Construction Insurance Bulletin

Although frequently contested as exclusions, defective construction claims are being scrutinized by the courts using various legal theories.

Traditionally, poor workmanship did not fall under the definition of an occurrence. Poor workmanship is a business risk, poor hiring.

The rules have begun to slide towards coverage now if non-defective materials or installations are damaged as a result of faulty workmanship. In other words, a ceiling collapses onto a newly installed sink and tub, chipping the marble. The tub and sink would be covered, but the ceiling would not. This rule is analogous to a frozen pipe. The damage to the pipe is not covered, but the ensuing water damage is.

In 2013, the Connecticut court found that defective workmanship was not intentional, and therefore could constitute an occurrence. In the same ruling, the court stated that the defect itself would not be covered, but ensuing damage would be.

Since 2013, other courts have broadened the definition of occurrence by ruling the “your work” wording excluded the work of subcontractors. So a subcontractors defective work would be covered as property damage under the prime’s CGL.

With the broadening of coverage for customers complaints, the contractors pick up valuable cost savings – legal representation. If defective workmanship is a covered property damage, then the contractor is entitled to defense from the insurance company.

As the courts broaden these definitions, you can expect consumers to try to broaden the definition of “defective”. Is inadequate soundproofing between walls a defect or a design flaw? What are the subjects of potential defects? Actual installation or functionality?

Of course, no contractor wants the reputation for or problems associated with defective workmanship. Where does design meet implementation to arrive at function? As the definition broadens, contractors will be held more liable. Check the wording of your commercial general liability defective workmanship clause. How broadly could it be interpreted? Ask your professional agent for some expertise in this area.

According to the National Council on Compensation Insurance (NCCI), the recession beginning in 2007 and economic conditions since then has changed the frequency of workers’ compensation claims.

Insurance carriers and risk managers concern themselves more with frequency than severity because the more incidents that occur, the more likely one will be catastrophic, or at least severe.

In 2010, according to NCCI, claim frequency increased for the first time since 1990. Claim frequency dropped the next two years and has been level since.

Interestingly, the frequency measurement is lost time claims per one million dollars in pure premium. The question becomes: are payrolls or rates increasing fast enough to reduce the number of employees required to generate one million dollars in pure premium? The long-term result of good safety management has certainly brought the incident rate down in manufacturing and construction.

How is the 2010 anomaly explained? Were salaried-exempt workers hours expanded to the point of worker exhaustion? People with jobs required to work too many hours, or were people preoccupied with non-work items? Maybe the average salary dropped, causing the frequency per hour worked not to change, but the lost time per million dollars of premium to increase. Was it just an anomaly?

2010 was also the start of more employees becoming independent contractors. Could this fact tweak the statistics?

As employees become independent contractors, more one-person firms come into existence. This arrangement is the toughest for workers’ compensation carriers to price. Very little loss control exists in small firms, but the employees also cannot afford to miss work.

The long-term trend has been better loss control and a safer workplace with larger employers. The shorter-term trend has been smaller employers, and more part-time employees, which drive the cost of safety training up.

It’s worth following these trends for the next few years.

Unfortunately, more drivers are operating vehicles without insurance, and for several reasons other than traditional ones. Ride share and cost sharing businesses will be tested regarding whether this arrangement constitutes a livery service, which is excluded from coverage under the family automobile policy, or a favor/carpool, covered.

With ride sharing and the anemic job market, recent graduates do not own cars. They also do not purchase automobile insurance. When they borrow their friend’s car or rent a car, they personally are not covered for liability.

Many consumers have reduced liability limits in an attempt to reduce premium, a cost savings necessity.

So, the trend is for fewer insured drivers, and lower limits of liability.

Protect yourself with higher uninsured and under-insured motorist liability.

What does this do? Uninsured motorist liability under your policy steps in and covers the other driver as though they were insured by your company and pays you for damages. Now, the irony is: your company will defend the other driver against your legal action too. But, the other driver winds up having some insurance this way.

Under-insured insurance is similar, but only adds limits to the existing inadequate policy of the other driver.

Raise your uninsured motorist limits at least to the levels of your policy limits. You and your employees should enjoy the same protection you’re providing for others.

Recent court decisions affect what is known as “stacking”. Suppose an uninsured motorist wrecks your thirty thousand dollar car. You have a twenty thousand dollar property damage limit on your uninsured motorist coverage and no physical damage coverage. Your company will pay twenty thousand dollars for damages. Stacking allows you to claim two uninsured motorist limits because you have two cars on your policies. Now you have forty thousand dollars available.

So far, most states require you to have two policies to collect two uninsured motorist claims. This requirement is under scrutiny now.

Falls account for almost one quarter of all industrial accidents.

These incidents can be avoided:

1. Use proper handrails.
2. Use proper guardrails.
3. Use properly installed scaffolding and tie-off roofers.
Train employees to carry appropriate sized loads to reduce strain and increase visibility.
5. Automate any product movement in the construction process.
6. Level all walking paths inside and out. Avoid stairs and elevation changes wherever possible.
7. Employees must wear appropriate footwear, non-skid.

Fall claims are expensive, about $19,000 on average. For a typical small contractor, their workers compensation modification (mod) will rise about twenty percent per year for three years, from one claim. The insurance company will probably not offer reduced preferred-rate coverage either.

Large contracting companies will suffer a lower percentage increase, but on a greater amount of premium. Still costly.

Doesn’t it make more sense to invest a few dollars to work safer than to pay a premium for ignoring the risk?

From the beginning of site work, grade the walkways and parking areas to level them. Stone or pave areas prone to becoming muddy or slick in foul weather. Make sure building entries are clear of debris and any elevation change is visually marked with bright tape or signs.

Storage areas, whether inside or outdoors, need to be kept clean and orderly. Assign space to each contracting crew.

Use proper tie-off techniques for ladders. Secure scaffolding properly and restrict access. Harness and tie-off roofers.

Inspect the interior work to assure proper waste removal. Material such as sheet rock scrap accumulates in minutes causing trip hazards. Sweep up screws and nails quickly. Keep five-gallon buckets against walls rather than the middle of floors.

In other words, consider what might present a trip hazard, how falls can be prevented, and what material might create a slipping problem. Remove the hazards and install guards as needed. You’ll receive a reduced premium in return.

1. You can define the standard for the completed work in writing and have agreement from the owner.

2. You can create a duty for the owner to report potential issues early, becoming part of a process that shifts some of the potential public liability.