To err is costly in the construction world, so don’t roll the dice when it comes to risk. Although contractors continue to improve their focus on risk management, accidents happen daily at construction sites all over the country, some resulting in tragic loss of life.
However, certain steps can be taken to reduce construction accidents and their financial impact on contractors. Take the case of a general contractor engaged in the construction of a $20 million utility substation. During installation, a $2 million transformer caused a huge fire, resulting in total loss of the facility, including the transformer. A post loss investigation revealed that a subcontractor had installed the transformer improperly, causing the ensuing fire loss.
Another recent example involved a concrete subcontractor that was erecting a four-story parking garage adjacent to a shopping center. Following project completion, part of the second level collapsed onto the first level, causing $500,000 in damages to the parking structure. What caused this costly loss? A subcontractor had installed the rebar improperly.
Indeed, these two incidents avoided significant financial loss because they had the right insurance coverages in place. In the case of the transformer fire, a standard builder’s risk policy alone would have covered the damage to the building, but not the transformer.
Fortunately, in the months leading up to the incident, the general contractor’s builder’s risk policy was structured to provide coverage for damages for direct physical loss to a building caused by defective materials, methods, plans and specifications or workmanship. This coverage applied regardless of whether the project was in the care, custody and control of (CCC) the contractor. As such, the $2 million loss, representing the value of the transformer, was fully covered.
In the case of the collapsed parking garage, the $500,000 damage was also covered because the concrete subcontractor’s policy had been structured to include policy wording limiting the “Damage to Your Work” exclusion found in many general liability policies. The addition of “that particular part” to the policy language limited the excluded work product to only the defective or actively malfunctioning part of the work, instead of the entire work product.
Construction defect claims are a frequent source of headache for property owners and builders alike. They often present significant legal challenges, and the associated losses are not always covered by commercial general liability policies.
In fact, coverage for such claims may be denied if they are not considered accidental “occurrences” or fall within one or more policy exclusions. The following solutions can help construction companies mitigate the financial impact of construction defect claims.
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Blanket Installation Floater
Blanket installation floaters provide coverage for such property items as materials, fixtures, machinery, equipment and items at the jobsite, as well as in temporary locations or in transit during the course of construction. This is an important coverage due to the fact that trade contractors frequently do not provide coverage for their own materials, which can result in uncovered claims when there is damage to their materials and equipment during the course of construction.
Coverage for Resulting Damage from Faulty Workmanship
Faulty workmanship occurring when a project is in the CCC of the general or trade contractor is normally excluded by insurance companies. However, coverage can be obtained by adding an “Amendment to Cost of Making Good” endorsement. This endorsement provides coverage for damages that occur as a result of direct physical loss to a building caused by defective materials, methods, plans and specifications or workmanship, even when in the CCC of a general or trade contractor.
Changing Policy Wording to Allow Coverage for Completed Operations
Being able to negotiate a change in policy wording allows coverage for damage to a contractor’s work or property in their CCC for completed operations. As mentioned in the case study above, this usually is done by amending the “Damage to Your Work” exclusion in the commercial general liability to include “that particular part.” In addition, the definition of “occurrence” can be amended to include construction defects as an occurrence regardless of state statute.
Removal of Endorsement CG 2294
The CG 2294 is one of the most complicated endorsements in contractors’ liability insurance. It essentially limits coverage for damage resulting from work performed by subcontractors. By removing or amending the endorsement, it effectively adds the coverage back for the general or trade contractor utilizing subcontractors.
This essential solution, and those listed above, represent a few solutions that can help prevent a financial loss that could add up to $2 million (or more). It’s important to know that, as with any financial advice, understanding unique business circumstances is crucial to identifying the right mix of solutions needed.
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