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Construction-Defect Trends Vary by Jurisdiction, but They All Point to More Expensive and Creative Claims
By Phil Gusman
Kaufman Dolowich Voluck LLP
Q: What is the most impactful construction-defect coverage trend you’re seeing, and how is it affecting the construction-insurance landscape overall?
A: Current trends vary by jurisdiction. But, there are two predominate trends in construction claims. Policyholders are routinely seeking “rip and tear” costs to secure coverage for property damage that would not otherwise be covered. For example, a balcony was defectively constructed such that water intrusion damaged an adjacent garage. Typically, the garage damage would be a covered loss but not the “work” of the defective balcony. If it is necessary to remove and replace the balcony to make the repairs to the garage, those costs are typically found to be covered.
The second trend is creating coverage for costs to prevent damage from occurring or to stop damage that has already begun to occur. For example, a contractor defectively installs windows in an office building. Water intrusion damages interior carpeting and drywall. Typically, the damaged carpeting and drywall are covered costs but the window repair costs aren’t. However, some courts are finding coverage for the costs to repair the windows under the theory that it must be done to prevent further covered damage. The difficulty with this argument is that, unlike the balcony/garage example, it is not necessary to repair the windows to effectuate repairs of the already damaged carpet and drywall.
Q: What is driving the trends we are seeing among policyholders?
A: As always, it is money. In the construction context we have seen that if the building market booms, the increased construction activity invariably results in an increased number of claims. The converse also drives claims: When the housing market collapsed, we saw an increase in claims because insurance proceeds were seen as a way to recover lost profits or investments. We also saw an increase in condominium claims in particular because units remained vacant and there were foreclosures, resulting in insufficient money to make routine repairs. Policyholders would therefore try and find ways to secure routine maintenance costs through defective construction lawsuits.
Q: What is the industry doing to adjust to these trends?
A: Unfortunately, the insurance industry is largely reactive. Either insurers are leaving jurisdictions, restricting coverage, or increasing premiums. This then results in greater difficulty for businesses to secure insurance, which is a necessity for a business owner.
Q: What should be the takeaway, given these trends?
A: The message is that an insurance policy is not always found to be what it says. Coverage not contemplated by the policy is being found based on creative arguments by policyholder counsel. This presents unique challenges to an insurer in its claim evaluation process and resolution strategy. There is also an impact on insurer underwriting as insurers must “catch up” to the trends and revise policy language and premiums accordingly. There is also a financial impact on the insurance industry as a whole to the extent that insurers are paying for claims that were not contemplated in their risk-evaluation and premium-calculation processes for a particular insured or class of insureds.