By George F. Burns, Shareholder, Bernstein Shur
Builder’s risk insurance is perhaps the least understood insurance product in the construction world. Even sophisticated construction participants are not quite sure what a builder’s risk insurance policy covers, who has rights to recovery, or how builder’s risk coverage dovetails with other insurance like comprehensive general liability and worker’s compensation insurance.[i] Many insureds have a vague notion that the product covers damage to work on a project, but that is about all they know.
A full education on these questions is more than this article will undertake. Rather, the focus here is on an important exclusion in most builder’s risk policies: the exclusion for faulty workmanship. A brief examination of case law regarding this exclusion is a good vehicle for showing the complexity of builder’s risk analysis. The message here is to be careful before jumping to conclusions either in favor or against coverage: faulty workmanship may have been a factor in a loss but that alone does not necessarily destroy coverage. On the other hand, factors contributing to the loss other than faulty workmanship do not in and of themselves guarantee coverage. Best to measure thrice and cut once in this area. The three “measurement” steps are the same here as for any insurance policy: is there coverage, is there an exclusion, and is there an exception to the exclusion? As disappointed insureds might tell you, it is better to ask these questions before you buy the product rather than after a loss.
Measurement No. 1: Is There Coverage in the First Place?
Speaking generally, builder’s risk insurance policies cover damage to the work of the project, and items related to that work, often arising out of extraneous causes like fire, collapse, or other physical calamities. There are some losses that simply do not qualify for coverage right out of the gate. E.g., Builders Concrete Services, LLC v. Westfield National Insurance Company[ii], no coverage for parts of the structure or building not involved with the work; Bergeron v. State Farm Fire and Cas. Co.[iii] , a dam not a structure covered by the policy; and Tocci Building Corp. v. Zurich American Ins. Co.[iv] grouting and patching a wall to meet municipal ordinance requirements was not covered physical damage.
Builder’s risk insurance is more accurately viewed as a first-party policy, protecting the insured from property damage rather than a third policy that provides defense and indemnification to the insured from claims of third parties. In everyday terms it is more like auto collision insurance than auto liability insurance. See, e.g., 689 Charles River, LLC v. American Zurich Insurance Company[v] (condo contractor not entitled to defense and indemnification from a poor workmanship claim).
There are all sorts of variations of builder’s risk insurance policies, and typically the prospective insured is presented with a varied menu of possible coverages. Not until a loss occurs do many insureds realize to their surprise that a loss is covered or not covered.
Measurement No. 2: Is There an Exclusion?
Assuming there is coverage to begin with, is there an exclusion that takes coverage away? The damaged property may be the kind of property the policy protects but an exclusion may apply. A common exclusion is the faulty workmanship exclusion. Here is a sample from a Zurich policy: “We will not pay for a loss caused by or resulting from any of the following. But if loss by a Covered Loss results, we will pay for the resulting loss caused by that Covered Cause of Loss.
Faulty, inadequate, or defective:
Planning, zoning, development, surveying, siting;
Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
Materials used in repair, construction, renovation, or remodeling; or
Maintenance; of all or any part of any Covered Property wherever located.”
A similar clause was at issue in Rocky Mountain Prestress, LLC v. Liberty Mutual Fire Insurance Company[vi] The whole claim was based on the faulty workmanship itself. The distinction to keep in mind is between the bad work versus the consequences of bad work. In Rocky Mountain, the contractor sprayed windows with the wrong product leading directly to damage to the windows. Simply stated, there was no coverage that would fund making poor work right.
Measurement No. 3: Is There an Exception to the Exclusion?
Just as an exclusion can punch a hole in coverage, an exception to that exclusion can fill that hole. Such is the case with the “resulting loss” exception to the faulty workmanship exclusion.
In Joseph J Henderson & Sons Inc. v. Travelers Property Casualty Insurance Company of America[vii] , an Iowa case, the issue was whether the faulty workmanship exclusion was fatal to a claim for roof damage caused by both a windstorm and faulty workmanship. The insurer argued that there was no coverage for the windstorm because that cause of loss was subject to an “anticoncurrent-cause,” a clause that essentially destroyed coverage if any other event contributed to the loss, in this case faulty workmanship. The faulty workmanship exclusion contained an exception similar to the resulting loss exception in the Zurich policy quoted earlier in this article and, unlike the windstorm-triggered clause, did not contain an anticoncurrent-cause clause. The insured prevailed. Had the faulty workmanship exclusion contained an anti-concurrence provision, as there was for the windstorm clause, the insured may have not prevailed. There was no such clause.
What to Do?
Owners and contracts should take these three “measurements” before buying the policy and not proceed blindly until there is a loss: coverage, exclusions, and exceptions. In both timeframes, before policy purchase and after a loss, it is best to simply read the policy, better yet with the assistance of a seasoned insurance agent, with the particular challenges and risks of each project in mind.
[i] For an analysis of the interrelationship of builder’s risk with other kinds of insurance products, such as a comprehensive general liability insurance see General Electric versus Zürich American Insurance D. Maine | September 27, 1996 | 952 F. Supp. 18
[ii] Builders Concrete Services, LLC v. Westfield National Insurance Company N.D.Ill. | September 14, 2020 | 486 F.Supp.3d 1225
[iii] Bergeron v. State Farm Fire and Cas. Co. N.H. | November 15, 2000 | 145 N.H. 391
[iv] Tocci Building Corp. v. Zurich American Ins. Co. D.Mass. | September 25, 2009 | 659 F.Supp.2d 251
[v] 689 Charles River, LLC v. American Zurich Insurance Company D.Mass. | September 04, 2018 | Not Reported in Fed. Supp.
[vi] Rocky Mountain Prestress, LLC v. Liberty Mutual Fire Insurance Company C.A.10 (Colo.) | June 02, 2020 | 960 F.3d 1255
[vii] Joseph J. Henderson & Sons, Inc. v. Travelers Property Casualty Insurance Company of America C.A.8 (Iowa) | April 20, 2020 | 956 F.3d 992
Article originally published by Bernstein Shur on May 11, 2021, https://www.bernsteinshur.com/what/publications/the-construction-advantage-the-faulty-workmanship-exclusion-in-builders-risk-insurance-measure-thrice-cut-once-and-maines-home-construction-contracts-act-maines-unfair-trade-practices/