Builders and Contractors Exchange
Weekly Bulletin: 4 Jan 2008
Insurance And Defective Materials
What can a contractor do when it incorporates defective materials into the job? The contract with the owner will almost always make the contractor liable for the correction of the defect, and possibly exposed to other damages, if raised in a timely manner. While the contractor will often attempt to shift that liability to other entities such as subcontractors and suppliers, increasingly in Virginia, it is unable to shift that risk onto its commercial liability insurance policy. The most recent case again favoring insurance companies is Stanley Martin Companies, Inc. v. Ohio Casualty Group, 2007 WL 2900172 (E.D. Va., Oct. 2, 2007).
In this case, a residential contractor included wood trusses containing mold supplied by a subcontractor in a townhouse development. At the demand of the homeowners, the contractor spent over $1.7 million in remediation efforts. The contractor asserted a claim for these costs on its CGL and umbrella policies. The court dismissed the claim against the policies though, reasoning that damage caused to the contractor's work by the defective workmanship of the contractor, or its subcontractors, does not constitute an "occurrence" within the meaning of the policy. If the work had resulted in bodily injury or property damage to other than the contractor's work, the coverage is possible, but here the contractor is responsible for its subcontractor's defective work - namely the inclusion of trusses covered with mold.
The lesson remains that because it cannot count on falling back on its commercial liability policy for defective work claims, a contractor must remain vigilant in its selection of subcontractors, inspection of materials, use of strong subcontracts, performance bonds, and if necessary special insurance riders relating to the specific aspects of the work.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.