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Construction Defects

Construction Defects. An Underwriting Perspective. Definition. Any condition that reduces the value of a home and triggers the duty to defend under GL insurance Defect claims trigger duty to defend even though coverage is questionable Two primary categories

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Construction Defects

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  1. Construction Defects • An Underwriting Perspective

  2. Definition • Any condition that reduces the value of a home and triggers the duty to defend under GL insurance • Defect claims trigger duty to defend even though coverage is questionable • Two primary categories • Poor Workmanship: code violations, water seepage, defective plumbing etc.

  3. Definition (Cont.) • Earth Settlement Problems: Expansive soils, improper compaction, poor drainage • Poor workmanship and earth settlement problems combined with an active plaintiff’s bar and a strong duty to defend produce costly litigation.

  4. Reactions • Underwriting Controls • Geographic- Withdraw or substantial reductions in problem states (California, Nevada, Colorado) • Focus on small custom homebuilders and commercial trades • No tract or condo builders • Require written contracts with subs

  5. Reactions (Cont.) • Coverage Controls • Excess insurance provision • Earth Movement Exclusion • Multi Unit Residential Exclusion • Homeowner Warranty Exclusion • Montrose Endorsement • No coverage for previously reported damage • Need combination of underwriting controls and exclusions

  6. Risk Transfer Controls • Need written contracts with subs • Additional Insured (limited coverage for completed operations) • Indemnification Provision (hold harmless clause)

  7. Risk Transfer (Cont.) • Subs presenting the most exposure to construction defect claims: • All subs, but especially: • Framers, Roofers and Drywall • Door/Window Installation • Excavation/Grading of Land • Siding Installation • Concrete Construction • All carpentry operations (not just framers)

  8. Future • Relationship between homebuilders and homebuyers is a dispute oriented relationship • In most states, disputes do not trigger GL insurance (i.e. not an occurrence or PD) • Has potential to spread countrywide if other state courts start ruling for GL duty to defend and California plaintiffs bar seeks countrywide opportunities

  9. Future (Cont.) • Best solution is insured HO Warranties and avoidance of litigation funded by GL insurance • Beginning to see combined GL/Warranty insurance products • Need to lobby state legislatures to require homebuilders to have insured HO Warranties

  10. Future (Cont.) • California • Likely to deteriorate as a result of Nov. ‘98 election of Democratic governor and legislature • Plaintiff’s bar is powerful in Democratic Party • Number one priority of plaintiff's bar is return of third party bad faith • Third Party Bad Faith Bill now in California legislature

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