Why are design professionals attractive targets in litigation relating to construction projects? The answer is easy – they have good insurance coverage. To understand why, you need to know the differences between the Commercial General Liability (CGL) policies purchased by contractors and subcontractors and professional liability coverage purchased by most design professionals.
About CGL Policies
CGL policies provide coverage for damages of a third-party for “bodily injury” or “property damage” caused by an occurrence as defined in the policy. CGL policies exclude coverage for defective or negligent construction, but instead provide coverage for damage resulting from defective work. There is no coverage under a CGL policy for the cost to repair and replace a contractor’s defective work. For example, if a contractor improperly constructs a roofing system which then leaks and causes damage to an interior floor of a building, a CGL policy will cover the floor damage but will not provide coverage to repair the defective roof system. The risk of poor workmanship is simply a business risk of the contractor and not that of the CGL carrier.
Examples of CGL Coverage
Two cases in South Carolina illustrate this distinction. In L-J, Inc. v. Bituminous Fire & Marine Insurance Co., the South Carolina Supreme Court held that costs to repair a negligently constructed roadway were not covered under a CGL policy where there were no claimed damages to property other than the defectively constructed roadway.1 In L-J, Inc., the contractor built roads for the Dunes West subdivision in Charleston County and completed its work in 1990. By 1994, the roads had begun to deteriorate, showing signs of “alligator cracking”. Two experts testified concerning the causes of the cracking. The first expert testified that approximately 50% of the cracking resulted from insufficient road subgrade preparation caused by the contractor’s failure to (1) properly remove tree stumps from the subgrade; and (2) compact the soft, wet clay in the subgrade. That expert also testified that improper drainage, excessive traffic and an insufficiently thick road course also contributed to the cracking. The second expert testified that the primary cause of the cracking was improper drainage.
Because of the deterioration of the roads, the developer brought an action against the contractor for breach of contract, breach of warranty and negligence. The contractor settled the lawsuit for $750,000.00 and then sought indemnification from four insurers. Three insurers contributed $362,500.00 towards the settlement, but Bituminous Fire and Marine Insurance, Co. refused to contribute. Consequently, the contractor and the three contributing insurers brought a declaratory judgment action against Bituminious seeking contribution and indemnification for defense costs. In L-J, Inc., the South Carolina Supreme Court determined that the contractor committed various negligent acts during road design, preparation and construction that led to the premature deterioration of the roads. The Court found that these negligent acts were “faulty workmanship, which damaged the roadway system only.” As a result, the Court held that the damages did not constitute an “occurrence” under the contractor’s CGL policy and did not trigger coverage.
In Auto Owners Insurance Co. v. Newman, the South Carolina Supreme Court recognized that a damage to property other than faulty workmanship itself, such as where the defective work causes damage to otherwise non-defective construction, may be covered under a CGL policy.2 However, even where there may be coverage for this “resulting damage” under a CGL policy, the defective workmanship is not covered. In Auto-Owners Insurance Co., a subcontractor negligently installed stucco on a home, which resulted in water intrusion and significant damage to the home’s exterior sheathing and framing. The homeowner filed an action against the contractor. The homeowner and contractor referred the matter to binding arbitration and the arbitrator awarded the homeowner $55,598.00. The general contractor sought coverage under its CGL policy.
The Supreme Court determined that damage to the sheathing and framing caused by the subcontractor’s negligent installation of the stucco was “property damage beyond that of the defective work product itself.” Consequently, the Court determined that the continuous moisture intrusion constituted an “occurrence” under the CGL policy and triggered coverage. However, the Court ruled that the homeowner could not recover the cost of removing and replacing the defective stucco, even though consequential damage to the property resulting from this defective work was covered and the removal and repair of the stucco was incidental to repairing the damaged sheathing and framing.
Professional Liability Coverage
In contrast, a professional liability policy issued to a design professional is quite different from a CGL policy. Such a policy provides coverage for damages caused by negligent acts, errors and omissions of the design professional, including the costs of redesigning any work that has been constructed pursuant to defective plans and specifications. Professional liability policies are generally “claims made”, meaning that the policy that provides coverage is that policy in place at the time that a claim is made.
In many construction cases, some of the contractors or subcontractors are small companies, with limited assets, unable to pay a substantial claim. Often, a portion of damages sought relate to defective workmanship and not to resulting damages and are not covered under the contractor’s CGL policy. In this circumstance, it is no surprise that a claimant will look to the design professionals involved in the project for financial contribution because the claimant has insurance coverage that covers a claim for professional negligence.
Does this mean, that a design professional should forgo purchasing professional liability coverage. Absolutely not! Design professionals should purchase adequate E & O coverage to cover their potential exposure. In our next post, we will discuss what to look for in a professional liability policy.
If you have any questions about insurance coverage for design and construction professionals and their projects, we would be glad to help you. The attorneys of Gibbes Burton are passionate about helping professionals and businesses to minimize risk and build success.