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The apartment business is booming right now. Unfortunately, construction defects persist as well, particularly in garden-style and wood-framed construction. Most developers are savvy enough to maintain a good insurance program, but many do not understand (until too late) that the policies they bought may not cover the risk of construction defects. 

As an owner-developer, neither your property insurance policy (including your builder’s risk policy) nor your general liability policy is likely to protect you from the cost of repairing defects to property you own. Most likely, your property policy has an exclusion for any damages caused by defects in construction or design. And your liability policy has exclusions for property damage to any property you currently “own, rent, or occupy.” (See exclusion J(1) below.) 

Even more surprising to some is another exclusion that prevents coverage for property damage to property that you “sell, give away or abandon” (known as the “alienated property exclusion”).  (See exclusion J(2) below) This means that for projects you develop, occupy (i.e., rent) and sell, you likely have no coverage during your occupancy of that project or after you sell  (whether to unit owners through a condo conversion or to another apartment owner). 

j.          Damage to Property

“Property damage” to:

(1)        Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;

(2)        Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises;

Upon learning of this unfortunate situation, many developers ask: What good is the policy if it doesn’t cover me when I own the project and it doesn’t cover me after I sell it? Good question. The insurer’s response is that the policy only covers damage to other people’s property (like the project next door), not damage to your own property or the property you once occupied and sold.  Strangely, if you sell the project before you occupy it, coverage is more likely. 

Solutions?  There are steps you can take to minimize your risk: 

The new year brings a reminder that owners need to be careful about changes to their contractors’ and designers’ insurance policies. Many of the most important terms of an insurance policy are in “endorsements” added to the policy. For example, a policy may include an endorsement excluding claims between insured parties (say, a claim by …

You may have recently heard that on December 11, 2013, the California Supreme Court denied the builder’s Petition for Review of the published decision in Liberty Mutual Insurance Co. v. Brookfield Crystal Cove LLC, 163 Cal. Rptr. 3d 600, Cal. App. 4th 98 (2013). For builders and contractors, this is very frustrating news and undermines…

The recent case of Ewing Constr. Co. v. Amerisure Ins. Co., 2012 U.S. App. Lexis 12154 (5th Cir. June 15, 2012) reminds us that, without an endorsement adding back to the policy specific coverage for contractual liabilities, defect claims arising from work under a construction contract may not be covered.  In Ewing, the …

 A recent Utah Supreme Court decision could result in significant benefits to some policyholders in Utah’s construction industry. The case, Ohio Casualty Insurance Co. v. Unigard Insurance Co., 2012 UT 1, concerned a fight between two insurers about how to split the costs of defending a lawsuit brought against their policyholder, Cloud Nine. For …

There are now 25 states in the U.S. that hold that construction defects are not an “occurrence” and are therefore not covered under commercial general liability policies insuring contractors.  Couple this troubling statistic with the ever increasing number of policy exclusions and limitations, and we begin to realize that in many situations the contractor’s insurance policy is inadequate (or non-existent) protection against defects. 

The importance of performance bonds as security to pay for construction defects is therefore growing.  While some sureties who sell the bonds will tell you that bonds merely guarantee completion, and do not insure against latent defects, the language of the typical bond defies this position.

 

Bonds plainly state that they guarantee each and every obligation of the contractor under the contract.  Those obligations usually include the duty to perform work according to the plans and specifications, the standard of care, and without defect or nonconformity.  This author has not seen a bond that attempts to carve out construction defects from its coverage.  And bonds do not have the host of exclusions or limited coverage grants that plague the value of insurance policies.  By the same token, bonds are not perfect and owners should consider the following to get the most protection from a bond:

 

First, the bond duration should extend at least as long as the warranty period (typically one year from completion but sometimes longer) and for as many years thereafter as possible, up to the statute of repose period in the state in which the project is located.  Because construction defects often appear years after completion, the bond duration is critical.  You may pay more for a bond with a longer duration, but if the bond is needed, you should be paying less for the unreliable insurance carried by the contractor.

 

Performance bonds—insurance-like arrangements in which a surety (the bonding company) contractually agrees to pay for the performance of a principal (the contractor) to an obligee (the owner) in case the principal fails to perform the obligations of its contract—should be used more often in construction agreements to provide owners with a source of funds to cover defective work in a project.

Currently, owners typically require contractors to obtain insurance policies with the hope that such policies cover defects in the work they perform for the owner. Though owners are willing to spend a lot of money, time, and effort in obtaining these policies, insurers continue to make revisions to their policies to limit, and sometimes prevent, coverage for these defects.

Performance bonds may provide better protection to an owner. Typically, the bond provides funds to pay for repair of defective work that may not be covered by insurance as part of the bond’s guarantee of the faithful performance of the contract by the contractor.

Unlike insurance policies, performance bonds provide coverage only for the owner’s project—if an owner discovers a defect in the contractor’s work, the owner will not have to worry whether another owner’s claim against the contractor for another defective project will reduce the coverage available under the contractor’s bond. The performance bond’s recovery pool belongs to the owner for the specific project it is drafted to cover.

Do you think you have adequate insurance protection for your project under an “additional insured endorsement” to another entity’s policy? Or through a “wrap” policy, known as either an Owner’s Controlled Insurance Policy (OCIP) or Contractor’s Controlled Insurance Policy (CCIP), because you are listed as “an insured”? Perhaps not under more recent policies. Check the…

Despite the explosion of articles, seminars and webinars on green building and development during the last year or so, there is a dearth of information in the development world regarding what project owners and developers who do want to build a green project should actually put in their design and construction contracts.

Here is what I think is important regarding this subject:

 

General Green Building Certification Goal. The project owner first must decide in general what green building goal it wants to achieve. LEED certification (from the US Green Building Council), at a particular certification level (general, silver, gold, platinum), is an obvious option. But there are other general green building certifications, too, such as Green Globes (Green Building Initiative) and SBTool07 (International Initiative For a Sustainable Built Environment), as examples. The owner should make this basic decision early on, based on good information and analysis and the advice and recommendations of design and green building consultants, as applicable.

 

Industry-Specific Green Building Certification Goal. Deciding on an overall green building goal such as a LEED certification is not the only certification goal a project owner should consider, however. There also is a growing number of industry-specific certifications that the owner should evaluate, depending on the nature of the project and the owner’s business. For example, there are certifications available for health facilities (Practice Greenhealth), restaurants (Green Restaurant Association) and hotels (Hotel Pure Green). How important an industry-specific certification of this type is to an owner is a question to be addressed at the start of the design process.

 

Tax and Other Governmental Incentives Goal. Another element of green building goals to be considered is tax and other governmental incentives relating to green building. Particularly in Oregon and under new federal stimulus legislation, there may be tax credits, grants and other public sector incentives for green, sustainable and energy efficient construction that can be of substantial benefit to a project. However, these incentives must be identified as project goals early in a project’s design in order to ensure that the owner is able to take advantage of them.

 

Making Green Building Goals Explicit. Once an owner has sorted through its optional goals for LEED or other general certification, for industry-specific certification and for tax and other governmental incentives, these goals should be expressly set out in the owner’s design and construction contracts. Otherwise, the owner’s architect and contractor will not have any contractual obligations to achieve the owner’s green building goals. Typical form contracts, including 2007 American Institute of Architects (“AIA”) forms of contract, include minimal references to these kinds of obligations and do not include language in which to make the goals explicit. 

Just when you thought it was safe to go back into the water, the Oregon Court of Appeals strikes again with another iteration of the “economic loss doctrine” which defines when parties can sue each other in negligence for construction defects. In Abraham v. Henry (September 2, 2009) the Court held that parties to a …