Face value: construction-defect lawsuits are piling up fast. Here's what to watch for and how to protect your business

Pool & Spa News, August 22, 2005 by Leslie Echols Pitts

Over the last five years, the rise of construction-defect litigation across the United States has grabbed headlines, particularly in the West and Southwest. Even where it isn't an issue, the fear of it still exists.

This concern has led to growing costs for contractors and subcontractors. It has resulted in less affordable legal fees and liability insurance. Legislation that attempts to preempt frivolous lawsuits may compound the problem, in some cases.

To protect themselves, contractors and subcontractors need to understand the basis for such litigation. They should also be aware of the insurance and legal challenges facing their businesses.

A search for meaning

Generally speaking, a "construction defect" is any condition that reduces a structure's integrity or value. These can range from complex foundation and framing issues to aesthetic ones, such as improperly painted surfaces, deteriorating trim or patio cracks.

Most importantly, construction defects can arise in any context, no matter how big or small. In fact, suits are being waged against anyone who played a role in the premises' construction.

Trial courts typically group construction defects into four major categories:

* Design defects.

Pools and systems do not always work as intended or specified. As a result, a deficiency occurs and relief is sought from the responsible designer or engineer.

* Material deficiencies.

Inferior or inappropriate building materials can cause flaws.

* Construction deficiencies.

Claims that the work performed was faulty, defective or shoddy.

* Subsurface or geotechnical problems.

These are landslide and earth settlement problems, such as expansive soils, underground water, horizontal movement, etc., that were not properly addressed.

To thwart frivolous cases, many states define construction defects statutorily by enacting various "right to cure" laws. In the case of legitimate claims, these laws allow contractors to remedy a grievance before a suit begins, especially in the area of residential construction.

The fallout

The goal of the typical construction-defect case is to bring a variety of potentially responsible parties and their liability carriers to the table. To this end, lawsuits are being crafted to include as many theories of recovery or "causes for action" as possible. The most common cases tend to involve a breach of warranty, faulty or defective work, negligence, fraud, strict liability, and consumer or property code violations.

As a result, insurers are employing a number of different strategies for dealing with the growing costs of these claims. Some underwriting policies avoid certain classes of contractors, specific types of construction or problematic regions.

In addition, insurers are attaching combinations of coverage-restricting endorsements to their policies. The precise combination of endorsements vary by class of contractor, construction and state. The most frequent combinations are: known or continuous injuries or damages; earth movement; residential construction; and damage to work performed by subcontractors.

Other common endorsements purport to limit the coverage afforded additional insureds or contractors.

The challenge

The increase in litigation and decrease in coverage poses a number of challenges for contractors and subcontractors. One difficulty is securing the coverage required by project owners and their general contractors before a job can begin. Another is making sure that the coverage provides the necessary protection and responds appropriately to a claim or suit.

As a precaution, contractors and subcontractors should take the following steps:

* Read construction contracts carefully.

Contractors need to understand the project's scope, their role in it and all the insurance requirements.

* Know what your insurance policy covers.

Contractors should read liability insurance policies as soon as they are issued. If certain coverage provisions such as "additional insured" designations are required by contract, make sure your insurance agent or company has a copy of the same, and the required coverage is secured. If you use subcontractors, be certain coverage is provided for claims arising out of their work.

* Be proactive.

Contractors need to keep accurate records and complete construction files of work performed. When the work began and ended, and who performed it are also important to document. Such information can be essential for determining not only a contractor's or subcontractor's liability exposure in a case, but also its coverage through an insurer.

* Know your rights.

Contractors and subcontractors need to know their rights and obligations under the states in which they do business. Under "right to cure" or construction liability laws, you need to know what is available and expected of you when construction-defect claims arise.

* Be responsive.

When a claim is made or a suit is filed, contractors and subcontractors who wish to seek liability coverage need to notify their carriers immediately. Ignoring the problem seldom works and can often lead to greater difficulties.