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How to deal with the liability insurance squeeze
After
weathering two decades of unrestrained construction defect litigation, many
liability insurers are opting not to write coverage for residential
contractors. Others are attaching exclusions to contractors’ general or
umbrella liability policies or limiting the geographic regions or the
percentage of problematic work allowed.
Construction defect litigation has become so widespread that some law firms
now specialize in it. Most claims involve multi- family residential
developments such as condominiums or town homes, though dissatisfied
single-family homeowners also initiate lawsuits.
At times, the suits are related to only minor defects, but industry analysts
estimate litigation has added an average of $20,000 each to the cost of
housing units in Southern California alone.
Coverage difficult to find
As a result, contractors relying on liability coverage against construction
defect claims are finding it increasingly difficult to obtain that coverage.
When they do, the price is high.
Subcontractors are particularly vulnerable, as claims against other
contractors often touch them, too. Some subcontractors have been forced to
leave the residential construction market when insurance became unavailable
or prohibitively expensive.
The good news is that a number of states have enacted “right-to-repair” laws
that require homeowners (or homeowners’ associations) to give builders the
opportunity to correct any problems before initiating legal action.
These laws establish procedures intended to keep legitimate construction
disputes out of court, to curtail frivolous suits, and to detail
responsibilities of both builders and buyers.
The legislation is expected to help reopen insurers’ doors to contractors by
reducing the threat of legal judgments. But in states without such
legislation, contractors can do little to avoid being named in a construction
defect suit or to obtain affordable insurance coverage.
Significant limitations
Even when they continue to offer construction liability coverage, insurance
companies are putting significant limits on that coverage. One court ruling
in particular has reduced liability insurance availability: The California
Supreme Court ruled in 1995 that knowing about losses or potential losses at
the time an insurance policy is purchased does not invalidate coverage until
the insured’s actual degree of liability has been determined.
As a result, insurers have developed “known injury or damage” provisions
excluding injuries or damages from conditions known at a policy’s inception.
In addition, many insurers have targeted a number of common types of
construction defect claims for exclusionary endorsements. At the top of the
list is damage related to the use of synthetic stucco, or exterior insulation
and finish systems (EIFS).
Contractors who are involved even indirectly with this regionally popular
building material are often not covered for any injury or damage connected to
it. Seemingly unrelated subcontractors, such as roofers and window
installers, are not immune, either, if their work can be tied to damage
resulting from moisture penetration of EIFS.
Mold often excluded
Mold is another area that has prompted exclusions. Although the long-term
effects of toxic mold on people remain uncertain, it can clearly produce
significant property damage. And because of the number of mold claims, even
pollution liability insurers now routinely exclude mold from their policies,
though some will provide coverage for an additional premium.
Coverage may also exclude damage caused by earth movement or subsidence –
including landslides, earthquakes, mudslides, settling or erosion. For
subcontractors, insurers may exclude residential construction as a class.
This exclusion on a subcontractor’s liability policy can affect coverage a
contractor may have had as an additional insured under the policy.
Close study needed
Contractors should examine their policies carefully for language limiting
coverage. For example, some EIFS exclusions may eliminate coverage for every
part of a structure with EIFS, regardless of whether a claim arises from the
EIFS section.
In any case, in addition to stringent quality control, contractors can best
defend themselves against the onslaught of construction defect litigation by
acquiring a detailed understanding of their insurance policies and monitoring
those policies for revisions that may increase their exposure.
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