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.
Let’s consider
two of the most costly recent examples of construction defect, EIFS and FRT plywood:
EIFS
Architects love to design using EIFS (exterior
insulation finishing systems.) EIFS cladding systems resemble stucco, but are
less costly to install and can be fashioned into a variety of architectural
shapes, including soft curves and geometric designs. This unique flexibility
makes EIFS treatments ideal for special elements such as porticos, archways,
ornate overheads for windows, doors and decorative trim.
As with any
exterior cladding, water can enter behind or around the system. Early applications
often lacked drainage features more commonly used today. With no place to go,
constant exposure to moisture can cause rot in wood and damage to other
materials within the building or home. Moisture-related problems led to an
avalanche of individual and class action lawsuits by consumers.
Are you using
EIFS in your designs? If so, strict adherence to guidelines for materials and
methods of application is your best defense against a construction defect
claim.
FRT
Plywood
Back in the
early 1990s, FRT, or flame resistant plywood, was touted as an alternative to
fire walls in multi-unit buildings. It appeared to be a revolutionary product
and was quickly adopted by architects and builders, especially in the
Northeast. But high temperatures in attics caused early and unexpected
deterioration of the material. Suppliers went Chapter 11, and builders were
left to face clients with major defects in their buildings, condominiums and
homes.
What new
building materials are you using in your projects? Have you done your research?
How confident are you in the manufacturer and the testing? Are you comfortable
with the risk?
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. Keep in mind that if you are
a general contractor, the whole project is your work.
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. Ask Naught-Naught Agency for details.
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. It’s a good idea
to require liability limits of at least $1 million on the subcontractor’s
policy.
Always request
coverage as an additional insured on a primary 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.
2. 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 Naught-Naught Agency 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.
Article by
Gregg Gaughran, Executive, Commercial & Specialty Lines for Westfield
Insurance. Mr. Gaughran is a 25+-year insurance industry veteran. Westfield
Insurance is a major regional insurance company headquartered in Ohio and one
of the leading insurers of contractors in the state. Westfield Insurance is a
Trusted Choice® member company.
