In today’s post-boom construction environment, claims of construction defects by project owners are all too common. Because the potential for damages and litigation expense associated with such claims can be substantial, contractors should have a working knowledge of their rights and responsibilities under a commercial general liability (CGL) insurance policy, especially the carrier’s “duty to defend.”
Under a standard form CGL policy, an insurer typically exercises two separate and distinct duties for the insured contractor. First, the standard policy provides a “duty to defend” the contractor when a lawsuit is filed, to the extent the suit raises claims potentially within the coverage afforded under the policy. The duty to defend is generally what it sounds like: The insurance company pays an attorney to defend the contractor, subject to the terms and conditions of the CGL policy. This coverage is critical considering the potential cost of defending a defect claim to completion.
Second, the standard policy provides a “duty to indemnify,” or to pay sums, to a third party, which the contractor may become legally obligated to pay, depending on the policy’s coverage and limits.
After a claim is lodged, both the insurer and the insured must determine whether the allegations against the contractor state a claim that potentially falls within defined coverage (e.g., the policy’s insuring agreement, endorsements, exclusions and exceptions to the exclusions). The CGL insurer’s duty to defend is triggered by the allegations contained within the complaint—not by the facts that may be proved later in court, nor the contractor’s version of the facts, nor the parties’ initial defenses.
If any doubt exists about whether the duty to defend applies, the issue must be resolved by a court in favor of the insured contractor. Florida courts, for example, hold that the duty to defend is broader than the duty to indemnify because the insurer must defend the case even if the facts alleged are untrue or the legal theories presented are flawed.
What causes the duty to defend to kick in? The short answer is an allegation that will “fairly and potentially” bring a claim within the coverage of the policy. The long answer is that, subject to the policy’s terms, exclusions and exceptions to exclusions, a standard CGL policy provides coverage for an “occurrence” that caused “property damage” (or bodily injury) within the policy’s coverage period. There is a lot to unpack in this sentence. Luckily, one state’s Supreme Court did just that in 2007.
The case involved a general contractor that hired a subcontractor to perform soil compaction and testing for a project. The soil compaction was performed in a defective manner that, in turn, caused structural damage to the building under construction. The court cited cases that generally held that the costs to properly fix the soil compaction would not be covered. However, the court found the structural damages to the building caused by the faulty soil compaction were covered as physical injury to tangible property. Therefore, generally speaking, the costs to repair property damage caused by a contractor’s (or its subcontractors’) defective work are often covered, whereas the costs to repair a contractor’s defective work generally are not.
As a rule of thumb, to trigger the insurer’s duty to defend, the allegations of the complaint should set forth a defect caused by the contractor or its subcontractors (e.g., an occurrence), which in turn caused damage to property other than the contractor’s (or its subcontractors’) own work, and which damages are within the coverage time frame and the terms and conditions of the policy. A construction defect caused by a subcontractor, not intended or expected by the general contractor, could constitute an occurrence under the language of the general contractor’s CGL policy.
Although the insurer typically assigns defense counsel, an insured may request a particular lawyer, possibly its own attorney, who is experienced with the claims being alleged and willing to handle the matter in accordance with the insurer’s guidelines.
One thing is certain—a contractor’s ability to trigger coverage under an applicable policy is absolutely critical. Just one significant uninsured defect claim could easily bankrupt most contractors.