Insurance Provision Under Assault

Today, builders are confronting a liability insurance crisis.  Due to adverse insurance market conditions, liability coverage for builders is less available, more expensive and more restrictive in terms of the coverage afforded.  And if that is not enough, some insurers are attempting to avoid insurance coverage in all construction defect cases by expanding the policy’s “occurrence” requirement. NAHB has filed amicus (friend of the court) briefs in several cases challenging the insurers’ rigid interpretation of the “occurrence” requirement on the grounds that it is overly broad and is not supported by any language in the insurance policy. 

One of the risks faced by a residential builder is that, following completion of construction, the homeowner may assert a claim against the builder based on an alleged defect that has appeared in the home.  The defect may be caused by a defective building product or by the faulty work of a subcontractor.

One of the ways a builder tries to manage the risk of such constructive defect claims is by purchasing comprehensive general liability (“CGL”) insurance.  The policy’s insuring agreement imposes three main requirements for coverage:  (i)  the claim against the builder must be for damages because of “property damage”; (ii) the property damage must take place while the policy is in effect; and (iii) the property damage must be caused by an “occurrence,” which is defined to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  To be caused by an “occurrence,” the property damage must be fortuitous, that is, neither expected nor intended from the standpoint of the insured. 

A number of insurance companies, however, are seeking to eliminate from their insurance policies coverage for such property damage.  They are denying coverage by arguing that property damage resulting from a construction defect can never be caused by an “occurrence” within the meaning of the policy’s insuring agreement.  The insurers argue that, as a matter of law, a builder expects or intends any property damage to the house resulting from a construction defect -- and hence such damage can never result from an “occurrence” and can never be covered by insurance.

The attempt by insurers to avoid insurance coverage in all construction defect cases by expanding the policy’s “occurrence” requirement would disrupt the long-settled allocation of loss as between builders and their insurers and deprive builders of valuable insurance for which they have paid substantial premiums.

If you are aware of a case currently in the courts with facts similar to those described above, which you think might be of interest to NAHB, you are encouraged to e-mail David Jaffe, in NAHB’s Construction Liability & Legal Research department, or call him at 800-368-5242 x8317. [ return to top ]