Claims for Faulty Work - Are They Covered?
Contractors are often sued on the basis that they performed faulty work. A plaintiff may allege that the contractor performed the work using inferior materials, the wrong machinery, or an improper method. Alternatively, the plaintiff may claim that the work doesn't meet industry standards or the quality warranted in the contract. Many faulty work claims aren't covered by a contractor's general liability policy. If you are a contractor, it is important to understand what types of claims are likely to be covered and which are not.
The following scenario demonstrates how a faulty work claim may occur. Ed owns Elite Electrical, an electrical contracting business. Elite Electrical has been hired by a property owner called Prime Properties to install new lighting in an office building Prime owns. Two of Ed's employees complete the installation work.
One month after the lighting work has been completed, Prime Properties complains to Ed that the lights aren't working properly. Ed's crew makes several trips back to the job site to fix the problems but Prime isn't satisfied. The property owner claims that Ed's employees failed to install the switches correctly and that they used shoddy materials.
Prime Properties hires another electrical contractor to correct Elite's mistake and then sues Elite Electrical for breach of contract. The suit alleges that Elite's use of inferior materials and faulty installation methods constituted poor workmanship. Elite is insured for liability under a standard general liability policy. Ed forwards the lawsuit to his liability insurer, which quickly denies coverage. Ed is stunned. Why isn't the claim covered?
Requirements for Coverage
For a claim to be covered under a general liability policy, several requirements must be satisfied. First, the claim must seek damages against an insured for bodily injury, property damage, or personal and advertising injury. Secondly, the bodily injury or property damage must be caused by an occurrence. If the claim alleges personal and advertising injury, the injury must result from an offense. Thirdly, the bodily injury, property damage, or personal and advertising injury must take place during the policy period and within the coverage territory.
(For the purposes of this article, we'll assume the third condition has been satisfied.) Finally, the claim must not be subject to a policy exclusion.
1. Does the Claimant Allege Bodily Injury or Property Damage?
In the Elite Electrical example outlined above, the suit against Elite cites poor workmanship only. Prime Properties has not alleged that Elite's poor workmanship caused Prime to sustain bodily injury or property damage. Thus, the suit isn't covered under Elite's general liability policy.
2. Has An Occurrence Taken Place?
Prime Properties' lawsuit against Elite electric contends that the electrical contractor failed to fulfill the terms of its contract. Ed's company didn't do what it had promised to do and now the property owner wants restitution.
Ed's liability policy covers damages that Ed's company is legally obligated to pay because of bodily injury or property damage caused by an occurrence. Elite's failure to perform is not an accident. As no occurrence has taken place, Prime's breach of contract suit isn't covered under Elite's liability policy.
As a general rule, lawsuits based only on breach of contract are not covered under general liability policies. A liability policy is not a guarantee that your work will be done in accordance with a contract. A project owner may require you to guarantee that your work will be completed as promised in your contract. You can provide that guarantee by purchasing a completion bond. Because the quality of your work is under your control, you assume the risk that your work may be faulty.
Some lawsuits against contractors seek damages for breach of contract and for bodily injury or property damage. In the Elite Electrical example, suppose Ed's employees have installed the lighting fixtures. Shortly thereafter, a wire leading to one of the lights overheats. The hot wire ignites a fire that causes $10,000 in property damage.
Prime Properties sues Elite Electrical for breach of contract and for fire damage caused by the faulty wiring. Elite's liability policy should cover the property damage portion of the claim.
3. Do Any Exclusions Apply?
A general liability policy contains exclusions that eliminate coverage for certain 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, and exceptions may apply in some circumstances.
- If your work is faulty, your policy won't cover the cost of redoing it. In the Elite Electrical scenario, suppose that Prime Properties sues Elite for the cost of hiring another contractor to redo Elite's shoddy work. Elite's liability policy will not cover the cost of correcting its faulty work.
- 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. You 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 will not 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. You are 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.
The three exclusions described above generally don't apply if your faulty work causes bodily injury to a third party or damages property other than your work. For instance, in the electrical panel scenario outlined previously, suppose that the fire spreads from the panel to an adjacent wall. The wall is badly damaged. If the property owner sues you for damage to the wall, your liability policy should cover the claim. The claim should be covered because property other than the electrical panel has been damaged due to an occurrence.
Similarly, if damage to your completed work injures a third party or causes damage to other property, the injury or damage should be covered. For instance, suppose that you use the wrong type of mortar to build a brick wall. The wall collapses onto the homeowner's car, damaging the vehicle. Your liability policy should cover the damage to the car. In this case, your faulty work caused damage to property other than the wall.
Damage to work you have completed may also be covered if the damaged work was performed by a subcontractor you hired. For example, suppose that you operate a masonry business and have been hired by a property owner to do extensive brick work. 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.