Construction insurance: The latest on construction defect claims

By Higginbotham on August 12 , 2014

Thinkstock_Leaning Tower of PisaIf someone files a claim against your construction business for alleged construction defects, are you covered under your General Liability policy?

That’s a question that’s been hotly debated in both insurance circles and the courts for years. And it’s a constant source of stress and uncertainty for the contractors, subcontractors, land owners, and developers who can easily get wrapped up in a construction defect lawsuit.

At the center of the debate is whether construction defects – defined as damages resulting from faulty work – constitute an “occurrence” that would trigger coverage under a company’s Commercial General Liability (CGL) policy. Unfortunately, when it comes to construction defects, the definition of “occurrence” gets cloudy.

Compounding the problem is the disparate interpretations of construction insurance policy language by courts in various jurisdictions around the country. That makes it hard for a policyholder to know what to expect. If your construction company is named in a suit, litigating the insurance coverage issues on top of the alleged construction defect can quickly drain your financial resources.

With state legislatures now stepping in, the tide may start to turn for construction business owners.

All of the uncertainty surrounding the interpretations of “occurrence” has prompted some state legislatures to jump into the fray. In an attempt to take the battle out of the courts and clarify how the term should be interpreted in construction defect claims, four states – Arkansas, Colorado, Hawaii, and South Carolina – have recently passed statutes defining construction defect claims as “occurrences.”

It’s a promising sign for an industry desperate for relief. But even though these statutes could start a trend in state legislatures, no one knows yet how these and future statutes will affect the construction and liability insurance industries. Policyholders are still frustrated by coverage gaps for faulty construction work, and incongruous court decisions are still creating uncertainty about coverage and driving up litigation costs.

What can you do to protect your business?

With so many things out of your control in a construction defect claim, you need to be aggressive about controlling the things you can. Here’s a few suggestions:

  • Avoid getting sued in the first place. Repair any alleged defects. Many construction defect lawsuits start with what initially seems to be a small problem that the builder didn’t correct.
  • Prepare for the worst while construction is underway. Properly document every phase of construction so if a situation arises, you can demonstrate that nothing is hidden under the surface that constitutes a construction defect. If a suit is still filed, detailed job notes, pictures and video taken during construction will help your defense.
  • Consider mediation. Mediation gives you a chance to avoid the time, expense and potential exposure of litigating a construction defect case. Make sure you pick a mediator who is experienced in construction defect actions and has the trust of everyone involved.
  • Get experts in your corner. If you end up defending a construction defect claim, make sure you have an attorney well versed in these cases, as well as seasoned construction, architectural and other design experts, as needed, to help you make your case.

Finally, don’t forget to have the right insurance protection. With the complex web of business risks exclusions, endorsements and coverage questions that can come into play in any construction defect claim, you need an insurance professional who will make sure you have the coverage you need to protect your business.

It’s too early to tell where the latest legislative trend will lead in the construction defect arena. But one thing you can count on is the construction insurance and risk management expertise you get with Higginbotham.

Tags: Business Insurance