Construction work is risky by nature. Common risks include natural disasters, inclement weather, flood or fire, accidents t
hat cause property damage or bodily injury, and the failure of one or more parties to perform their designated responsibilities, resulting in defective work, negligent design, missed schedules, regulatory investigations, or the failure to make payment, among other things. It is impossible for construction industry participants to avoid all of these risks. Rather, prudence dictates a risk management portfolio that identifies risks and assigns a mechanism to reduce or eliminate the consequences of those risks, if they occur. A primary mechanism is to maintain appropriate insurance coverages.
Natural Disasters, Weather, Theft, Fire
If your business or house is damaged by a natural disaster such as flood or wind, or by theft or fire, you logically look to a property insurance policy or business loss policy for coverage. Most property policies, however, exclude damage to property under construction. As a result, damage to the owner’s property, existing construction work, or the contractor’s materials or equipment is generally covered not by property insurance but rather by builder’s risk or all risk insurance, which is a niche property insurance product developed specifically for the construction industry.
Generally, builder’s risk insurance covers the out-of-pocket costs of repairing or replacing work damaged during construction. These policies can vary significantly in terms of the scope of coverage and the types of allowable damages. For example, some builder’s risk policies will cover not only direct damages but also indirect costs of delayed completion, such as lost overhead, additional fees incurred, and other similar costs. Other policies will carve particular exclusions for types of losses, depending on the state of the work at the time of the loss. For example, water damage may be excluded unless the building was weather tight.
Bodily Injury, Property Damage
Third-party claims of bodily injury or property damage are common risks associated with construction work. These are the types of claims for which commercial general liability is intended to mitigate against. However, whether your insurance policy will trigger defense or indemnity (i.e., payment) of a claim depends on several factors, including the timing and nature of the injury.
CGL policies are “occurrence-based” policies, meaning the policy will cover the claim as long as it was in effect at the time the event causing the injury occurred. This analysis can become complicated, particularly in the case of latent or lingering property damage, or damage covered by subsequent work.
Some jurisdictions count the date of occurrence as the date when the damage is discovered or becomes apparent; others look for the date when the defective work is incorporated into the project; and others identify when the property is actually damaged. Massachusetts uses a fact-based approach where the date of occurrence depends on the nature of the injury and the damage claimed.
Where the insurer agrees there has been an occurrence, within the meaning of the general liability policy, the insurer may still reject coverage if the claim falls within an exclusion. A common exclusion in the construction context is the so-called “your work” exclusion, which states that the policy will not cover damage to faulty workmanship performed by the insured contractor. Another example is the “contractual liability exclusion” which bars coverage for damages incurred by reason of assumption of liability in a contract. The analysis does not end there, with exceptions to the exclusions, and endorsements that can restore or eliminate coverage.
Negligent Design, Errors, Omissions
Architects and engineers may design elements of a project in a way that might be deemed negligent, if the instruments of service are missing information, fail in their ultimate purpose, or result in nonconforming or noncompliant work. Claims alleging negligent design are generally covered by professional liability insurance policies, sometimes referred to as “errors and omissions” coverage. Unlike commercial general liability policies, professional liability policies are “claims-made” policies, meaning that they will cover claims made or asserted during the policy period, or within a designated time after the effective dates of the policy. It is therefore important to notify the insurer of claims or potential claims as soon as the insured becomes aware of their existence. Late notice which causes prejudice to the carrier’s ability to investigate a claim is a common ground for denial of a professional liability claim.