Can you name the most significant liability risk to a construction company’s operation?
Answers to that question can be as numerous as the specialties that exist within the industry. Certainly, with the goal of limiting risk, most construction firms secure general liability insurance coverage for their operations. But despite these general liability policies, construction defect claims still present some of the most severe consequences for construction companies.
Two circumstances contribute to the severity. First, construction defect litigation has exploded along with the construction boom of the recent past. Second, and more alarmingly, insurance companies have been aggressively challenging coverage for defect claims—and winning. Of the approximately 20 state supreme courts that have delivered a verdict on these disputes, half ruled in favor of insurance companies, denying legitimate policyholders their
coverage.
In this environment, construction companies must maximize their chances for coverage. Four steps are particularly critical:
- purchasing the right insurance;
- procuring the appropriate additional insured endorsements from subcontractors;
- hiring a qualified insurance broker; and
- engaging personal counsel experienced in insurance issues.
Purchasing the Right Insurance Procuring the right insurance is the most important step a company can take to protect itself against construction defect claims. No matter what type of liability policy a company purchases, every construction firm should review its policy limits and confirm the existence of completed operations coverage.
Construction defect claims are expensive. Millions of dollars in repair costs are not uncommon. A typical general liability policy provides only $1 million in coverage—a wholly inadequate amount in the face of a significant defect claim. Construction companies that fail to obtain proper limits risk paying defect claims out of their own pockets.
Historically, construction companies could tap policies dating back several years to provide coverage for defect claims, significantly multiplying the amount of available coverage. In recent years, insurers closed that path by issuing policies that limit coverage for defect claims to a single policy year.
Accordingly, construction companies now should consider looking to other solutions to receive adequate protection. Specifically, they must increase the limits of their primary policies or purchase excess insurance, which is generally available at rates lower than primary policies.
Problems arising from defective construction typically are not discovered until long after construction is completed. General liability policies provide either ongoing operations coverage, which only covers damage that occurs during construction, or completed operations coverage.
Completed operations coverage includes damage that occurs after construction is complete. Most construction defect claims fall within the scope of completed operations coverage. Should a company fail to request completed operations coverage, the company faces the very real prospect of having no coverage for a construction defect claim. Completed operations coverage is readily available upon request.
Additional Insured Endorsements
General contractors should require subcontractors to maintain completed operations additional insured coverage and, more importantly, they should obtain and review a copy of subcontractors’ additional insured endorsements before work begins to confirm proper coverage exists. Conducting this review is not complicated, but the consequences of failing to do so can be extensive.
Additional insured endorsements are designed to pass liability to the subcontractor that performed the defective work. As such, they provide an important risk-transfer mechanism for construction companies.
Like general policies, additional insured endorsements provide either ongoing operations or completed operations coverage. Insurers typically issue the ongoing operations endorsement as a matter of course. The completed operations endorsement readily exists, although subcontractors usually must ask for it.
A subcontractor that fails to obtain a completed operations additional insured endorsement may subject the contractor to significant uncovered liability for defect claims, regardless of the subcontract language requiring specific coverage. Once the policy is issued, the subcontractor cannot change the terms. If that policy does not include a completed operations additional insured endorsement, the general contractor will not be afforded protection from the subcontractor’s insurer even if the subcontract required the subcontractor to provide the endorsement.