Three workers in hard hats reviewing documents on construction site.

Wherever there’s construction, there’s an opportunity for something to go wrong. According to Eric Matthias, director with Nationwide E&S/Specialty Programs, the bigger the job, the bigger the potential for trouble.

“The larger the scale and the more complex the project, the greater the probability that there will be some kind of construction defect,” he says.

What counts as a construction defect?

“A construction defect is any condition that results in a flaw in the design, materials, workmanship or site preparation that causes a failure in a building or structure that can lead to damage, safety hazards or diminished value,” explains Matthias.

This could include design deficiencies, such as flaws in the architecture or engineering plans, as well as material deficiencies, such as the use of substandard lumber, steel, roofing tiles and other construction-related products. Subsurface deficiencies, including issues with expansive soil or improper site preparation, can result in serious problems, too.

In addition, workmanship deficiencies can play a role in construction defects.

“This is when there is poor execution during construction,” says Matthias. “For example, the improper installation of plumbing could lead to mold.”

Issues that show up immediately are called patent defects and are easier to identify and mitigate in a timely fashion. However, latent defects—those that may not surface until years later—may cause greater damage.

“Latent defects get a lot of press,” Matthias notes. “There may be faulty wiring behind a wall, and you don’t know about it until there is a fire, or a drain that was improperly installed, and there’s no evidence of it until a slow leak makes its way into the wall.”

Getting the right protection in place

Construction defects can’t be taken lightly. The most egregious could result in catastrophic failure and result in significant losses, including bodily injury. That’s why it’s critical for contractors to have the right protection in place.

“My best advice is to work with an insurance professional with in-depth knowledge of construction,” says Matthias.

They can help you determine the right kind of coverage or combination of coverages you need for your specific risks. For example, a commercial general liability policy may cover property damage and bodily injury, but it often excludes faulty workmanship and damage to the contractors’ own property.

On the other hand, contractor’s errors and omissions insurance is designed to provide protection from professional negligence. This may include faulty workmanship, design mistakes and defective materials, but it typically won’t cover bodily harm or property damage.

Meanwhile, builder’s risk insurance covers damage to the building or structure during the course of construction but excludes professional negligence and bodily harm.

Contractors looking to simplify their insurance coverage may opt for a wrap-up policy that provides consolidated coverage for all parties on the project, including subcontractors. The two main kinds of wrap-up policies are owner-controlled insurance programs and contractor-controlled insurance programs.

Mitigating risk with subcontractors

On projects large and small, general contractors hire specialized subcontractors to perform portions of the construction job. Although this may expedite construction, it also increases exposure.

“To limit risk, it’s essential to start with a strong subcontractor agreement with clear language around performance expectations, as well as a requirement for subcontractors to indemnify the general contractor with a waiver of subrogation for claims arising from their work,” notes Matthias.

This subcontractor agreement includes verifying that the subcontractor has the right insurance coverage and additional insured endorsement for the general contractor on their policy. It should also include a plan for regular inspections to verify that the work is being performed per the contract.

Beyond the subcontractor agreement, make sure to carefully vet any subcontractors you hire to ensure they have a solid track record with similar projects. This includes making sure they have the proper licenses and certifications for the scope of work needed.

After that, assess their financial stability.

“If a subcontractor is financially stable, they are less likely to disappear,” he adds.

What to do if a construction defect surfaces

In the event that a construction defect comes to light, it’s critical to take action immediately.

“You have to document everything as soon as you see an issue,” insists Matthias.

This includes taking photos and putting together a comprehensive report.

“Take note of everything—what the issue is, what caused it, what you did to resolve it,” says Matthias.

Review contracts and warranties to see if there are any repair obligations. It’s also important to notify all contractors and subcontractors right away about the issue, and you should engage experts to understand the scope of the problem and how serious it is. If you are unable to resolve the issue, consult with a legal expert for guidance on how to proceed.

Partnering with the right insurance professional

Construction defects can be complex, so it’s optimal to work with an experienced insurance professional who understands the risks you face and the steps you need to take to ensure you are protected from loss.

“The right insurance professional has risk management expertise and other resources to support you, which is key for anyone in the construction space,” Matthias concludes. “You don’t have to go it alone.”

 

Discover more insurance insights from Nationwide Programs at Nationwide.com/Programs