A Liability Policy Does Not Guarantee the Quality of Your Work.
Contractors can be sued by customers who allege they performed faulty work. Unfortunately, many faulty work claims aren’t covered by a standard general liability policy. If you are a contractor, you should understand what types of claims are likely to be covered by your liability insurance and which are not.
- Faulty work claims occur when a customer alleges that the contractor did a poor job, their work didn’t meet industry standards, or did not perform the quality or kind of stated in the contract.
- A faulty work claim will be covered under your liability policy only if no exclusions apply and the claim alleges bodily injury or property damage. Also, the injury or damage must result from an occurrence or accident.
- Contractors can protect themselves from claims based on mistakes, negligence, errors, and omissions by buying contractors errors and omissions insurance.
Basis of Faulty Work Claims
Faulty work claims generally derive from complaints about the way a job was done. A plaintiff may allege that the contractor performed the work incorrectly, or that the contractor used inferior materials, the wrong tools, or incorrect machinery. Alternatively, the plaintiff may claim that the work doesn’t meet industry standards or the quality warranted in the contract. Some claims allege the contractor completed the work but failed to provide adequate instructions or warnings.
Pete owns Primo Painting, a commercial painting business. Pete’s company has been hired by Ready Realty to paint the interior of an apartment building Ready owns. Pete has signed a contract stating that the apartment walls will be painted a satin finish paint called Snow White. Several of Pete’s employees complete the painting work.
One month after the work has been completed, Ready Realty sends Primo Painting a letter stating that Primo’s painting work doesn’t meet the requirements stated in the contract. The letter contends that Primo’s employees used a cheap brand of flat paint rather than the high-end satin paint called for in the contract. They also used the wrong color paint (gray instead of white) and left visible roller marks on the walls.
When Pete fails to respond to the realty company’s complaint, Ready Realty hires another painting contractor to repaint the apartments. It then sues Primo Painting for breach of contract, citing poor workmanship. The painting company is insured for liability under a standard general liability policy. Pete forwards the lawsuit to his liability insurer, which quickly denies coverage. Pete is stunned. Why isn’t the claim covered?
Requirements for Coverage
For a faulty work claim to be covered under a general liability policy, several requirements must be satisfied.
Bodily Injury or Property Damage
First, the claim must seek damages for bodily injury or property damage that takes place during the policy period and in the coverage territory. In the Primo Painting example outlined above, Ready Realty’s suit cites breach of contract based on poor workmanship. Because the claim doesn’t mention any bodily injury or property damage, it isn’t covered.
Secondly, the alleged bodily injury or property damage must be caused by an occurrence. Ready Realty’s lawsuit contends that Primo Painting failed to fulfill the terms of its contract. Primo’s failure to do what it promised to do is not an accident. As no occurrence has taken place, the suit isn’t covered under Primo’s liability policy. Lawsuits based only on a breach of contract (with no bodily injury or property damage) aren’t normally covered under general liability policies.
No Exclusions Apply
No Exclusions Apply
Thirdly, a claim will be covered only if no exclusions apply. A general liability policy contains several exclusions that eliminate coverage for suits arising from your faulty work. These exclusions are complex, and courts don’t anyways interpret them in a consistent manner. Here are some basic concepts to keep in mind. These are general rules that may not apply in some circumstances.
- If your work is faulty, your policy won’t cover the cost of redoing it. In the example outlined above, suppose that Ready Realty sues Primo Painting for the cost of hiring another contractor to redo Primo Painting’s faulty work. Primo’s liability policy won’t cover that cost.
- If you are working on part of a building and accidentally cause damage to the specific part you are working on, your policy won’t cover that damage. For example, you are an electrical contractor and have been hired by a property owner to install a new electrical panel. While working on the panel you accidentally start a fire and the panel is destroyed. If the property owner demands compensation for the damage to the panel, your insurer won’t cover the loss.
- If work you have completed sustains property damage, your policy won’t cover that damage. For example, suppose you operate a masonry business and have been hired by a homeowner to install a brick wall. Because you used the wrong type of mortar, the brick wall collapses after it is completed. If the homeowner demands that you redo the wall (or pay the cost of hiring another contractor), the claim will not be covered by your liability policy.
Claims Your Policy Won’t Cover
The exclusions that may apply to faulty workmanship claims are complex and courts don’t anyways interpret them in a consistent manner. While exceptions may apply, policies generally exclude the cost of redoing faulty work, damage to property you’re working on, and damage to work you’ve completed.
Cost of Redoing Faulty Work
If your work is faulty, your policy won’t cover claims demanding you repair or replace it. In the example outlined above, suppose that Ready Realty sues Primo Painting for the cost of hiring another contractor to redo Primo Painting’s faulty work. Primo’s liability policy won’t cover that cost.
Damage To Property You’re Working On
If you are working on part of a building and accidentally cause damage to the specific part you are working on, your policy won’t cover that damage. For example, you are an electrical contractor and have been hired by a property owner to install a new electrical panel. While working on the panel you accidentally start a fire and the panel is destroyed. If the property owner demands compensation for the damage to the panel, your insurer won’t cover the loss.
Damage To Work You’ve Completed
If work you have completed sustains property damage, your policy won’t cover that damage. For example, suppose you operate a masonry business and have been hired by a homeowner to install a brick wall. Because you used the wrong type of mortar, the brick wall collapses after it is completed. If the homeowner demands that you redo the wall or pay the cost of hiring another contractor, the claim won’t be covered by your liability policy.
Contractors can protect themselves from faulty work claims by eliminating any coverage gaps in their liability insurance, clarifying their duties under contracts, practicing good quality control, and promptly notifying their insurer of any claims.
Claims Covered by Exceptions
The exclusions described above have some exceptions. That means there are situations in which the exclusions do not apply and you would still be able to get coverage. First, policies generally cover claims alleging that your faulty work caused bodily injury to a third party or damaged property other than your work. For instance, in the electrical panel scenario outlined previously, suppose the fire spreads from the panel to an adjacent wall. If the property owner sues you for damage to the wall, the claim should be covered. You have negligently caused damage to property other than the specific part you were working on.
Damage to work you have completed may be covered if the damaged work was performed on your behalf by a subcontractor. For example, suppose you operate a masonry business and have been hired by a property owner to do extensive brickwork. You hire a subcontractor to construct a brick wall but do all of the remaining work yourself. The subcontractor performs shoddy work, the wall collapses, and the property owner sues you for property damage. Because the wall was not your work, the property damage claim may be covered.
Contractors Errors and Omissions Coverage
Finally, contractors can obtain coverage for some faulty work claims by purchasing errors and omissions coverage. It covers claims based on negligence, mistakes, poor design, use of defective materials, and other errors or omissions you’ve made.
Frequently Asked Questions (FAQs)
What is the definition of faulty workmanship?
Generally, work is considered faulty when it doesn’t meet a required standard, such as a building code or the specifications stated in the contract. Standards may be specific or implied based on what’s normal for the industry or to meet minimum building standards. What constitutes a defect is subjective, and the contractor and the customer may disagree on whether the work is faulty.
What does liability insurance not cover?
General liability insurance doesn’t cover the cost of redoing faulty work or the cost of repairing or replacing the part of property you’re working on when the accident occurs. Liability insurance also excludes the cost of repairing or replacing work you have already completed unless the work was performed by a subcontractor you hired.
What type of insurance covers someone’s negligence in performing work?
General liability insurance covers a contractor’s negligence in performing work if their negligence causes an accident that injures someone else. It also covers damage they cause to someone else’s property if the damaged property isn’t the contractor’s finished work or isn’t being worked on by the contractor. Contractors errors and omissions insurance protects contractors from claims based on errors in design, faulty workmanship, or the use of defective materials that cause damage to the contractors’ work.
To read the full article, click here.