Dispelling Myths about Insurance Coverage of Defective Construction

Lawsuits over defective construction often result in one or more parties attempting to invoke insurance coverage, at least to cover defense costs if not to cover the underlying claims. Some fifty years after courts began parsing the extent of insurance coverage for construction defects, some standards have become commonplace, if not uniform, among the states. Two state supreme court decisions in the past week have confirmed these standards. In short, there is almost never (see below on the “almost never” point) insurance coverage for repair or replacement of defective work. On the other hand, damage to certain building elements or systems, caused by defective work to other elements or systems, is normally covered by general liability insurance.

The Nebraska Supreme Court held that remedial work to address defective rebar in pile caps was not “property damage.” Problems with the rebar did not require remedial work to be done to any other aspect of the project, as the deficiency was addressed by making existing pile caps wider, with more rebar. In the case of Drake-Williams Steel, Inc. v. Continental Casualty Co., (Aug. 5, 2016), the Nebraska high court reaffirmed the common standard: the cost to repair or replace defective work is a business risk that is not ordinarily covered by insurance.

In New Jersey, that state’s supreme court held that water damage to other building components, arising from a sub’s faulty workmanship, was “property damage” and the water flowing to the interior portions of the building was an “occurrence” covered by the developer’s/contractor’s general liability coverage. That case is Cypress Point Condo. Ass’n. v. Adria Towers, LLC, (Aug. 4, 2016).

With all due respect to the legions of ink used to report on these decisions – particularly the New Jersey case – neither case is a ground-breaking decision. Both decisions confirm what has become the general rule throughout the U.S. on cases discussing insurance coverage of construction defects.

When faced with the cost of addressing improper work, most parties invariably seek to find pockets of money (meaning someone else’s pockets!) to help address the situation. But the prevailing court decisions remain as before: insurance companies do not insure the business risk of fixing the insured’s improper work. And in another respect the prevailing court decisions remain as before: consequential damage to another building component, arising from improper work, is normally covered by insurance. The “myth” here is that either case was breaking news.

A few words on the “almost never” comment above. There are anomalies, and there are certain coverages obtained at times, which would provide insurance coverage contrary to the “standard.” Whether a unique rider that specifically covers defective construction (it does exist for certain specialty subs, albeit at a high premium), or a more narrow definition of “named insured” that exists in certain completed operations riders (potentially affording coverage to a prime contractor who must remedy a sub’s improper work), there are unique circumstances that may in uncommon situations bring about a different result.

But construction industry participants should come to expect the outcomes stated in the New Jersey and Nebraska decisions, when seeking coverage from an insurance carrier for faulty construction and its aftermath.