The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

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The resolution of construction defect cases and the availability of insurance coverage go together like the Los Angeles Lakers and NBA Championships (sorry Celtics fans). In addition to coverage issues that arise when defect claims are made, contractors and subs will want to quickly tender the defense of claims to their carriers. Generally speaking, policies of insurance include limitations on the time in which claims can be made, so my rule has always been, “When in doubt, send the notice of claim out.”

When a claim arises, some may question if they have insurance coverage or if they are entitled to  have the cost to defend the claim paid by their insurance companies. Don’t. Assume the claims are covered and make your carrier confirm in writing one way or the other.  First, an insurance carrier’s duty to defend is broader then its duty to indemnify. That means, in most states, you are entitled to a defense if it is possible that the claim is covered. On the other hand, a carrier is only required to indemnify the claim (in other words, pay the settlement or judgment) if the defect is actually covered by the terms of the policy. 

By tendering the claim to your carrier, you will trigger statutory time lines by which the carrier must confirm in writing its position on its coverage and defense obligations. Sometimes an insurance company will agree to defend the claim under a reservation of rights. That means the insurance company believes the possibility of coverage exists, triggering its duty to defend but it is reserving the right to withdraw the defense if it is established that there is no coverage under the terms of the policy.

Especially for large claims, you should not be surprised if the insurance company sues you at the same time it is defending you on the construction defect claim. The suit will not be for monetary damages but rather, for a declaration by the court of the rights and duties of the parties under the terms of the insurance contract. The insurance company will argue its interpretation of the policy language and why there is no coverage, and you will have to argue why there is coverage. While inconvenient for you, this is the prudent course of action for the carrier. When the tender of defense or coverage is wrongfully denied, the policyholder has the right to sue for contract damages, bad faith, and in some cases, punitive damages. Rather than risk being wrong, a carrier will often ask the court to decide questions about coverage.

If the tender of defense or coverage is denied, you should engage legal counsel to help you evaluate your options. There are outstanding insurance coverage lawyers who can help you. Look for one who specializes in insurance coverage of construction claims.  Construction defects present unique issues in terms of coverage that a generalist made not understand.

My next post will continue this theme about insurance coverage for construction defect claims. I plan to address recurring problems when successive policies are implicated by the claims and how so-called self-insured retention may affect the obligations of umbrella or excess carriers.