Does a builder have insurance if a building has defects? Beware builders and owners!

Most builders or contractors have a commercial general liability (“CGL”) insurance policy for a particular project. It is often required by the construction lender. However, whether this policy actually affords any meaningful insurance to either the contractor or the owner is another question.

Much to the surprise of builders and owners, construction defects are generally NOT covered by either a CGL policy or the owner’s homeowners policy (or business policy). The example we often give clients is that if your roof leaked as a result of a construction defect, the insurance company >might pay for the damage the leak caused, but not the cost of repairing the leak.

Reduced to the most basic terms, a CGL policy will only cover losses caused by an “occurrence” not a defect. An occurrence could be a fire or storm, for example, that occurs while the builder is working on the project. It would also likely cover personal injuries suffered by third parties on the job.

Several years ago, CGL policies provided additional insurance for subcontractors on the job. Under these older policies, if a contractor was negligent, it might be covered under the policy. However, in more recent years that coverage has been written out of the policy and can only be acquired by purchasing a separate endorsement from the insurance company.

For builders who find themselves without coverage and facing a substantial claim – bankruptcy may be the only alternative which is terrible news for both the contractor and the owner.

Email me if you have other questions.

This blog does not create an attorney-client relationship. You should not rely upon this blog for legal advice, but instead should consult an attorney experienced in your area of concern.

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