Construction defect litigation can be costly.
To mitigate that, contractors and other building professionals carry insurance as evidenced on a certificate required in contractual requirements. But despite the fact that construction companies invest and commit significant resources to risk control, safety practices and responsive customer service to eliminate or lower the frequency and severity of losses, problems with construction can arise months or years after the project ends, says Susan R. Schwartz, a director of the Construction Services Group at Aon Risk Services Central Inc.
“The problems generally are related to defective design, poor workmanship, geological issues or deficient building materials,” Schwartz says.
Smart Business spoke with Schwartz about how much of the construction property damage claim is covered by the contractor’s general liability insurance and the exclusions that could be added to a contractor’s policy that could void coverage.
How do commercial general liability claims work?
CGL policies are written on either a claims-made or occurrence basis. The trigger of the occurrence form is the damage that occurs during the policy period. The occurrence policy in effect at the time the damage occurs will apply to the loss, whether the claim is made against the contractor this year or in some later year. The standard policy defines an occurrence as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’
Insurers may try to argue that a construction defect claim is not an accident, and therefore does not meet the definition of an occurrence. In that instance, the claim is not covered under the CGL policy because the work constitutes a breach of contract, and failure to fulfill a contractual obligation is intentional, the substandard work was intentionally performed, or the damage was a foreseeable result.
Even though courts speak in terms of breach of foreseeability, the test for an occurrence involving defective work is whether the property damage is unexpected and unintended and whether it extends beyond the work of the insured. The fact that there are exclusions in the general liability policy for property damage caused by certain categories of a contractor’s defective work implies that defective work claims can trigger coverage under the policy. Otherwise, the exclusions would not be necessary.
Also, if the substandard work was performed by the insured contractor’s subcontractor, the insured contractor could not have intentionally performed substandard work. If the damage extends to property other than the faulty work, the ‘occurrence’ condition in the CGL policy will be satisfied.
