Construction Defect Insurance Claim

Cause and Effect: Managing the Construction Defect Claim

Joseph M Junfola
January 8, 2013

Before trying to learn calculus, it’s probably a good idea to know some basic arithmetic. While a somewhat weak analogy, before tackling the world of construction defect claims, it’s likewise a good idea to start with some basics like what a construction defect claim is.

What Is A Construction Defect Claim?

Before addressing what a construction defect claim is, let’s first define “construction defect.” While there is no one uniform definition [1] in all jurisdictions, there are enough commonalities to fashion at least a working definition. Construction defects can be defined by statute. In response to the proliferation of construction defect lawsuits, legislation in approximately half of the jurisdictions in this country mandates that certain prerequisites be met prior to a homeowner filing suit against a builder. These “Right to Repair” or “Right to Cure” laws usually include definitions or descriptions of the construction defects intended to fall within the parameters of the statutes.

Nevada, for example, defines a “constructional defect” by explaining that, “it includes a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or an addition to an existing residence, or of an appurtenance.” Further, physical damage must be proximately caused by the construction defect. [2]

Florida defines a construction defect as, “a deficiency in, or a deficiency arising out of, the design, specifications, surveying, planning, supervision, observation of construction, or construction, repair, alteration, or remodeling of real property” caused by failure to meet workmanship standards, inadequate design, violation of building codes, and defective materials.[3]

Most good definitions of defects will include aspects of design, workmanship, and materials that are defective. One can also approach a definition by categorizing the consequences of construction defects: 

A construction defect is a defect or deficiency in the design, construction, or materials on a construction project. Broadly speaking, construction defects fall into two categories: defects that affect the performance of the structure, and defects that affect the appearance of the structure...Legally, a construction defect is a violation of the applicable code, a violation of the standard of care in the community in which the project is located, or a violation of the manufacturer's recommendations.[4]

A Working Definition

Here is a working definition:

A “construction defect” can be defined as a failure of the construction to perform in an intended or expected way. This failure to perform can cause physical injury to the work itselfand/or other property or work.  “Construction defects” include defects in design, faulty work, defective building products/material, and various types of soil failure.

Examples of defects in design include defective plans and specifications, and selection of improper materials.  Faulty workmanship can encompass noncompliance with plans and specifications or failure to meet industry standards.  The materials or products used in the project may be defective or of inferior quality.

Construction Defect Claim

A construction defect claim is a claim for damages, i.e. money, arising out of a defect in construction, including defective design, faulty workmanship, and defective materials. The defect can, but not necessarily, cause damage (or physical injury) to the work itself, to other work or property, or to both. The construction defect may cause no damage at all but still result in a claim for damages. 

A defect, while causing no damage, can still result in damages because the work or product that is defective does not perform at all, or does not perform as it should, causing some kind of monetary loss for which a claim is made.

In either case of damage or no damage, it is common in the construction defect world for the defect and/or damage to manifest (become apparent) or be discovered some time after the initial construction or installation.  It remains latent, or hidden, for a time.  The statute of limitations or repose, in a given state, can be 10, even 15, years, meaning that a lawsuit can be filed up to 10 or 15 years after substantial completion of a project.

In a pure sense, any damage for which a claim is made, whether latent or not, whether immediate or not (immediate in time to the creation of the defect), as the result of the contractor’s work, inadequate design, or defective materials can be considered a construction defect claim.  After all, it is the defective work, or cause, that results in injury or damage, or effect.

But the construction defect claim nomenclature is specific in the industry and usually is restricted to initially latent, long-term problems with construction that manifests, or becomes apparent, later and for which damages are claimed. And when the problem manifests in the form of property damage, it is typically a continuous and progressive process.

Construction defect claims are primarily in the form of completed operations claims on commercial general liability policies involving developers and contractors, and errors and omissions claims involving design and other professionals. Product manufacturers and others in the stream of commerce are also vulnerable to product liability in construction defect claims.

Construction defect claims can be made by the property owner against the developer and/or general contractor, with the subcontractors and design professionals brought in at some point during the process. In addition to the owner, the universe of claimants includes those with an interest in the property, such as tenants and homeowners (or condominium or townhome) associations. The buildings include single-family homes, multi-family dwellings, apartments, and condominiums, in addition to commercial, governmental, and industrial structures.

Sources of Construction Defect Claims

Other than direct and immediate claims, a construction defect claim can and frequently does evolve from a business dispute involving the payment of money owed, for example, to a subcontractor who forecloses on a mechanic’s lien.  The general contractor will justify not paying because the work is defective.

Claims can also arise out of the occurrence of a catastrophe, for example a hurricane or earthquake, when it is discovered that the damage may not have been as severe had the original construction been done properly in the first place. 

Hurricane Sandy, in late October 2012, provides a good example.  The cost of the devastation wrought is estimated to be anywhere from $25 to $75 billion, or higher.  And this is in addition to the tragic loss of more than 70 lives.

Cozen O’Connor, a leading law firm in the subrogation and recovery area, recently published a white paper dealing with “Superstorm Sandy” and included a “Summary of Subrogation and Recovery Opportunities Arising From Sandy.”  For example, there may be potential for recovery from a contractor if it is discovered that the structure was not up to requirements, possibly accounting for more, or more severe, damage, than would have ordinarily occurred because of a catastrophe, such as a hurricane.

 …for commercial facilities and certain high-end housing, there may be building specifications, architectural drawings and engineering details that need to be consulted to determine if there were any construction requirements above and beyond the minimum levels mandated by applicable codes. [5]

Claims often occur after a home is inspected.  A routine inspection by a mortgage lender, for example, could reveal defects and/or damage that lead to a claim. 

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[1] Roland Nikles, et al., Construction Defects (Chicago,IL: American Bar Association, 2012) 21.

SOURCE: www.propertycasualty360.com

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