New faulty workmanship coverage forms have emerged to potentially address the “your work” exposure found in most contractors professional liability (CPrL) policies. Once offered by only a single carrier, several insurers have recently entered the marketplace to cover the cost to repair or replace faulty work or the related material costs associated with the “self-performed work” of general and trade contractors.

Commonly serving as a separate insuring agreement and offered in carrier-specific CPrL policies, faulty workmanship coverage forms are designed to protect contractors from the “your work” claims triggered by project owners and other third parties. This includes the contractor’s workmanship as well as the equipment, parts and materials such as steel beams, epoxy activators and anchor bolts used to perform construction work.

Insureds should be aware that exclusions and strict conditions apply. For instance, faulty workmanship policies typically do not cover resulting bodily injury and property damage and some policies even exclude project delays and other business risks that can arise from the claims of unhappy customers. Another potentially confusing issue is the scope of coverage offered under a ‘faulty work’ endorsement. While some faulty workmanship enhancements are specifically-designed to cover “your work,” claims, others may only cover the products manufactured or fabricated by the insured and not the work they perform or install.

Another issue is that contractors often are so focused on the potential value of faulty workmanship coverage that they neglect to consider other prevailing exposures such as professional liability and pollution liability. For instance, the moment a contractor subs out work, performs construction management or delegates or performs in-house design, the risk management or coverage emphasis may shift towards professional liability exposures rather than the value of faulty workmanship coverage. In other words, the quality and breadth of the professional liability coverage may be even more critical to a general contractor or large trade contractor than that of a faulty workmanship insuring agreement covering only self-performed work, particularly those professional liability policies that provide carvebacks for coverage of faulty workmanship claims that arise out of negligent provision of professional services (e.g., construction management).

Contractors should always assess what professional services (e.g. design assist, value engineering, management of subs, etc.) and construction activities they are performing during the course of their business as well as the overlaying exposures presented with the coverage grants provided under a faulty workmanship or professional liability policy.

Here are some examples of where a typical faulty workmanship policy could benefit the insured:

• An electrical contractor installed the entire electrical and audio-visual systems for a large office building, but failed to see that the plans/specs require (per the building code) that all of the wiring must run through conduits as opposed to running freely through the wall cavities. All of the wiring had to be torn out and replaced to comply with code. The cost to repair and replace is in the hundreds of thousands of dollars.
• A flooring contractor installed exotic hardwood flooring. After installation, the hardwood floors started to warp and pop as a result of the contractor failing to acclimate the wood to the humidity and temperature of the building. All of the floors had to be ripped out and replaced.
• A masonry contractor failed to properly compact the underlying sand and gravel base of a bluestone dining patio install at a restaurant. Further, the drainage layout was improperly laid out and installed. Over the course of a wet winter, the patio heaved and caused cracking and undulations in the patio. As a result, the entire patio had to be torn out, appropriate drainage and compaction applied and stone re-laid costing tens of thousands of dollars.

Faulty Workmanship Coverage Forms

True faulty work coverage forms are currently available from nearly five carriers as part of a blended contractor’s errors and omissions product or totally separate insuring agreement via an endorsement to CPrL policies. This includes capacities ranging from $250,000 to $5,000,000 and premiums starting as low as $2,500-3,500. Know that carriers can be selective when it comes to the types of exposures and projects they cover.

The benefits for construction firms ranging from electricians, plumbers, HVAC and mechanical contractor to interior finishers, masons, utility contractors and flooring contractors are many. They include the ability to potentially protect contractors from the “your work” faulty workmanship claims of third-parties with reasonably affordable coverage forms provided in an uncertain environment that can be litigious.