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Construction projects can be complex undertakings. Multiple companies often are involved in designing and building commercial and residential buildings, and the projects frequently take several years to complete.
Accordingly, insurance coverage for construction risks also can be complex as all the parties involved need protection for their specific needs. Yet insurers provide ample capacity for the construction sector, and in several areas are expanding the products they offer to address evolving needs and to clarify coverage.
One area that needs additional clarity, however, is how commercial general liability policies address construction defect risks. As we report on page 4, policyholders are frustrated by conflicting court decisions in various states over whether construction defect claims constitute an occurrence under CGL policies.
With differing judicial interpretations of the CGL wordings, policyholders don't know whether their CGL policies will cover their construction defect claims. And, on the other side of the equation, insurers don't know whether they will have to pay claims that have been filed.
Such inconsistencies add to the costs for both sides and create an uncertain atmosphere for businesses struggling to generate revenues in a particularly hard-hit area of the economy. Policyholders don't know what uninsured costs they may face if a construction project goes wrong and insurers face a much tougher time underwriting the risks.
The good news is that some state governments have recognized the problem and are addressing it through legislation. Arkansas, Colorado, Hawaii and South Carolina have passed laws legislating that construction defect claims constitute an occurrence under CGL policies.
Those states may benefit economically as the laws make them more attractive places for construction firms to do business, but more importantly the laws reduce the risk of protracted legal disputes.
As with all state legislation, there will be the risk that different states' laws will differ so much that they will add to the confusion, but leaving the decisions to state courts likely will produce even more inconsistencies.
Given the overall importance of the construction industry to the struggling U.S. economy, states can and should act quickly to ease this liability burden.