Possibly no two words strike more fear in the hearts of architects, engineers and contractors than “construction defect.” A claim for construction defect can cost astronomical amounts to correct and defend. And then there’s the damage to your reputation and its impact on your future opportunities for work. It’s enough to break a business.

Construction Defect Risks

Today, your risk of becoming involved in a construction defect claim is greater than ever. New technology, materials and applications have changed the way commercial buildings, homes and condominiums are constructed.

Advances are enabling the design and construction of buildings that are more attractive and less costly. Yet, many of these advances have yet to be tested in real application over time, where problems may be uncovered that were never anticipated in the lab.

At the same time, new applications require new skills from contractors, who may overlook important requirements for installation or take shortcuts that cause devastating consequences. When problems occur, it’s hard to know the cause without investigation, and everyone on the project is forced to become involved. Fingers point. Often, whoever has the deepest pockets or the most to lose becomes the primary target for plaintiff lawyers. Fairly or not, you could be left holding the bag for others’ mistakes.

Types of Construction Defects

Generally, courts categorize construction defects in one of four categories:

  1. Design deficiencies typically relate to building designs that do not meet code or perform to standard.  
  2. Material deficiencies occur when use of inferior materials causes significant problems, such as when windows leak or fail to perform even when properly installed.
  3. Construction deficiencies are problems created by poor quality workmanship.
  4. Subsurface deficiencies usually involve cracked foundations or other structural damage caused when soil is not properly compacted and prepared for adequate drainage.

The goal of the court is to determine fault and damages, and require the party responsible for the defect to remedy the situation.

Insurance

Under the standard commercial general liability (CGL) policy, your insurance company has a duty to defend you for construction defect claims if any damages are potentially covered under the policy. Coverage for construction defect only exists if there is an “occurrence” under the policy.

If the court finds against you and you are a subcontractor, the policy will frequently pay for property damage caused by the occurrence. It does not, however, cover the costs to remedy your work – the faulty workmanship or material that led to the damage. In many cases, the cost to correct the construction defect will be greater than the actual property damages incurred.

Architects and engineers will want to consider the additional protection of a professional liability policy. Professional liability provides coverage when a design does not function as anticipated or promised.

What You Can Do to Manage Your Risk

Many risks you face are not typically covered by insurance. In addition to insurance, you can reduce your risk in two ways:

  1. Transferring Risk

You can transfer some of your risk to a responsible third party. General contractors transfer risk to the subcontractors they use on a construction project through indemnification and hold harmless agreements as well as additional insured requirements in their construction contracts.

Indemnification and hold harmless agreements are typically included in standard construction contracts. Keep in mind that if the subcontractor lacks the financial resources to meet its obligations, you still could be obligated for any construction defect claims. That’s why it is important to check the financials of your subcontractors and choose wisely. And never under any circumstances use uninsured subcontractors. They put you at great risk and could increase the cost of your own insurance. 

Whenever you hire subcontractors, have them add your business to their liability policy as an additional insured. You will be protected by the subcontractor’s policy for work the subcontractor does for you, up to the policy limits.

Always request coverage as an additional insured on a primary and non-contributory basis. This way, you assure that their insurance responds first to a claim. (Your insurance becomes excess coverage and responds only if the judgment exceeds the subcontractor’s policy limits.) Be sure to specify the length of time you will be added to the policy for completed operations. Construction defects often come to light long after a job is completed. You can verify coverage by requesting a copy of the certificate of insurance on an annual basis. 

  1. Risk Control

The best way to avoid a construction defect claim is through quality construction. Work only with architects, engineers and contractors who have good reputations and a track record of performance. Don’t cut corners. Plan and perform work in the correct sequence and with proper supervision. Be sure to document any and all plan changes. Organized records are critical to your defense. 

Rely on Our Construction Expertise

The legal landscape for the construction industry is complicated and changing. In today’s legal climate, customers who are dissatisfied with work are increasingly resorting to litigation. The recommendations here are a starting point for understanding and avoiding construction defect claims. Sleep better at night by consulting your insurance broker and your attorney. They are experts in their professions as you are in yours. Both will bring you good advice and recommendations, and make them partners with your business.