Construction Defect Claims Addressed in Recent Court Cases
Results Could Affect Design Professionals
In construction defect cases it is often difficult to determine what damages were caused by negligent design and what damages were caused by faulty construction. Design professionals have coverage under a professional liability policy for damages caused by their negligent acts, errors, and omissions. Traditionally, damages caused by contractors have been covered by the contractor’s comprehensive general liability (CGL) policy. Although CGL policies excluded damage to the contractor’s “work product,” it covered damages to other property that resulted from the contractor’s faulty work. For example, a poorly constructed roof might result in water damage to the contents of a warehouse. The CGL policy would not pay to repair the roof but would pay for the damage to the contents. Several recent cases, however, may change an insurance company’s obligation to pay for these “other” damages. If the courts hold that these damages are not covered by the contractor’s CGL insurance, contractors may have to pay these claims out of their company’s personal assets. This could result in design professionals becoming bigger targets with “deeper pockets” due to the availability of their professional liability insurance policies.
These cases have caused the courts to address the issue of whether or not construction defect claims constitute an “occurrence” under a CGL policy. In Crossman Communities of North Carolina, Inc. vs. Harleysville Mutual Insurance Co. the Supreme Court of South Carolina found that an “occurrence” is an accident that occurs by chance with unintended and harmful results. The court ruled that there was no “occurrence” when a contractor’s faulty workmanship on a condominium project resulted in water intrusion because the water intrusion and ensuing damage were foreseeable consequences of the faulty workmanship and therefore not covered under the contractor’s CGL policy.
However, a similar case in Colorado was overturned by the state legislature.
A recent case in Hawaii (Group Builders, Inc and Tradewind Insurance Company, LTD vs. Admiral Insurance Company and National Interstate Insurance Company) also held that construction defect claims do not constitute an “occurrence” under a CGL policy. Interestingly, however, the majority of insurance carriers in Hawaii have not been denying coverage to contractors. There is speculation that the carriers are doing this so that the state legislature does not become as involved as it did in Colorado.
More than ever, design professionals should use sound risk management practices when selecting new projects—especially condo projects. Design professionals should insist upon providing full construction phase services and should urge developers to retain contractors using qualifications-based selection procedures.
It will be interesting to see if the courts in other states follow suit.