Insurance Coverage for Defective Construction: Litigation, Legislation and Reaction
If you have ever remodeled or built a house, you can begin to understand a significant issue that has generated both litigation and legislation arising out of defective construction: Do comprehensive general liability (“CGL”) policies provide coverage for construction defects?
Contractors typically purchase performance bonds to cover their work, but these bonds generally have higher premiums than liability policies. While it is not surprising that consumers would prefer the availability of the lower-priced coverage if provided by CGL policies, the cost of those policies may increase if courts and legislatures mandate constructive defect coverage under CGL policies.
A CGL policy covers potential liability for property damage caused by an “occurrence,” typically defined as an “accident,” including gradual accidental harm. In construction defect coverage, courts across the country have handed down opinions with varying interpretations of the “occurrence” issue, with most being divided on the issue as to whether coverage is available for construction defects.
One approach takes the position that defective construction work—and resulting damage—is not covered under liability insurance policies because neither was the result of an “accident” (i.e., an “occurrence”). Pennsylvania, New Jersey, New York, Arizona, Ohio and Kentucky courts, among others, have adopted this position, while courts in Colorado and Hawaii were split within the state. The analysis is that construction defects are the natural consequence of performing (substandard) work and liability policies do not protect against foreseeable business risks. They conclude that CGL policies are not performance bonds and liability insurers did not sign up to be guarantors of a contractor’s work.
Other jurisdictions, including Florida, Wisconsin, and Alabama, among others, have held that faulty or defective workmanship is considered an “accident” and therefore an “occurrence,” or that even if the defective construction work itself is not an “occurrence,” the resulting damage is covered because it was fortuitous and unintended. (“Your substandard work may not have been an accident, but the resulting mess was.”)
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