In last month’s blog we talked about one of the main kinds of losses covered by general liability insurance: premises / operations, or coverage for “trips and falls” by members of the public. We saw how these claims aren’t always reported when they happen. In fact, the claimant may not even know they are hurt for days. This is one reason why it is vital to have an established incident reporting procedure and to make sure it is being used.
If someone tripping and falling on the sidewalk isn’t always obvious, how much less apparent can a defect in the way a home was built be? First, no one intends to create a construction defect, so until something happens to suggest there is a problem the defect just sits there waiting. It may wait for weeks, months or even years. When something finally happens it could be nothing more serious than the failure of what was defective to function as it should. On the other hand, that failure to function may lead to catastrophic loss.
Let’s say your electrical contractor installs smoke detectors powered by the house’s electrical systems in all your homes. In one of those homes an electrician fails to connect the smoke detector in a finished basement because he was distracted by a minor fire at the jobsite. When he returned from putting out the flames, he simply forgot that he hadn’t finished installing the smoke alarm and attached the cover. Years pass. The homeowner is supposed to replace the batteries that provide backup in case of a power failure, but he doesn’t. Then, during a Super Bowl party, one of the guests who was asked to smoke outside, uses the basement bathroom instead due to the cold night air. The guest drops a cigarette butt he thought he’d put out into the wastebasket. In minutes the bathroom is fully engulfed and smoke is leaking through the cracks around the bathroom door and accumulating along the ceiling; the ceiling in the hallway outside the basement rec room, where everyone is focused on a very close Super Bowl game and where the unconnected smoke alarm is just hanging there not going off. By the time the homeowner and his guests smell smoke, the hallway, leading to the only exit from the basement, is filled with dense, black, choking smoke. Panic erupts. Someone manages to smash one of the two small basement windows, but not everyone is able to climb through it. Someone else has the presence of mind to call 911. When the fire department arrives flames have spread to the main floor. Fire damage to critical support elements as well as smoke damage to the upstairs, not to mention the damage the fire fighters cause in containing the blaze, result in the total loss of the home. Most of the guests managed to get out, but three people, including the homeowner, are dead.
Apart from the awful human tragedy, both the electrical contractor’s and the builder’s general liability limits are exhausted. Worse, those limits came to just $2,000,000 and three relatively young people, all with surviving dependent families, are dead. Add to this the cost of the home and this becomes a seriously underinsured loss. The electrical contractor and the builder are sued. Their business assets are being sought to cover the uninsured portion of this terrible claim. Legal fees mount. Litigation consumes more and more time. Children of the victims will have the right to sue the electrical contractor and the builder when they reach majority age, but by then there are no assets left. Both the builder and his electrician will have long since gone out of business.
Granted, this hypothetical claim is very much a worst case scenario. That said, it is by no means an unlikely illustration. If after reading this blog you find it difficult to sleep tonight; wondering how many unconnected smoke detectors might be waiting in some of the homes you’ve built, I’m sorry. It was not my intention to ruin an otherwise good night’s sleep. There is little use worrying about what might be. Remember, a construction defect is not a claim until something happens. So what CAN you do? Here’s a checklist:
- Does your current general liability policy insure the products-completed operations of subcontractors? Many do not. The RWC Insurance Advantage always does.
- Check your contracts with your subcontractors. Do all subs hold you harmless for all claims, suits, etc.? Are they required to name you additional insured on their general liability policies?*
- Do you know your total business assets? Are your general liability limits sufficient to protect them in the event of a truly major loss?
- If the answer to question 3 is no, you may want to consider an umbrella or excess policy.**
- Don’t think it can’t happen to you? Plan for the worst while expecting the best.
Construction defect claims may start with something as simple as an electrician forgetting to complete the connection to a smoke alarm, but they can turn into a complex and serious loss that may hold the potential to put you out of business and leave everyone associated with it scarred. If you would like to know if your general liability coverage is adequate for your needs, of if you’re getting close to your ex-date and would like a quote, give us a call today at 1-866-454-2155 or visit us on the web at https://rwcinsuranceadvantage.com/ .
*This is not intended as legal advice. We are not attorneys. We urge you to consult an attorney before making any changes to your agreements.
**Umbrella and excess liability coverage is not available in all states and the amount of coverage varies by state.