• Are your materials covered while in transit and temporary storage?  If so, how much?
• How are you going to insure your business profit and overhead on the job?
• Where you going to obtain coverages for your scaffolding and construction forms?
• Can you be certain the coverage is actually in force? 
• Will the policy cover collapse or theft of building materials before they are permanently attached? 

The answers to the above questions are probably going to be unfavorable.  This is why we recommend that our builder clients carry the Builders Risk policy instead of allowing the homeowner to set it up.

 Source:  Jon Fritinger/Great American Insurance and Sadler & Company, Inc.

The judge based his decision on the exclusion within the homeowner’s policy which excludes damage caused by latent defect, faulty materials, corrosion, and pollution.  With this exclusion, the policy would not cover removing or replacing the faulty drywall or any subsequent damages.

Needless to say this decision sets an unfavorable precedent for homeowners.

Source:  Insurance Journal

“The property loss from Chinese drywall could exceed every U.S. hurricane except Katrina and Andrew”. 

The complaints received by the Consumer Products Safety Commission show that the impact of Chinese drywall will be widespread.  Between 2004-2006, an estimated 500 million pounds of tainted drywall came into the United States.  It is quite possible that the tainted drywall is now in more than 100,000 homes.  The tainted drywall supplies have affected all but 12 states, with the greatest problems occurring in Florida, Louisiana, Mississippi, Alabama, and Virginia. 

“Based on $80 per square foot (the lowest cost from the verdicts made public) in 100,000 homes with an average of 2,200 square feet per house, the loss would be $18 billion in property damage”. 

The damaging health effects of having to live with the drywall have not been discussed, but the potential for property damage/claims alone are catastrophic. 

Source:  http://www.iiaba.net/IAMag/NewsViews/052010.html

 Source:  Independent Contractor or Employee, SC Lawyer Magazine  January 2010

I spoke to a manager at the South Carolina Workers Compensation Commission who advised that it would be rare for an injured owner of a subcontracting company to be successful in tapping into coverage under a general contractor’s Workers Compensation policy.  The injured owner would have to prove that he is an employee of the general contractor.  This may be difficult short of a situation where the general contractor is just calling the subcontractor an independent contractor to evade paying payroll taxes.

My advice to our builder clients is this:

It is best if the owner of the subcontracting company is covered under his own Workers Compensation policy.  It is very common for them to not be covered.  It is an acceptable risk in my opinion for the builder to accept a certificate of insurance showing that the owner is not covered.  It may be helpful for the builder to have a provision in his contract with the subcontractor to the effect that the subcontractor understands that he is not entitled to benefits under the builder’s Workers Compensation policy and that no premium has been deducted. 

Source:  John Sadler

The “bunkhouse rule” was argued and the rule acknowledges that there are circumstances when it is necessary for the employee to live in housing provided by their employer in order to complete their job.  The migrant worker and others resided in housing provided by their employer.

The South Carolina Workers Compensation Commission denied the claim.  However, the South Carolina Supreme Court ruled that the worker was entitled to Workers Compensation benefits due to the “bunkhouse rule” and the testimony of the company’s president, which stated that his business could not operate if he did not provide the housing.

Source: www.insurancejournal.com

The Connecticut Superior Court ruled that the business risk exclusion is applicable to deny coverage.  This exclusion, which is Exclusion L under the ISO General Liability form reads “Property damage to “your work” arising out of it or any part of it and included in the “products-completed operations” hazard.

The purpose of this exclusion is to give the contractors incentive to be careful while performing operations.  In this case, the court reasoned that the entire home was being directly worked upon.

Source:  http://www.insurancejournal.com/news/east/2010/01/21/106738.htm

The New Jersey Division of Workers’ Compensation rule that the serious injuries were compensable since the accident arose in the course of employment as opposed to being a personal errand.

In my opinion, this case is a “stretch” and exemplifies that most Workers’ Compensation Commissions will go to great lengths to allow benefits.

 Source:  http://www.insurancejournal.com/news/east/2010/01/25/106840.htm

The building industry is constantly experimenting with new building products and techniques in an effort to reduce costs, become more efficient, and to add value. Sometimes these products don’t stand the test of time as unforeseen problems may arise that result in construction defects. Examples include EIFS or synthetic stucco, Masonite siding, Georgia Pacific siding, polybutylene plumbing, and more recently, Chinese drywall.

The full weight of the construction defect crisis began to be felt by the insurance industry about ten years ago. Regionally, in the Southeast, the first wave of large-scale lawsuits arose over EIFS. The insurance industry fully funded a plaintiff attorney’s “gravy train” in this area since most of the costs were covered by General Liability insurance policies of manufacturers, distributors, builders, and installers. The EIFS epidemic, with its readily available funding source (General Liability carriers), seemed to fuel the spread of construction defect claims of all different types.

As a result, two trends emerged. The first was that most insurance carriers left the market and refused to write General Liability insurance for builders since they reasoned they couldn’t make a profit at any premium level. The second was that those few that remained in the market decided that they did not want to be a funding source for the next wave of construction defect lawsuits. In response, the insurance industry adopted an array of exclusionary endorsement forms from which carriers could pick and choose to limit their risk.

To follow is a listing and brief commentary of commonly found exclusions that can severely impact coverage for builders. In addition, solutions are provided where applicable.

Synthetic Stucco (EIFS) Exclusion: If you’re a builder and you install or repair EIFS, you need to buy a special General Liability policy from the high-risk marketplace to cover this type of work.

Soil Movement Exclusion: Expansive soils have been a problem in some parts of the country and have been a major source of construction defect lawsuits. Its possible to pick up coverage for this exposure through the use of certain home owner’s warranty products such as HBW 2-10.

Fungus, Mold, And Mildew Exclusion: This exclusion was added almost immediately to most General Liability policies when toxic mold lawsuits began to first appear. This strategy proved to be effective in cutting off what many feared to be the next “gravy train” of construction defect litigation. Most versions of this exclusion only eliminate coverage for the “property damage” portion of the lawsuit but leave coverage in place for “bodily injury”. If you’re concerned about this exclusion, you can purchase a special Mold And Pollution Liability policy from the high risk insurance market. The minimum premiums start out in the $2,500 to $5,000 range and prices increase according to your sales.

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.

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.

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. In my opinion, this exclusion is unacceptable for a builder under any circumstances resulting in the need to find a new insurance carrier.

Property Damage To Your Work Exclusion: This exclusion is not a stand alone exclusion like the rest that have been mentioned. Instead, it is part of the regular General Liability policy form and appears as exclusion L. This exclusion eliminates coverage for “property damage” to your “work” arising out of it…. However, there is an important exception where coverage is given back if the damaged work was performed on your behalf by a subcontractor. This exception is what historically gave builders (that were general contractors) broad coverage under their own General Liability policy for construction defect claims.

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.

Unfavorable Case Law 

In order to have a favorable claim outcome, builders not only have to avoid the above mentioned exclusions, but also must not fall victim to unfavorable case law. Nationally, a number of courts have ruled that a contractor’s General Liability policy does not cover “property damage” to either faulty work or resulting non-faulty work under the theory that such damages don’t constitute an “occurrence”. The South Carolina Supreme Court ruled similarly in the road contractor case of L-J vs Bituminous. However, the South Carolina Supreme Court recently clarified its ruling for builders in the Auto Owners vs Newman rehearing. In this case, the court ruled that “property damage” to non-faulty work is an “occurrence” and thus subject to coverage (unless otherwise excluded). This is a mostly favorable ruling for builders in South Carolina but is still an overall coverage reduction to the extent that coverage is precluded for property damage to the faulty work itself.

Risk Management

Builders must employ aggressive risk management techniques to protect against out of pocked losses due to policy exclusions and unfavorable case law. Examples of such techniques include contractual transfer of risks to subcontractors (ex: hold harmless / indemnification provision and insurance requirements), the use of home owner warranties, thorough documentation of construction files, and being proactive in dispute resolution.

 Current losses can cost you much more if you have less payroll than in past years.  One recommendation is - don’t cut back on your safety program!  Investing your time & money in a safety program will protect you and your business in the long run.  Make sure your safety program is current & up to date.

 Source:  SCHB Self – Insurers Fund (Andrew Woodham, Marketing Manager)