9 min read · Last updated August 7, 2026
- General liability renewal rates rose 5.44% in the second quarter of 2026 according to the Ivans Index, and the Council of Insurance Agents and Brokers separately measured the line up 2.6% in its first-quarter broker survey.
- A commercial general liability policy only pays when property damage was caused by an “occurrence,” defined as an accident. Several states hold that ordinary faulty workmanship is never accidental, so the claim never reaches the exclusion a broker prepares a contractor to fight.
- In Sheehan Construction Co. v. Continental Casualty Co., an Indiana general contractor lost the coverage fight at both the trial court and the court of appeals on the “no occurrence” argument alone, before the state’s supreme court reversed and sent it back.
- The subcontractor exception to the “your work” exclusion, standard on CGL forms since 1986, does nothing if a court decides there was no occurrence to begin with. It answers a question the claim never reached.
In this article
- What the denial letter actually said
- Why insurers argue there was no accident at all
- The case that shows the sequence exactly
- Where courts land today
- What the subcontractor exception does not fix
- Frequently asked questions
Owen Bracewell’s framing crew subcontracted the window installation on a $310,000 home addition to a two-man outfit that skipped flashing tape on eleven window units. Water worked behind the siding for eight months before anyone noticed a soft spot in the drywall. By then the sheathing and two floor joists on the north wall had rotted through, and the repair estimate came to $146,000. Owen’s commercial general liability carrier denied the claim in four sentences. It never cited an exclusion. It said there had been no occurrence at all.
What the denial letter actually said
Every commercial general liability (CGL) policy pays only for property damage caused by an “occurrence.” The standard form, published by the Insurance Services Office (ISO), the organization that drafts the policy language most carriers use, defines an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” That single word, accident, carries the whole coverage grant. Courts have spent decades arguing over whether badly installed windows are ever accidental, since the installer meant to install them exactly the way they did.
Owen’s broker had told him, correctly, that his policy carried the “subcontractor exception,” a provision added to the standard CGL form in 1986 that carves faulty subcontractor work back into coverage the policy would otherwise exclude. That exception sits inside the same faulty-workmanship exclusion our general liability guide for contractors walks through in full. Owen assumed that exception was his protection. It never came up. His carrier’s denial argued the claim failed at an earlier stage: no covered accident had happened, so no exclusion, and no exception to it, needed to be discussed at all.
Why insurers argue there was no accident at all
The insurer’s argument has two independent forks, and only one of them is the fight most contractors prepare for. The first fork is the coverage grant itself: was there an “occurrence” at all? The second fork, reached only if the first is won, is whether an exclusion carves the resulting damage back out. A minority of states let a carrier win outright at the first fork, before a contractor’s broker-prepared exclusion argument is ever heard.
Ohio is one of them. In Ohio Northern University v. Charles Construction Services, a case over extensive water infiltration at a newly built university inn, the Ohio Supreme Court held that “CGL policies are not intended to protect owners from ordinary ‘business risks’ that are normal, frequent or predictable consequences of doing business that the insured can manage,” and concluded that “we cannot say that the subcontractors’ faulty work was fortuitous.” No accident, no occurrence, case over. Pennsylvania courts have reached the same result, holding that “the definition of ‘accident’ required to establish an ‘occurrence’ under the policies cannot be satisfied by claims based upon faulty workmanship,” per the state’s supreme court in Kvaerner Metals v. Commercial Union Insurance Co..
The policy behind this fight keeps getting more expensive to buy, whichever way a court lands. General liability renewal rates rose 5.44% in the second quarter of 2026, according to the Ivans Index, which measures agency-placed small and mid-market renewals, decelerating from 6.85% the prior quarter. The Council of Insurance Agents and Brokers put the same line up a milder 2.6% in its first-quarter broker survey. A contractor paying more for the policy every renewal has more reason to know exactly what a court can take off the table before the exclusion language is ever read.
The case that shows the sequence exactly
Sheehan Construction Co. v. Continental Casualty Co. shows the sequence in real detail. Sheehan Construction, a general contractor, built a home for Vincent and Mary Alig. Subcontractors installed the windows and flashing incorrectly. Water intruded, the oriented strand board sheathing decayed, and the floor joists deteriorated. That is resulting property damage, not a cosmetic complaint about a window that looks bad.
The insurers never had to argue the exclusion, because the trial court and the Indiana Court of Appeals both granted summary judgment against Sheehan on the coverage-grant question alone, holding that faulty workmanship is not an accident because it is the natural, foreseeable result of installing something badly. Neither court analyzed exclusion j(5), j(6), or l., the “your work” exclusion. The case was decided, twice, before any of them were relevant. The Indiana Supreme Court reversed, holding that faulty subcontractor work may constitute an occurrence depending on the facts, and remanded the case, at which point the exclusion and its subcontractor exception finally became something worth arguing about.
Where courts land today
The states split, and the split has kept moving through the 2020s.
| Rule | Representative states and cases | What it means for a contractor |
|---|---|---|
| Majority: resulting damage from faulty work can be an occurrence | Texas (Lamar Homes, 2007), Indiana (Sheehan, 2010), South Carolina (Newman, 2009), New Jersey (Cypress Point, 2016), Colorado via the 10th Circuit (Greystone, 2011), Illinois (Acuity, 2023), Oregon (Twigg, 2025) | The claim clears the coverage grant. The real fight moves to the exclusion and the subcontractor exception. |
| Narrower majority: occurrence exists, but only for damage to other, non-defective property | Connecticut (Capstone, 2013) | The cost to redo the defective work itself stays excluded even after the occurrence question is won. |
| Minority: faulty work is never fortuitous, no occurrence at all | Ohio (Ohio Northern University, 2018), Pennsylvania (Kvaerner Metals, 2006) | The subcontractor exception never gets read, no matter how the policy is written. |
South Carolina’s Supreme Court split a claim the same way conceptually. In Auto Owners Insurance Co. v. Newman, a subcontractor’s stucco installation did not conform to industry standard and water seeped in behind it, damaging the framing and sheathing. An arbitrator had awarded $55,898 in itemized damages. The court held that the $55,898 cost of replacing the defective stucco itself stayed excluded, while the water damage the bad stucco caused to the framing and sheathing behind it counted as a covered occurrence.
Illinois went further than any of these in 2023. Acuity v. M/I Homes of Chicago involved water damage from faulty exterior subcontractor work on townhomes. The Illinois Supreme Court rejected the idea that coverage requires damage beyond the project itself, calling that premise “erroneous.” Oregon’s 2025 decision in Twigg v. Admiral Insurance Co. shows insurers trying a newer, procedural version of the same argument, over a defective concrete garage-floor overlay that cracked and let water in: they argued the underlying claim sounded only in contract, not in tort, so it could never be an “accident.” Oregon’s Supreme Court rejected that framing too.
What the subcontractor exception does not fix
The subcontractor exception was added to the “your work” exclusion in the 1986 ISO CGL revision. If the damaged work, or the work that caused the damage, was performed by a subcontractor on the insured’s behalf, the exclusion does not apply. That is what lets a general contractor’s policy respond when a sub’s bad work damages the GC’s own project.
Here is the trap. New Jersey’s 2016 Cypress Point decision distinguished its own older no-occurrence precedent specifically because the newer CGL form, with the subcontractor exception, was in play. But the court still had to clear the occurrence question before that exception mattered at all. In Ohio and Pennsylvania, a policy with a textbook subcontractor exception buys a contractor nothing, because the claim never gets past the coverage grant to reach exclusion l. in the first place. Checking whether your policy has the exception is necessary. It answers a question the claim may never reach.
Ask two things before you have a claim, not after. First, does your state fall in the majority column or the minority column in the table above, and has a recent decision moved it? Second, where does the fight actually happen: at a motion to dismiss under the eight corners rule, comparing only the complaint to the policy, or later, once the underlying facts are established. If your broker can only answer the second question by pointing at the exclusion page, ask again about the first. The same policy that answers this question is usually the one behind an additional insured endorsement on a subcontractor’s certificate, and the fight over whether the injury was even a covered occurrence in the first place can undercut that endorsement the same way it undercuts the “your work” exclusion. Our piece on the action-over exclusion covers a related gap that shows up on the same certificate.
Frequently asked questions
What does “occurrence” mean in a general liability policy?
An occurrence is an accident, including repeated exposure to the same harmful conditions. Coverage only applies when property damage was caused by an occurrence. Courts disagree on whether ordinary faulty workmanship, done badly but on purpose, counts as accidental at all, which is the fight this article describes.
Does having the subcontractor exception protect me from a “no occurrence” denial?
Not by itself. The exception restores coverage that an exclusion would otherwise take away, but it never gets read if a court decides there was no occurrence to begin with. In Ohio and Pennsylvania, that threshold question ends the case before the exception is relevant.
Is this the same thing as the faulty workmanship exclusion?
No. The exclusion assumes coverage exists and then carves a category back out. The “no occurrence” argument attacks coverage before it exists at all. A carrier can win with either one, and the no-occurrence argument is often cheaper for the insurer to raise and to win.
How do I find out whether my state follows the majority or minority rule?
Ask your broker directly which rule your state’s courts currently follow for construction-defect claims, and ask for the most recent decision, since several states have moved in the last five years. A broker who cannot name a case is guessing the same way you are.
Compare general liability coverage before your next renewal
See which carriers write the subcontractor exception clearly and how they price it against this year’s renewal rates.
