensation policy has two parts. Part One pays the benefits the Labor Code requires to an injured employee, and because those benefits are set by statute there is no list of exclusions in the ordinary sense; if the injury arises out of and in the course of employment, the benefits are owed. Both the national standard form and California policy forms do make you responsible for payments above the regular benefits in some cases, including serious and willful misconduct, knowingly employing someone in violation of law, and failing to comply with a health or safety law.

Part Two, employers' liability, covers the employer against the narrower set of lawsuits that fall outside the compensation system. In California that set is small: workers' compensation is generally the employee's exclusive remedy against the employer (Labor Code §3602), and an employer who has paid compensation is not liable to reimburse or hold harmless a third party the employee sues, unless the employer agreed to do so in writing before the injury (Labor Code §3864). That second point is one reason the indemnity language in your subcontracts matters. On the national standard policy form, and in similar terms on California forms, Part Two excludes, among other things: liability assumed under a contract; punitive or exemplary damages for injury to an employee employed in violation of law; injury to an employee employed in violation of law with your actual knowledge; bodily injury you intentionally cause; employment-practices claims such as discrimination, harassment and termination; and fines or penalties for violating the law. The national form shows employers' liability limits as bodily injury by accident (each accident), bodily injury by disease (policy limit) and bodily injury by disease (each employee); California policies are written on California forms, and at least one states a single employers' liability limit that includes defense costs. Contracts frequently specify these limits, so read your own policy's declarations and wording. For the coverage itself, see Workers' compensation insurance for California plumbing companies.

Reading the policy

Practical takeaway

1. Get the full policy for every line, with all endorsements. A certificate and a proposal are not the policy.
2. Search the GL endorsements for the terms in the checklist and have your broker explain each one that appears, in writing.
3. Match the policy to the work before bidding anything outside your usual scope: unit count, building type, new construction versus service, subcontractor use.
4. Fix the subcontractor paperwork now, so the warranty endorsement is satisfied rather than triggered.
5. Get the carrier's position on sewage and mold before the first slow leak.
6. Put every business vehicle on commercial auto and add hired and non-owned coverage for employees' cars.
7. Treat renewal as a re-read, because endorsements change from year to year and carrier to carrier.

For the San Fernando Valley contractor, four endorsements turned a routine completed-operations claim into a coverage fight. Three of them could have been addressed at bid time: an endorsement or a different carrier for the condominium project, certificates and an indemnity agreement from the subcontractors, and a description of operations that included remodel and repipe work. The mold exclusion could at least have been known and priced into the decision to take the job.

When you request a quote, describe every kind of work your company does and the kinds of buildings you do it in. The exclusions a carrier attaches are a response to what it thinks you do; the time to correct that picture is before the policy is written.