Construction Risk

Cost of replacing defective work excluded under Builder’s Risk Policy

A construction contractor (Laquilia Construction, Inc.) poured concrete that failed to meet the specifications for minimum strength for the floor slab of a high rise commercial building. The defective concrete had to be ripped out and replaced. This replacement required reinforcing the building while the rework was performed. It also required various subcontractors to remove and later re-install their work, including HVAC ductwork, electrical fixtures and plumbing.

The question addressed by the court was whether the Builder’s Risk insurance policy issued by Travelers Insurance was required to cover the costs incurred in the re-work as insured damages. The policy stated that it insured against the risk of “physical loss or damage to the property insured, except as excluded hereunder.” The exclusions stated that the policy would not pay for:

“1. (a) Any loss of use or occupancy or consequential loss of any nature howsover caused, including penalties for non-completion or delay in completion of or delay in completion of contract or non-compliance with contract conditions;

(b) Cost of making good faulty or defective workmanship or material, but this exclusion shall not apply to physical damage resulting from such faulty or defective workmanship or material.”

The contractor submitted a claim to Travelers for the “costs of repairing the fifth floor slab under an approved correction plan.” Included in these costs was the cost of removing and replacing the slab, shoring the full height of the building while the corrective work was performed, and the cost of the other trade contractors’ having to removing and reinstall their work. Travelers denied coverage on the basis that the claim was excluded because it was for the “cost of making good faulty or defective workmanship or material.”

In suing Travelers for coverage, the plaintiff asserted that the exception to the exclusion at part (b) above was applicable because the defective installation of the concrete physically damaged the insured property by being incorporated into the building and could only be removed at cost. In reading the exception to the exclusion, the court stated that “the exception to any exclusion should not be read so broadly that the rule – the exclusion clause – is swallowed by the exception….”

The court found that the plaintiff’s claim “falls squarely into the exclusion clause simply as a cost incurred to make good the defective concrete. If, however, the fifth floor slab had collapsed and damaged machinery, plumbing and electrical fixtures, or neighboring property, those losses would qualify as “ensuring losses” that are covered under the policy. The defective materials, themselves, would still not be covered. But where there was no collapse and no actual physical damage, the court found that “Laquila’s claim for coverage here is no more than an attempt to recover for excluded costs of making good its faulty or defective workmanship.” Pressing home its point, the judge concluded: “Were I to accept the plaintiff’s interpretation, it would result in coverage for nearly every instance of defective workmanship . . . whether or not there was any actual ensuring loss or if such loss stemmed directly from a risk expressly and unquestionably excluded by the policy. Such coverage would wrongfully insulate contractors from liability when their negligent or shoddy workmanship results in structural or other failings.” Laquila Construction, Inc. v. Pinnacle Concrete Corp. v. Travelers Indemnity Company of Illinois, 66 F. Supp. 2d 543 (D.C. Ill. 1999).

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 2, No. 4 (Apr 2000).

Copyright 1999, ConstructionRIsk.com, LLC

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