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Navigating the Choppy Waters of Construction Defects

February 28, 2019

The commercial construction industry is a double edged sword today. The industry is growing – construction spending in the United States topped $1.23 trillion in 2017 according to research firm Statisa, but construction contractors are finding it harder to attract quality workers.

According to research from the Associated General Contractors of America (AGC), 78 percent of firms are having trouble finding qualified workers to staff the new projects they are taking on.

Another unintended byproduct of the industry’s growth is a rise in construction defect claims due, in part, to less-experienced workers being thrust into positions they are not qualified to handle. The end result is unsatisfied clients, lost revenue, construction delays, possible legal action and costly claims. It all adds up to a recipe for disaster.

What Are Construction Defects?

What is a construction defect? According to the International Risk Management Institute (IRMI), a construction defect is a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonably workmanlike manner, and/or in accordance with a buyer’s reasonable expectation.

Extreme defects have the capacity to fail and can result in damage to the property or worse, physical injury and even death to people. While most defects do not result in injuries or damage they do lead to headaches, distress, disruption and additional costs to the property owner in the form of loss of use, diminution in value, and extra expenses while the defects are corrected.

A construction defect can include any defect in the design, workmanship or in the materials used on a project of any size and scope. Defects can occur on a $50 million healthcare facility project just as easily as they can on a $250,000 commercial kitchen renovation.

As a rule, the “your work” exclusion in Commercial General Liability (CGL) policies is intended to exclude poor workmanship, as this is a business risk, and cover you for the resulting property damage, as well as the work performed on your behalf by a subcontractor.

In the past with most cases, and based on a carefully scripted lawsuit, the CGL policies have defended construction companies from construction defects, and have indemnified them for the resulting property damage of construction defect claims. However, a recent court ruling threatens to change that.

A Changing Legal Landscape

If the shrinking supply of skilled craftsman and laborers isn’t enough of a headache for general contractors and subcontractors, a recent ruling handed down by the Ohio Supreme Court could add to that pain.

The net effect of the case – Ohio N. Univ. v. Charles Constr. Servs. Inc.  – is that construction company owners, general contractors, construction managers and subcontractors can no longer rely on their commercial general liability (CGL) policies to provide defense or indemnity for claims arising from construction defects.

The timing of this ruling makes it a fluid situation for all involved, and Ohio is not the only state to take this type of action.

The recent endorsements some contractors have added on to their policies address work performed on your behalf by a subcontractor, but not for self-performed work (Note: a few policies do address the self-performed work issue).

For contractors with self-performed work, this is a potentially difficult situation. Relying solely on your CGL policy to defend your company in a construction defect claim is risky.  As mentioned earlier, in the past you might have had coverage to defend yourself from construction defect claims because of the resulting property damage allegations, but that might no longer be the case as a result of this court decision.

For General Contractors and Construction Managers

  • Discuss with your attorney (one that is well-versed in construction law) and consider adding language in your subcontract agreements requiring subcontractors to carry Errors & Omissions with the “rip & tear” type coverage.

For Contractors That Self-Perform Work

  • Consider adding Contractors Errors & Omissions coverage to protect against claims for alleged faulty workmanship, design errors or omissions, and the use of defective materials.
  • Have an attorney review your contracts to make sure the language is current and offers you protection.

The Oswald Solution

When it comes to insurance protection, general contractors and subcontractors need to take a closer look at their coverages and contracts. Oswald has a suite of coverage options available and will guide you through them and tailor a unique solution that offers your business the protection it needs.

Brian Hoagland, CPCU, CRM, CIC
Vice President

Note: This communication is for informational purposes only. Although every reasonable effort is made to present current and accurate information, Oswald makes no guarantees of any kind and cannot be held liable for any outdated or incorrect information. View our communications policy.