From a builder’s perspective, the most daunting part of a construction defect claim is often this: How can I afford to defend this? This is what insurance is for. Unfortunately, Oregon construction defect policies are replete with exceptions that swallow up a large part of what insurance is supposed to cover.
This is also important from a homeowner’s perspective as well. More often than not, if there is no insurance, there is little chance of the builder being able to pay for any mistakes. This is why a skilled construction defect attorney should, from the start, properly plead a case to best insure insurance coverage in order to increase the likelihood of a financial settlement.
What is the date of the “occurrence”?
What event triggers the insurance coverage? Is it the date of the completion of the project? The date that the homeowner discovers the damage? Neither. The typical Oregon insurance policy involves coverage for the date the damage occurred.
For example, if the siding was installed in in the summer of 2010 but the water damage wasn’t discovered until 2013, then the date of the first rain was likely the date that the damage began. If the builder had a different policy when it was built versus when the rain started, the relevant policy would probably be the policy that was applicable when the damage begin. However, this is sometimes negated by an insurance exclusion.
When there are multiple policies since the damage began until it ended, then each policy would be on the hook, generally for a proportion of the damage equal to the length of time that coverage was in place. If you built a building in year 2000 and water is dripping every winter since then for ten years, and you had a different policy each year for ten years, then each carrier would be on the hook for 1/10 of the damages.
Sometimes there are orphan years, or years when the builder had no insurance coverage due to lapses in coverage or due to exclusions. This is when the insured builder has to absorb the repair costs as its own. This could be years worth of damage where the contractor could be stuck with a large portion of the bill.
In summary, for the property damage provision of an insurance policy to kick in, the “trigger” is the actual physical injury to tangible property. Bad conduct (i.e., bad workmanship) itself doesn’t trigger insurance coverage.
What Does Insurance Cover?
Another issue in a construction defect claim or case is what does the insurance cover? Generally insurers have a duty to defend (pay for an attorney) and a duty to indemnify (pay the damages).
The duty to defend question is often the most urgent issue for a small business like a contractor. Will the insurance company pay for an attorney? Do you need to hire an attorney to file an an answer to the complaint within the 30 days?
Oregon is generally called an “eight corners” state. To determine if the insurance has a duty to defend, the insurance companies are supposed to look to the four corners of the complaint (the allegations in the lawsuit) and the four corners of the insurance policy. They are not to look at extrinsic facts outside of these documents.
For example, if the complaint alleges that damage occurred in January 2010 and the policy was in effect at that time, then the insurer would have a duty to defend. This is true even if the insurer can prove that the house wasn’t even built yet through external documents such as building permits or the builder’s contract.
Now that the insurance company is defending you do they have to pay all the damages awarded against you? Not necessarily. Just because there is a duty to defend doesn’t mean that they have to indemnify you if damages are later determined to be outside the scope of coverage.
This is most often seen in relation to contractual attorney fees. Oftentimes, the actual repair damages are small in comparison to attorneys fees. If the construction contract provides for attorneys of the winner to be paid for by the losing party, that attorney fee amount can often exceed the value of repairs. Unfortunately, most insurance polices do NOT cover attorney fees for the other side. That would be out of your own pocket with some exceptions, such as when there is a statutory duty to pay attorney fees. In those situations, the insurance policy would cover those fees as costs taxed against the insured.
Reservation of Rights Letter
The contractor will get a letter from the insurance company pretty early on that says why there is or may not be coverage for you. For instance, they will specify an exclusion for water intrusion if applicable and present in the policy.
Policy Exclusions
Exclusions are the bane of builders in litigation. One of the more ridiculous exclusions in a contractor’s policy is the exclusion for the contractors own work. What? There is actually an exception for your own work? Oftentimes, yes. However, there is usually an exception that says “except when work is performed on your behalf by a sub.”
Also, this is relevant when the repairs for your own bad work might only be a small portion of the damages. The real damages are often when your own work causes damages to an other’s work. For example, a problem with flashing may be a cheap fix so the coverage exclusion is no big deal. The policy still usually covers the damage that the flashing problem caused to the framing or drywall.
Inception Date Exclusions
There is often an exclusion for work done before the policy went into effect. This can be a big problem if you switched carriers since the job was completed.
Residential construction or multi-family construction exclusions
This becomes particularly complicated involving a commercial property that may have apartments upstairs. Is it residential or commercial?
Goals in coverage analysis
An attorney is always looking for ambiguities in the contract to better assist the contractor in a coverage dispute. The ambiguities are always resolved in favor of the insured since most, if not all, policies are a “take it or leave it” contract where the insurer sets all the terms.
Contact a commercial/civil litigation business attorney today at 541-797-0110. Text or call!