3 tips to guard against construction defect claims.

Male construction worker in hard hat looking at construction plansIt’s an unfortunate truth: few building owners and general contractors have managed to remain untouched by the impact of construction defect claims – despite continually striving to deliver quality projects safely, on time, and within budget.

In fact, 75 percent of construction industry players participating in a, large-scale risk study by Dodge Data & Analytics reported experiencing a claim or dispute in the past ­five years. And claims arising from construction defects surfaced as the most common – and most costly – type of dispute, the study found. 

Construction defect claims can happen on projects of all types and sizes. They result from a failure to design or construct in a manner considered reasonable in terms of workmanship and/or an owner’s expectations. When these deficiencies rise to the level of a legal challenge, they can take a high toll on the companies involved, leading to disruption and increased costs, among other damaging effects.

“Construction defect claims can affect a contractor’s reputation, its profits, and its ability to maintain insurance coverage,” says Aldo Fucentese, VP and Underwriting Manager for Liberty Mutual Insurance’s Construction practice. “One large claim can cripple a business if it doesn’t have the right risk management plan in place.”

“Claims arising from construction defects surfaced as the most common – and can also be the costliest – type of dispute.”

Fortunately, there are steps you can take to reduce this risk and the financial and reputational damage stemming from these challenges. What’s your best defense? Review these three important strategies.

1. Check scope of coverage and contractual protections

Construction projects often include multiple stakeholders, such as general contractor, designer, engineer, subcontractors, and material suppliers. Assigning accountability if certain aspects of a project turn out subpar can be difficult without clear guidelines in place.

Take the following four actions before starting a new project – and consult with your insurer and legal counsel if you have questions:

  • Scrutinize your general liability policy to review limits, exclusions, and exceptions. Higher limits may be required in certain states. In addition, take note: some policies may cover faulty workmanship only if completed by subcontractors.
  • Reduce coverage gaps by considering excess, professional, and pollution liability in addition to property policies. These coverages can be key safeguards in the event of a large claim, or if an incident isn’t covered by your general liability policy. This comprehensive coverage is especially important if your company is involved in:
    • Design-build.
    • Building information modeling.
    • Integrated project delivery work.
    • “Wrap ups,” either owner-controlled or contractor-controlled insurance programs.
  • Clarify legal and financial responsibilities within the contract. Some states, for example, may limit a contractor’s ability to transfer certain liabilities and risks to subcontractors.
  • Confirm that all stakeholders are contractually responsible for their own work. Review each party’s certificate of insurance and additional insured endorsement for adequate coverage levels. Also check if there are any endorsements, such as a residential construction exclusion, or state anti-indemnity provisions that might affect coverage.

2. Maintain a robust quality control program

Continuous collaboration on quality control is one of the best ways to avoid construction defect claims, improve safety, and limit costs associated with delayed delivery dates and rework. In fact, nearly all the contractors participating in the Dodge study (91 percent) agreed that collaboration is a fundamental strategy to reduce these risks.

To focus the entire team on quality control, Fucentese advises adopting the following framework:

  • Involve all parties early on by forming a quality control committee at the outset. Then, distribute a written quality control program, sharing it with everyone involved in the project to set expectations, outline responsibilities, and align goals.

“Continuous collaboration on quality control is one of the best ways to reduce the risk of construction defect claims, improve safety, and limit costs associated with delayed delivery dates and rework.”

“At its core, a construction project represents a gathering of individuals, each of whom brings a specific skill and responsibility to the table,” Fucentese says. “So, it makes sense to involve all of these parties as early as possible in the process to take advantage of everyone’s expertise.”

  • Hold pre-construction meetings to review plans and specs together – and provide the chance to address potential issues before they take hold. On the agenda should be:
    • Pre-work site assessments.
    • Performance mock-ups.
    • Prefabrication and assembly.
    • Quality Inspection process.
    • Safety expectations.

“Regular inspections assess the quality of workmanship and identify errors that can be corrected before they lead to major, more costly problems,” says Fucentese. “And taking photos before, during, and after completing work adds valuable documentation to these visits.”

  • Maintain the project paper trail. Keep records of inspections, delivery schedules, and stakeholder names and responsibilities and document change orders, requests for information, materials acceptance, workmanship approvals, and installation verifications.

Anyone on a worksite, from project managers to trade workers, should feel empowered to report potential issues related to already completed work. Documenting these concerns and getting approval from appropriate parties in writing before proceeding with any additional work is critical.

Bottom line? Comprehensive records may help minimize or avoid litigation.

There’s no question that construction defect litigation can be time-consuming and expensive. Your best bet for mitigating the costs will center around close ties with your insurer. John Kelley, Construction Defect Claims Manager suggests following these three guidance points:

  • Always inform your insurer of potential claims immediately and be ready to provide project-related records. Notifying other involved trades and issuing contractual-based tenders early on is also important. Your claims adjuster can help guide this process. 
  • Partner with the claims adjuster to help use resources appropriately. For example, engaging attorneys at the right time can help minimize legal fees and expenses. Paying attention to costs for non-legal resources, such as forensic engineers, consultants, and expert witnesses, is also vital.
  • Be open to settlements. “While receiving a favorable verdict can be satisfying, it may not provide the best financial outcome,” notes Kelley. “Knowing when to settle can not only save your company time and money, but also allow the team to move forward.” Consult with your insurer about when a settlement might be the right solution.