Construction Defect Claims

Resolution

Dealing with Insurance

Construction defect claims are unique because the damage is often discovered long after the work is completed. Depending on the situation, later carriers might be called upon to contribute to the settlement. Under California law, each insurer who issued a liability policy from the date of completion of the work and for the following ten years is potentially obligated to participate in the claim. This is known as being “on the risk.” This means that if a defect is discovered within this ten-year period, the insurers may be required to cover the claim.

California case law also holds that a series of related acts attributable to a single cause constitutes a single occurrence. According to the decision in California Pacific Homes, Inc. v. Scottsdale Ins. Co., deductibles cannot be “stacked” because that would effectively reduce coverage.

When a claim involves multiple carriers on the risk, clients may elect to make an Armstrong election to one of the carriers. This does not relieve the other carriers of their obligations under their respective policies but helps clarify which carrier collects the deductible.

Best Practices for Handling Construction Defect Claims

Upon Receiving Notice of a Potential Claim

• Notify Interested Parties: Before repairing construction defects, provide notice to all parties whose work may be altered or implicated. This maximizes potential recovery options in the future.
• Inspection Opportunities: Take advantage of any opportunity to inspect the damaged property. This ensures a thorough understanding of the defect.
• Notify Insurance: For all but the most minor claims, it’s important to engage your general liability carrier early on. Many carriers have existing relationships with engineers and other experienced construction professionals who can assist with the investigation process and enhance the likelihood of sharing repair costs with other responsible parties.

Potential Issues: It is sometimes tempting to simply document the damage with photographs and then proceed with rectifying the situation as quickly as possible. However, photographic documentation of the defects may not be sufficient to head off allegations of spoliation of evidence.

• Bias: Photographs are often taken from the plaintiff’s perspective, causing certain aspects of the loss to be highlighted while others are omitted. This selective sampling can lead to a skewed representation of the defect.
• Independent Consultants: Allow potentially impacted parties to retain their own consultants. These consultants can perform their own independent tests and investigations, potentially leading to different conclusions, alternate causes, or less costly repairs.

Key Elements of Investigation: Investigating construction defects often requires hiring experts, and in many instances, the general liability carrier takes on this responsibility.

• Engineering Analysis: Conduct a thorough engineering analysis to determine the root cause of the defect. This involves several steps:
  • Reviewing the Original Documents: Examine the original construction documents, including blueprints, specifications, and contracts. These documents provide a baseline for understanding the intended design and construction methods.
  • Inspecting the Physical Conditions: Conduct a detailed inspection of the physical conditions at the site. This includes verifying the materials used and the methods of construction employed. Comparing these findings with the original documents helps identify any deviations or inconsistencies.
  • Determining the Extent of the Defect: This involves identifying all affected areas and understanding the severity of the issue. A comprehensive assessment ensures that all aspects of the defect are addressed.
• Cost Analysis: Analyze the estimated cost of repairs.
  • Detailed Estimates: Obtain detailed estimates for the cost of repairs from qualified contractors. These estimates should cover all necessary materials, labor, and any additional expenses.
  • Alternative Solutions: Consider alternative repair solutions that might be more cost-effective. This can include different materials or methods that achieve the same result at a lower cost.
• Consider Alternative Causes: Verify possible alternative reasons for the defect, such as poor workmanship, improper maintenance, or environmental factors.
• Allocate Costs: Allocate repair costs based on the identified causes. This ensures that responsible parties are held accountable and repair costs are distributed fairly.