Today your risk of becoming involved in a construction defect claim is greater than ever. Advances in construction are enabling the design and construction of buildings that are more attractive and less costly. However, many of these advances have yet to be tested in real application.
Types of construction defects:
- Design Deficiencies- typically related to building designs that do not meet code or perform to standard.
- Material Deficiencies- use of inferior material causes significant problems such as when windows leak or fail to perform even when properly installed.
- Construction Deficiencies- problems created by poor quality workmanship.
- Subsurface Deficiencies- usually involve cracked foundations or structural damage caused when soil is not properly compacted and prepared for adequate drainage.
The goal of the court system in construction defect claims is to determine fault and damages, and require the party responsible for the defect to remedy the situation.
Insurance:
Under a standard general liability policy, coverage for a construction defect exists only if there is an “occurrence” under the policy. Occurrence is a defined term in an insurance policy. Each insurance company interprets the definition in its own way. However, in general, if you are a subcontractor, the policy will frequently pay for property damage caused by the occurrence, but not the cost, to remedy your work.
General contractors have to be very careful because many policies consider the entire project your work and don’t provide any coverage. General contractors have to be cautious when purchasing an insurance policy in order to avoid this pitfall. It is probably the most important aspect to general liability coverage and all insurance companies handle these claims in a unique way. General Contractors and subcontractors should discuss how their insurance companies typically respond to construction defect claims with their insurance agents.
What can you do to manage your risk?
Risk Transfer- General contractors transfer risk to subcontractors through indemnification and hold harmless agreements. They can also use additional insured requirements in construction contracts. These contracts make the responsible party liable for the damage caused by their mistakes.
Risk Control- The best way to avoid a construction defect claim is through quality construction. Work with quality subcontractors, and don’t cut corners. Plan and perform work in the correct sequence and with proper supervision. Be sure to document any and all plan changes. Organized records are critical to your defense.
MAHB - The Michigan Association of Home Builders has partnered with Frankenmuth Insurance Company and put together a very comprehensive insurance program available to members that includes Property, General Liability, Auto, and Workers Compensation coverage. The endorsed Frankenmuth Insurance program tailors coverage for contractors, including general contractors, and offers may coverage advantages to contractors over competing insurance companies. In addition to very broad coverage, Frankenmuth gives a contractor or general contractor a chance to “buy back” typical coverage exclusions through endorsements. This benefit is available to all members of the Michigan Association of Home Builders. If you're a member, contact an association agent to learn more.
The legal landscape for the construction industry is complicated and constantly changing. The recommendations here are a starting point for understanding and avoiding construction defect claims. If you'd like to discuss your coverage, contact us today.
Matt Waligorski has worked in the insurance industry since 1994. He joined Lyman & Sheets in 2000, and specializes in commercial and residential construction risks. Email Matt at mattw@lymansheets.com, find him on LinkedIn, or follow him on Twitter @mattwaligorski.