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Can you insure against construction defects and avoid litigation?

Due to the sheer number of workers that are often involved in a construction project, there may be a greater potential for disputes that escalate into construction litigation. For example, the entities involved in a construction project may include municipalities, contractors, subcontractors, developers, homeowners associations or zoning authorities, and others. 

What kind of problems might give rise to litigation? Perhaps delays arose due to unexpected mechanical or supply issues. Zoning challenges might arise even after a developer has obtained the necessary permits and construction on the project has begun. Financing issues might result in mechanic’s liens being filed. Disputes over the quality of work may lead to construction defect claims, which are among some of the most common types of construction litigation.

Given the complexity of modern construction projects, it is important to safeguard against liabilities to the maximum extent possible. Yet is insurance coverage a safeguard against construction litigation arising from an alleged defect?

The answer depends on several factors. A contractor may have a general liability policy that includes coverage for property damage caused by an accident or occurrence. However, an attorney that focuses on real estate litigation knows that a court may not agree that a construction defect qualifies as an occurrence.

The plaintiff may argue that the contractor should be held accountable in a court of law because construction work is attributable to negligence or substandard work, not an accidental or unforeseen occurrence. 

The determination of whether construction defects are covered by insurance may also depend upon the specific type of insurance. According to a recent article, contractors may be tempted to procure controlled insurance programs, or CIPs, for specific construction projects. CIPs generally offer liability coverage to most or all of the workers on a specific construction site, including subcontractors. CIPs may also offer bundled savings and a consolidated claims procedure.

However, CIPs may also contain substantial differences from a contractor’s general liability policy.  There may be residential exclusions, shared limits that could exhaust coverage, and other limitations for how post-completion repair and warrant work is covered. An attorney that focuses on construction law can review such policies to advise clients of potential pitfalls. 

Source: Insurance Journal, “Construction Insurance Trends to Watch in 2015,” Jody T. Wright, Tom G. McCall, and Tony Page, Jan. 21, 2015

 

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