It would be nice to think that you’ll never have to deal with a construction defect or faulty workmanship claim. After all, you strive for perfection on every project and have rigorous standards in place to prevent these sorts of issues from occurring. If a construction defect claim does come knocking on your door, it may be a good idea to have some sort of contractor insurance policy in place as a safety net... but which one?
Which of your Contractor Insurance Policies Covers Construction Defects?
Your construction insurance coverage is generally meant to protect you from the truly unexpected events you could encounter: fires, theft, auto accidents, injuries, or even a setback for the project you’re working on. But a construction defect usually falls outside of this realm of “unexpected” event.
A construction defect is typically a result of failure of design or construction which may lead to injury or damage. Some construction defects may have serious repercussions, while others may present no increased risk of injury. The latter are considered “passive” losses, which could lead to a loss of use, extra expenses, or decreased value for the property owner. Either way, the losses an owner faces could come back to you.
If you are hoping to safeguard your contractor business against the risks of a construction defect, here are a few of the policies which may (or may not) cover you:
Builders risk coverage protects a project under construction against losses from theft, fire, vandalism, or wind. Builders risk is often written on an “all-risk” basis, meaning all perils are covered unless they are specifically excluded in the policy. Which means construction defects or faulty workmanship may possibly be covered in your policy.
Check out the pros and cons below to find out if it is.
Some builders risk policies may include specific coverage for resulting damage due to faulty workmanship, construction defect, or design error. Carefully read your builders risk policy to see if it covers construction defects, or ask your insurance provider if this coverage is included.
Not all builders risk policies cover faulty workmanship or construction defects. Yours may contain a faulty workmanship exclusion, which would prevent coverage for these claims. Read your policy to see if faulty workmanship is excluded.
Builders risk coverage is typically written on a project specific basis; it begins when materials are delivered for the project, and ends when the work is complete and the finished project has been turned over to the owner. If your builders risk policy does include coverage for construction defects, the coverage period is generally only for the amount of time it takes to complete the project. Any defects which arise after the policy period has ended generally won’t be covered.
Product liability coverage protects manufacturers or sellers from third-party injuries or property damage claims. Typical coverage includes manufacturing or production flaws, faulty design, or inadequate warnings or instructions.
If you manufacture and install a particular building supply, such as custom windows, product liability is meant to protect you from claims arising from defective products. If you are a retailer who offers installation services, you may also benefit from this coverage.
Not all contractors can benefit from product liability insurance. The coverage is specifically meant to cover manufacturers and businesses which sell products. If you don’t manufacture the product itself, then this particular policy won’t be the answer to your defect coverage issue. If you install the windows manufactured by someone else, for example, product liability covers the manufacturing party but not you.
Contractors Professional Liability
A relatively new coverage which is intended to protect contractors involved with design-build work, Contractors Professional Liability protects against construction defects arising from design errors or omissions. Like a standard professional liability policy, it covers lawsuits due to errors, oversights, or professional negligence.
Contractors who engage in design-build work face more risks for professional liability exposure. Contractors professional liability coverage can be written on a project-specific basis, just like builders risk; on a claims-made basis to cover any claims made during the policy period; or on an annual basis to cover all of your design-build operations.
The benefits of a contractors professional liability policy typically make this policy a smart addition to a contractor insurance package when you perform design-build operations. General contractors or subcontractors who don’t perform design-builds may have never even heard of this coverage and aren’t likely to carry it.
General liability protects contractors from third-party claims for bodily injury or property damage, and many contractors assume that this coverage includes faulty workmanship and other construction defects. (This assumption may or may not be correct, so keep reading.)
General liability insurance often includes coverage for “completed operations,” which includes liability arising from your work or product once operations have been finished.
Most general liability policies actually include multiple exclusions which specifically prevent coverage for faulty workmanship. The subject of defect coverage within your general liability coverage is actually a pretty heated one in the insurance industry.
The overall purpose of a general liability policy is to cover you for damages due to bodily injury or property damage caused by an occurrence. And there is widespread industry disagreeance about whether or not a construction defect actually counts as a covered occurrence. Many courts in various states have come to different conclusions about whether a defect is or is not an occurrence, as well as resulting damage to other work or third party property.
You may be surprised to find that faulty workmanship has traditionally not been covered by a contractor general liability policy.
But there’s one more contractor insurance solution to be considered for protection against defects.
Faulty Workmanship Endorsement
Citizens General offers a Faulty Workmanship Endorsement which can be added to a contractor general liability policy. This endorsement removes uncertainty over whether construction defects and faulty workmanship are covered under your general liability policy or not.
The Faulty Workmanship Endorsement provides up to $10,000 of coverage for you against claims arising out of faulty workmanship, materials, or products. With the endorsement, you don’t have to worry whether or not your defect claim is covered by a standard general liability policy; you’ll have peace-of-mind knowing you’re covered.
There are no drawbacks to adding this endorsement to your general liability policy. The affordable endorsement offers you protection against a risk that you are very likely to face as you perform your work, no matter how much you strive for perfection on every job. If you want a safety net against construction defect claims, the Faulty Workmanship Endorsement is the answer. This endorsement is so affordable, you'd be downright careless not to include it to your contractor insurance coverage.
No one wants to think their work could be considered “faulty” or “defective.” But if you do happen to have an incident where something you’ve designed, built, manufactured, or installed led to an injury or property damage, the right contractor insurance policies and endorsements can offer you a safety net to protect you. Mistakes can happen. When they do, your insurance is there to ensure you won’t be left paying the price.