Defect.ppt

Construction Defects  An Underwriting Perspective

Definition  Any condition that reduces the value of a

home and triggers the duty to defend under GL insurance • Defect claims trigger duty to defend even though coverage is questionable  Two primary categories • Poor Workmanship: code violations, water seepage, defective plumbing etc.

Definition (Cont.) • Earth Settlement Problems: Expansive soils, improper compaction, poor drainage  Poor workmanship and earth settlement

problems combined with an active plaintiff’s bar and a strong duty to defend produce costly litigation.

Reactions  Underwriting Controls

• Geographic- Withdraw or substantial reductions in problem states (California, Nevada, Colorado) • Focus on small custom homebuilders and commercial trades • No tract or condo builders • Require written contracts with subs

Reactions (Cont.)  Coverage Controls

• • • • •

Excess insurance provision Earth Movement Exclusion Multi Unit Residential Exclusion Homeowner Warranty Exclusion Montrose Endorsement – No coverage for previously reported damage

 Need combination of underwriting controls

and exclusions

Risk Transfer Controls  Need written contracts with subs

• Additional Insured (limited coverage for completed operations) • Indemnification Provision (hold harmless clause)

Risk Transfer (Cont.)  Subs presenting the most exposure to

construction defect claims: • All subs, but especially: – Framers, Roofers and Drywall – Door/Window Installation – Excavation/Grading of Land – Siding Installation – Concrete Construction – All carpentry operations (not just framers)

Future  Relationship between homebuilders and

homebuyers is a dispute oriented relationship  In most states, disputes do not trigger GL insurance (i.e. not an occurrence or PD)  Has potential to spread countrywide if other state courts start ruling for GL duty to defend and California plaintiffs bar seeks countrywide opportunities

Future (Cont.)  Best solution is insured HO Warranties and

avoidance of litigation funded by GL insurance  Beginning to see combined GL/Warranty insurance products  Need to lobby state legislatures to require homebuilders to have insured HO Warranties

Future (Cont.)  California

• Likely to deteriorate as a result of Nov. ‘98 election of Democratic governor and legislature • Plaintiff’s bar is powerful in Democratic Party • Number one priority of plaintiff's bar is return of third party bad faith • Third Party Bad Faith Bill now in California legislature