A Texas agent who requested help from the IIABA Virtual University "Ask an Expert" service was able to change an insurer's claim decision regarding the faulty work exclusion on the garage policy. The same exclusion exists in the auto dealers coverage form and thus the same conclusion can be inferred.
The agent's customer, an auto dealership, was performing routine service on a customer's transmission. The technician installed a damaged o-ring during the process and the transmission was damaged when another employee test-drove the vehicle.
The adjuster initially denied the dealership's claim for the amount required to replace the damaged transmission, citing the "faulty work" exclusion in the garagekeepers section of the policy. (Garagekeepers coverage applied rather than the General Liability Coverages section since the vehicle was still in the custody of the dealership when the damage occurred.) The exclusion precludes coverage for "faulty work you performed," and is one of the most troublesome exclusions found in any liability policy.
The issue always involves isolating and excluding only the particular part of the work that was performed in a faulty manner. In this case, the only faulty work was the o-ring itself. The damage to the transmission was the result of the faulty part and not the faulty work itself. The exclusion is intended to eliminate coverage for the cost of re-working the portion of the repairs that are improperly done. Any other interpretation of the exclusion would render garagekeepers coverage meaningless.
The company claims manager ultimately agreed with the opinion of the IIABA "Experts" and paid the claim.
The Other Faulty Work Exclusion
Unfortunately, the result in the case cited above might not have worked out in the dealership's favor if the vehicle had already left the dealership in the customer's possession when the damage occurred.
The "Work You Performed" exclusion in the General Liability Coverages section of the auto dealers coverage form precludes coverage for "property damage to work you performed if the property damage results from any part of the work intself or from the parts, materials or equipment used in connection with the work."
Since the damage in this case resulted from the faulty o-ring (a part used in connection with the work), the damage to the transmission would have been excluded.
Some insurance companies that specialize in writing auto dealerships may offer proprietary endorsements to limit the scope of the faulty work exclusion subject to a deductible.