Contractors often assume that their commercial general liability (CGL) insurance policies will cover them in the event of a construction defect claim. But that’s not necessarily the case. Coverage may be denied if construction defects either: 1) aren’t considered accidental “occurrences” under applicable state law, or 2) fall within one or more policy exclusions.
In many states, unintentional construction defects are considered accidental. Any resulting property damage, therefore, may constitute a covered occurrence under a contractor’s CGL policy. But courts in some states deny coverage, reasoning that defective construction constitutes a normal business risk typically not assumed by a CGL insurer. To allow coverage, these courts say, would inappropriately cause a CGL policy to function as a surety or performance bond.
Even if you’re operating in a state in which construction defects fall within the scope of CGL insurance, your policy may contain one or more exclusions that preclude coverage. For example, many policies include an “expected or intended injury” exclusion that denies coverage for property damage that’s “expected or intended from the standpoint of the insured.” Some courts have interpreted this language to apply to any “foreseeable” property damage or bodily injury, including damage resulting from defective construction.
The “your work” exclusion
This exclusion typically reads something like: “This insurance does not apply to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.”
Typically, the “your work” exclusion contains an exception for property damage arising out of work performed by subcontractors, so general contractors remain protected against construction defect claims. But, in some policies, this exception is omitted.
Assumptions about bonding
To ensure that you’re protected, review your policy’s language and familiarize yourself with the laws of the jurisdictions in which you do business. And don’t assume that you’re covered by surety or performance bonds. These bonds may or may not cover construction defects and, even if they do, you may be required to indemnify the surety if you remain solvent.
In addition, if latent defects cause property damage after a project is substantially complete, the surety may no longer be liable or your claim may be barred by applicable statutes of limitation or contractual limitations periods.
If there are gaps in your insurance protection, consider purchasing supplemental coverage — such as builder’s risk or professional liability coverage. And if you’re uncertain about the extent of your CGL coverage, be sure to consult your attorney and insurance broker.