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Managing risk

Faulty workmanship is a risk specialty contractors face with each project they take on. Problems can come from a variety of factors and often take years to arise. For this reason, contractors need insurance coverages built for their unique exposures. To address this need, business insurance carriers are beginning to offer contractors errors and omissions policies, which can protect your company from significant losses.

Historically, professional liability policies were designed to protect firms against risks beyond the coverage of their general liability policies — specifically claims resulting from design errors and omissions. Today, professional liability policies have evolved into a more robust contractors errors and omissions policy that expands coverage to include faulty workmanship and the use of defective materials and/or products. It is important that you understand the limitations and benefits of professional liability policies, for both your firm and the design professionals you are hiring. More and more contract requirements are emphasizing the need for this type of coverage.

Commercial general liability (CGL) policies were never intended to serve as warranties of work. Damage to self-performed work is considered to be a “business risk” and is excluded in most situations. Exceptions would be damage to property that is not the work itself or, possibly, damages caused by or to the work of a subcontractor done on behalf of a general contractor.

Some insurance carriers hold that faulty workmanship never satisfies the commercial general liability insuring agreement because there is no accident and, therefore, no property damage to be considered a covered “occurrence.” Case law is often split by state. Since 2005, at least 20 jurisdictions have issued decisions to support defective construction as an “occurrence” with respect to damage to property other than the work itself. Courts in other states, such as Arkansas, Hawaii, Pennsylvania, South Carolina and Ohio, ruled faulty workmanship is not an occurrence. In response to those decisions, South Carolina and Arkansas joined other states in enacting legislation to support the opinion that faulty workmanship, which causes damage to property that is not the self-performed work, is indeed a covered occurrence.

While court decisions may change how CGL policies are construed, insurance carriers do offer endorsements to clarify that the exceptions to work exclusions, and damage to property that is not the work itself, are deemed to be an occurrence. Contractors should partner with brokers and carriers that can properly explain these options and whether or not they are needed.

Many carriers have taken steps to recognize the coverage need for what had previously been considered a pure business risk — faulty workmanship self-performed by a subcontractor. The Contractors Errors & Omissions and Pollution Liability (CEO) policy was developed in response to a number of requests for a product to address construction errors and omissions.

A contractor’s work often includes an element of judgment and design in selecting the means and methods of construction. Their contractual scope of work, however, is construction driven, and they do not generally deliver design documents as a work product. Claims regarding work by specialty contractors are typically driven by faulty workmanship. The CEO product responds to that market need. It is designed for specialty contractors that do not have a professional exposure per se, but do have an exposure from errors or omissions in construction that may cause damages not covered by the ISO Commercial General Liability (CG 0001) form or traditional professional liability forms.

The information, examples and suggestions presented in this material have been developed from sources believed to be reliable, but they should not be construed as legal or other professional advice.