Liability Issues For Builders

In an effort to reduce costs, add value, and become more efficient, the building industry is constantly looking for new products and ways to be innovative which may or may not stand the test of time.  Some prime examples of this are synthetic stucco (EIFS), masonite siding, polybutylene plumbing, and Chinese drywall. 

About 10 years ago the insurance industry was hit hard with a construction defect crisis due to the use of some of these products.  At the time, most of the costs of covering these defects were covered by the General Liability policies of the builders, manufacturers, and distributors.  This led to two major insurance changes for these industries:  First, most insurers left the market deciding that they could not be profitable at any premium with these classes of business.  Second, the remaining insurers decided that they did not want to fund the next wave of construction defect claims.  This resulted in adopting exclusion endorsements that could be added to their policies that are designed to limit their risk.

The following are some common exclusions which can severely limit coverage for builders:

1)  EIFS Exclusion:  If you install or repair Synthetic Stucco, you very likely will need to purchase a special General Liability policy from the high-risk insurance markets.

2)  Soil Movement Exclusion:  Expansive soils can lead to and have been a major source for construction defect claims.  You can usually pick up coverage for this through certain home owner's warranty products.

3)  Absolute Pollution Exclusion: This is a powerful exclusion that can have consequences beyond what you normally think of as pollution. This is exemplified in the recently emerging Chinese drywall crisis where its alleged that drywall from certain plants in China release noxious fumes that cause corrosion of metal in a home, a foul smelling odor, and health problems. The insurance carriers plan on denying these claims by using the Absolute Pollution Exclusion. Pollution is broadly defined under this exclusion as any solid, liquid, or gaseous contaminant or irritant. Once again, if you are concerned about this exposure, you can buy a special Pollution Liability policy through the high risk marketplace.

4)  Prior Completed Operations Exclusion: The standard General Liability policy form normally picks up coverage for building operations completed prior to the start of the policy term as long as the covered “property damage” or “bodily injury” occurs during the policy term. However, with the addition of the Prior Completed Operations Exclusion, coverage for prior completed operations is eliminated. This presents a problem because the General Liability forms from the prior years don’t pick up this coverage to the extent that the “property damage” or “bodily injury” occurs after the expiration of the prior policy terms. Some versions of this endorsement limit its scope to “property damage” only. You may want to attempt to negotiate the elimination of this endorsement if it appears on your policy.

5)  Products / Completed Operations Exclusion: This exclusion has perhaps the most devastating impact of any of the construction defect exclusions. Quite simply, this exclusion eliminates coverage for all “bodily injury” and “property damage” that occurs after the home has been sold. This would require you as a builder to purchase separate warranties through another company or find an insurance carrier that will remove this exclusion.

6)  Exclusion: Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294): Around 2004, most carriers began adding this exclusion to builder’s General Liability policies to eliminate the favorable coverage exception that was granted to builders (that were general contractors) under the Property Damage To Your Work Exclusion listed above. The presence of CG2294 eliminates coverage for construction defect claims. If CG2294 appears on your policy, there are two viable solutions. First, ask if your carrier has a “buyback” of the lost coverage for an additional premium charge. Second, search for a carrier that has a less severe version of this exclusion that only eliminates coverage for “property damage” to the faulty work itself but not to resulting “property damage” to the non-faulty work.  The best thing to do is to make sure you are collecting certificates of insurance from your sub-contractors naming you as an additional insured on their policy.  Also, make sure you are working with subs who are stable enough to remain in business long after the job is completed.  This exclusion has been added to separate liability between subs and GC's so the GC's insurance is designed to protect them for things which they are actually liable for. 

It is imperative that builders employ aggressive risk management techniques to protect themselves and limit their losses.  A couple things I recommend:  First, contractually transfer these risks to your subcontractors by using hold-harmless agreements and enforcing insurance requirements.  Second, make sure you thouroughly document construction files and be proactive in dispute resolution.  Please contact me if you have any general questions about this or specific questions about your policy.