Financial Implications of Construction Law: Insurance
We have all heard Cuba Gooding in Jerry Maguire screaming the phrase "Show me the money!" The developer is often a shell with no assets. It may even be bankrupt. The subcontractors often are unknown or, if known, may operate out of the back of a pick-up truck and have no tangible assets. The design professionals typically have no substantial assets either. The manufacturer of defective building products may be out of business, bankrupt or have liens against its assets in favor of a commercial lender. Faced with such scenarios, plaintiffs are often in despair about how they are going to recover millions of dollars in damages for defective materials or deficient workmanship. They are especially concerned about laying out enormous sums for legal and expert fees and costs, with no idea where the money is going to come from to pay their damages. One of the most important things counsel does is show the client where the money is going to come from. The answer is—insurance.
Builders, their subcontractors and design professionals usually have commercial general liability (“CGL”) insurance policies that pay for property damage when there is an occurrence as defined under the policy. The property damage cannot be damage to the workmanship or materials provided by the particular contractor who did the work in question. Thus, if the roofer was negligent in applying terra cotta roof tiles over sheathing applied by the framing contractor and the tiles get damaged, that is not property damage covered under the roofer's CGL, because it is damage to the materials and workmanship of the roofer.
However, if the deficient installation of the roof tiles allowed water to penetrate the roof tiles and damage the sheathing underneath that was installed by someone else (i.e., the framing contractor), then that is property damage covered under the roofer's CGL. This is known as consequential property damage. It does not matter whether the contractor is still in business, is bankrupt, a dead-beat, or ran off to Fiji and cannot be found. As long as there was a CGL in place when the deficient work was done and the insurance company is still in business, then there is coverage—and a pocket to pay for the damages. In fact, if the contractor cannot be found, the plaintiff can often get the court to allow the plaintiff to serve the carrier for the absent defendant with the complaint and force the carrier to defend, and ultimately pay damages for, the absent contractor. Obviously, this is a gross over-simplification of an extremely complex analysis and the exclusions and other language of the policies will have to be carefully evaluated by experienced counsel before any conclusions about coverage can be reached.. Nevertheless, counsel should be mindful of the availability of insurance coverage as an avenue of recourse for clients who have been badly hurt by deficient workmanship and/or defective building products.