It’s become an age-old question: Does defective workmanship constitute an "occurrence" for purposes of coverage under a CGL policy? It’s been an issue shrouded in fog and an ongoing battle in the courts for over 20 years. And in just the past two years, that battle has been heating up.
Multiple jurisdictions, multiple headaches
One of the biggest hurdles involves construction companies that operate in multiple states or jurisdictions. These companies discovered a long time ago that when it comes to the “standardized language” of a typical CGL policy, there’s nothing standardized about the way different courts and states interpret that language.
While it would be hard to define any particular trend, court decisions over the past few years have generally fallen into one of four categories:
- Defective construction is an occurrence
- Resulting damage to other work is an occurrence
- Resulting damage to third-party property is an occurrence
- Defective work is not an occurrence.
Most courts agree that the application of these terms, policy provisions, and endorsements is intended to exclude defective construction itself, while still covering the unintended consequences. But that’s about as far as any agreement goes.
Courts are still divided over whether the natural and probable consequences of defective construction are covered. They disagree about whether incorporating defective work or products into a structure can give rise to covered damages. They disagree about whether damages caused to other property while making repairs to defective construction are covered. Battles over retentions and deductibles, additional insured status, and other insurance and excess insurance are commonplace.
A slight clearing in the fog?
With all of the uncertainty surrounding the interpretations of “occurrence” and the disparity in court decisions, many state legislatures and supreme courts have taken up the issue in recent years. And more and more, they’re concluding that construction defects are “occurrences” or accidents, which is slowly opening the way for these claims to be covered by insurance.
But the bottom line is, inconsistent court decisions are still creating a fog of uncertainty about coverage, and policyholders are still frustrated by coverage gaps and litigation costs.
How do you protect yourself?
Unfortunately, there’s no quick and easy solution to ensuring that you’re adequately covered if you’re doing business across multiple jurisdictions. But construction companies and their risk management teams can take steps to protect themselves:
- Identify where you’ve done business for the past several years and where you’ll be doing business in the upcoming policy year. Then educate yourself about the laws and court decisions addressing construction defects in those jurisdictions.
- Find out where your subcontractors do business and learn about the court decisions and legislation in those states. See if those states have issued decisions or have current legislation regarding the scope of coverage under additional insured endorsements. Don’t assume that the physical address of the project will dictate the applicable state law.
- Make sure your risk management department is involved in the approval of all subcontractors' insurance and additional-insured endorsements. Insist on completed operations coverage under these endorsements whenever possible.
- Thoroughly review your company's individual insurance program even if you’ll be part of an owner-controlled insurance program, a contractor-controlled insurance program, or a wrap policy. You want to make sure you’re covered if the OCIP/CCIP/wrap limits are inadequate.
Another way to put the odds a little more in your favor is to partner with a risk management expert. With more than 150 years of combined experience in the New York construction industry, BNC Insurance and Risk Advisors understands the complexities of construction risks, so we can guide you through the fog. Contact us today to learn how we can help.
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