Builders and Contractors Insurance

By Arthur H. Skola

Builders and contractors pay huge premiums for general insurance policies. They expect to be defended if they are sued and for the insurance company to pay if they are found liable.

But when property damage claims are made, most are surprised to learn what their policies do not cover. Even those who have endured several unpleasant tours at the defense table in property damage cases often remain puzzled by the stand that their insurance companies take.

Insurance policies have evolved over the years. Most changes occur as insurance companies try to plug one hole after another created by a court case that went against them. Although policies differ, there are a number of common characteristics.

To understand the typical policy, one must first understand what the insurance companies are trying to do with their policies. An insurance company wants to insure the builder or contractor against claims for injury or damage to third persons only. For instance, if a beam is improperly fastened, falls down, and injures someone, the company will pay the claim with little question. If it falls down and damages someone’s car, the company will also pay. But if it just falls down, the company will not pay for the repair to the building. The mystery to most builders is the case where a beam falls down and pulls out a window as well. In many cases, the company will pay for the window repair, but not the beam repair.

What the company is trying not to pay for is the business risk associated with conducting operations. The idea is that, as a builder or contractor, you are responsible for the failures of your own work. One is not insured for one’s own sloppy workmanship. Obviously, if the beam’s bad connections were discovered before the beam fell down, whatever trade was responsible for those connections would be required to go back and make the repairs at his own cost. It is only damage to other property that the insurer is insuring against. That is why the term “resulting damage” is so important. To find coverage for a claim, even coverage for defense costs, one must identify “resulting damage.”

Resulting damage is damage to property other than property that the insured was responsible for constructing. To take another example, supposed a building was erected by a developer, who hired a general contractor, who hired the usual subtrades except framing. A roof leak ensues that damages framing, interior finishes, and a tenant’s equipment. The owner reimburses the tenant, repairs the damage and sues the builder and general contractor. What is covered?

First, whatever created the rook leaf is itself not covered (although the cost of repair may include the repair to the cause of the leak). The damage to the tenant’s equipment is covered (like the beam hitting the car). Also, since the interior furnishings were constructed by trades other than by any trade that may have been responsible for the leak (the roofer, sheet metal contractor or framer), that damage is also covered. If the leak was caused by a trade other than the framer, the damage to framing is also covered. However, if the leak was caused by the framer (i.e., the general contractor) inadequately supporting the roof sheathing, damage to the framing will not be covered, even though the other damage is covered. That is why in litigation so much time is spent trying to attribute fault to subcontractors who might not otherwise seem to have responsibility.

Builders are almost always baffled when they are told their insurance company will not pay for some damage, but will pay for other damage. They think that, since they were not directly responsible for any of the work, no distinctions should be drawn.

It is important for builders and contractors to thoroughly understand what their policies do and do not cover to make intelligent decisions on the purchase of policies, general risk management, how any particular contract job is manned, contract provisions, and even business organization*. Although advice can be obtained through independent insurance brokers on some of these issues, experienced legal counsel should be consulted to develop a sound risk management strategy.

*Business organization will be reviewed in the next article.

Arthur H. Skola is a partner in the law firm of Skola, Winton & Larson, LLP. Mr. Skola is the consummate strategist. His extensive background, experience and education in many diverse areas of the law such as Construction Defect Litigation, Taxation, Insurance, Real Estate and Complex Business Litigation enable him to confidently control the conditions under which he practices.
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