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Construction Industry Still Unaware of Potential CGL Coverage Related to Faulty Workmanship

A recent Georgia case illustrates that many in the construction industry still believe that CGL insurance policies exclude coverage for defective construction – a belief that resulted in loss of coverage for one contractor.  The court affirmed that, “while construction defects constituting a breach of contract are not covered by [CGL] policies, negligently performed faulty workmanship that damages other property may constitute an ‘occurrence.’”

Based on a mistaken belief of no coverage, a contractor failed to provide timely notice to its insurance carrier.  As a result, the court dismissed the CGL insurer from the case, leaving the contractor (and the owner) without insurance coverage for substantial damages. 

Background

Owner hired Contractor to construct a condominium complex near Georgia Southern University.  The relationship between Owner and Contractor deteriorated, and Contractor sued Owner to recover unpaid amounts.  Owner then filed a counterclaim against Contractor for negligent and defective construction and breach of implied duties to perform work in a workmanlike manner.  Specifically, Owner alleged that faulty workmanship resulted in moisture intrusion into units and the structure as a whole.

After consulting with its attorney, Contractor decided not to notify the CGL carrier about the lawsuit until over two years after the lawsuit was filed.  It believed that CGL insurance would not provide coverage for the counterclaim.

After two years and seven months of litigation, Contractor notified its insurer of the lawsuit.  The insurer began providing a defense under a reservation of rights.  Eventually, the insurer filed a declaratory judgment action in federal court to determine whether it was obligated to provide a defense in light of Contractor’s failure to provide timely notice of the lawsuit.

Failure to Provide Notice Voided Coverage

In the federal declaratory-judgment action, Contractor argued it was entitled to coverage, even though it didn’t provide timely notice, because it was unaware that CGL insurance would provide coverage for the Owner’s claim.  The court did not accept this argument because, as is well settled now under Georgia law, CGL policies will provide coverage for damage to other property arising from faulty workmanship.  The court therefore held that, due to Contractor’s failure to provide timely notice, the CGL policy did not provide coverage for the claims.

Conclusion

The construction industry should quickly learn about the possibility of coverage provided by CGL policies for property damage arising from faulty workmanship.  Otherwise, contractors, subcontractors, and others will continue to waive their rights to coverage – for which they have paid and to which they are rightfully entitled.

Even if a claim might remotely relate to property damage arising from faulty workmanship, one of the first steps should include notifying CGL carriers.  As the construction industry becomes aware of this remedy, they will (and should) more frequently rely on CGL policies for recovery.

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