Sustainable Land Development Today - September 2007 - (Page 43)

RISK MANAGEMENT Insurance Coverage for Construction Defect Claims By Lynda A. Bennett, Esq. Long gone are the days when builder-developers could take comfort that the projects they worked on were protected against unanticipated claims of personal injury or property damage because one or more parties connected to the project had insurance. During the past decade, builder-developers increasingly have found themselves ensnared in complex and expensive construction defect litigation where insurance companies have refused to defend and/or pay the claims for a variety of reasons. The insurer’s denial places the builder-developer in the difficult position of having to wage war simultaneously on two fronts –defending the defect litigation and then also suing its insurer (and perhaps its subcontractor’s insurers under an additional insured theory) to obtain the protection that was bargained for when the substantial premiums for the policies were paid. As a practical matter, however, many builder-developers do not pursue coverage from the responsible insurers because the typical denial form letter sent by the insurer at first blush seems very convincing. Insurers typically deny coverage because the complaint alleges breach of contract, including breach of warranty, and therefore from the insurer’s perspective, the claim cannot fairly be characterized as an occurrence that is covered by insurance. The insurer may also take the position that its policy contains business risk exclusions that do not allow coverage for claims involving faulty workmanship or a defective product. If all else fails, the insurer will contend that there must be other insurance available to cover most, if not all, of the loss because its policy was intended to pay only in a last resort, excess capacity. What many builder-developers do not know is that the insurers’ positions, while initially appealing, do not hold up in many construction defect claim settings. For example, while it is true that most general liability insurance policies contain an exclusion for claims that allege breach of contract, that exclusion also typically contains an exception that, if the builder-developer would be held liable for the alleged damage independently of the contract claim, then coverage must be made available. A breach of warranty claim is a good example where the exception should apply. With increased frequency, builderdevelopers and suppliers of construction products are being sued under various state product liability act statutes and common law product liability principles where the plaintiffs contend liability may be imposed regardless of any contract requirements pertaining to warranties. The breach of contract roadblock is also a red herring because most builder-developers obtain contract liability coverage through their general liability policies. Thus, to the extent that a contract requires the builder-developer to assume certain tort liability associated with the project, the general liability policy is supposed to provide insurance protection for that liability. The insurers’ no occurrence argument is equally unavailing in many instances. As a general matter, insurers are quick to point out that general liability policies do not provide coverage for faulty workmanship or defective products, on the grounds that damage from such workmanship is not accidental. That is a true statement. However, most lawsuits filed www.LandDevelopmentToday.com 43 Circle 101 • or www.LandDevelopmentToday.com/adinfo http://www.romtecutilities.com http://www.romtecutilities.com http://www.LandDevelopmentToday.com/adinfo http://www.LandDevelopmentToday.com

Table of Contents Feed for the Digital Edition of Sustainable Land Development Today - September 2007

Sustainable Land Development Today - September 2007 Contents Our Voice: Teaching and Learning Your Voice: Reader Response Editorial Board A 52-Mile Taking Fiber to the Front Doors of America Educators Incorporating Sustainability Land Planning: The Truth about Sprawl Irrigation: Communication Key Wastewater: Many Challenges Determine Sewer Options Regulation: Changing by State, Region, and Municipality Risk Management: Construction Defect Claims Recommended Reading Products/Services Showcase Advertiser Index Calendar Classifieds The Last Word

Sustainable Land Development Today - September 2007

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