Construction Defects and Limitations on CGL Coverage

Description

General contractors frequently buy CGL insurance on the assumption that it will cover third-party claims in connection with defective construction. But whether defective construction work constitutes an accidental "occurrence" under the standard form CGL insurance policy--with or without resulting property damage--is dependent on which state's law applies. Determining which state's law applies to a construction defect claim is critical and may be outcome determinative.

Certain jurisdictions hold that construction defect claims do not give rise to an accidental "occurrence" within the CGL insurance policy and may refuse to provide coverage. However, the analysis often depends on the named insured’s scope of work and whether the complaint identifies claims for purely defective work or includes allegations of resulting damage.

Typically, favorable indemnity agreements with subcontractors can protect against relying on insurance coverage, but that requires a solvent and responsible subcontractor. Builders should, when possible, negotiate during the policy procurement process for amended language that broadens coverage or for favorable choice of law provisions. Alternatively, builders may look to other insurance options, including manuscripted Controlled Insurance Programs (CIPs) specifically designed to provide coverage for construction defect claims.

Listen as our authoritative panel discusses proceeding with construction defect claims in jurisdictions across the country. The panel will address best practices to mitigate liability and pursue claims when coverage may not be available.