Contractor liability insurance coverage in construction defect cases is a matter that is hotly litigated. On the one hand, coverage often exists when a defect causes harm to a third party’s property. On the other hand, if the only harm is to the insured contractor’s defective work itself, there is usually no coverage. In between lies controversy. A key area of dispute is where defective work on one part of a construction project causes harm to another part of the same project, a common occurrence. Courts are split on whether coverage exists under such circumstances, although the trend appears to be in favor of coverage. See Expanding CGL Coverage for Construction Defect Claims?, 2010 Emerging Issues 4860.
A recent Ohio case demonstrates, however, that courts in some states continue to find no coverage, highlighting the risks for contractors. The Cincinnati Ins. Co. v. Dorsey Reconditioning, Inc. (Coshocton Co.), 2011-Ohio-1499. In this case, a subcontractor on a project was required to prepare the surface on piping being supplied by others and then apply a primer coat of paint. The subcontractor failed to prepare the surface properly before applying the primer. The pipe was then shipped, additional finish coats of paint were applied over the primer by another subcontractor, and the pipe was installed. Sometime later, the paint began cracking and flaking off, due to the primer’s lack of adhesion to the piping and to the finish coats of paint, thereby leaving the pipe exposed and in need of being repainted, all at great expense.
The subcontractor argued in court that its insurance covered the cost of repairing the other contractors’ work because the defective work of the insured subcontractor damaged that other work. The Court rejected this argument. Despite the injury to other work, the Court held, in fairly broad language, that no insurance coverage existed for defective construction and, therefore, that no coverage existed for the injuries caused to other parts of the construction project by the defective prep work.
The result of this was that not only did the subcontractor lose coverage for the cost of repair, it also lost the costs of its defense to the claims being made against it, which were likely substantial.
What, then, can a prudent contractor do to maximize its protection? Among other things, it should consider the following:
- Talk with its insurance agent up front about its coverage for defective work to better understand the extent of its coverage.
- If the contractor is doing design/build work, it should make sure that it has coverage for potential design liability claims and not only Commercial General Liability coverage, which will have exclusions to coverage against professional liability.
- Make sure that subcontractors carry adequate liability insurance, including design liability coverage if applicable. The contractor’s ability to assert claims against a subcontractor’s policy may be stronger, in some instances, than a claim on its own policy.
- Always require and follow up to ensure that subcontractors have the contractor named as an additional insured on their policies.
- Understand that a claim against an insured contractor is more likely to trigger a positive response from the insurer if the claim alleges with factual specificity that:
- The defect was unintended and unexpected, i.e., an accident;
- The defect caused harm to work or property other than work or property of the insured contractor; and
- The damages for coverage being sought are for other than the repair of the defective work itself.
- Comply with all notice requirements in the policy.
- Submit a claim even if only a small part of the damages might be covered, because even such a small covered claim may well trigger the insurer’s duty to provide the costs to defend against all the related claims, even ones that are not covered.
- Enlist the help of the insurance agent in making the claim. A good agent can offer excellent assistance.
- Consult an attorney. Given the complexity and highly technical language in insurance policies, it is vital to get good legal advice early in the claims process.