In a recent case, the Massachusetts Appeals Court ruled that commercial general liability policies that cover “property damage” do not cover construction defects left by contractors in homes. The ruling has practical implications for both home builders and buyers, who can no longer expect general liability insurance coverage to pay for these problems.

Appeals Court: General Commercial Liability Policy Does Not Apply

The case, Lessard v. R.C. Havens & Sons, Inc., involved a fairly run-of-the-mill construction dispute. The plaintiffs hired the defendant company to be the general contractor and build their Massachusetts home. Whether it was the fault of the general contractor or a subcontractor that they hired, the result was substandard and even the structural integrity of the home was compromised.

The homeowners sued, the case went all the way to trial, and the jury sided with the homeowners, awarding them $272,533. The question then became who would pay that sum, and both the homeowners and the contractor turned to Main Street America Assurance Company (MSA), the company that provided the contractor with general commercial liability coverage. MSA, however, pointed out that the policy only covered “damages because of… ‘property damage'” and that “property damage” meant “physical injury to tangible property, including all resulting loss of use of that property [or] loss of use of tangible property that is not physically injured.” MSA claimed that this did not cover construction defects, and the appeals court agreed.

According to the court, “faulty construction is defective at the outset.” It distinguished between the costs of repairing the defect, on the one hand, and the costs of repairing damage caused by the defect, on the other. “An improperly installed window would not be ‘property damage,' but resulting water damage to the surrounding wall would be.”

What This Means for Contractors

For contractors, this case has massive implications: You cannot rely on a general liability policy to cover your negligence in constructing a home. Instead, you will need errors and omissions insurance. If you do not have errors and omissions insurance, and either you or a subcontractor messes up on the job, you are going to have to pay out of your own pocket to fix it.

What This Means for Homeowners

For homeowners, this case means you need to be extra wary when hiring a contractor to build a home. When you do your due diligence, it is no longer enough to ask merely whether a contractor has insurance or not. You have to ask if they have errors and omissions insurance. If they do not, and there are construction defects in the home, the deep-pocketed insurance company will not pay to have them fixed. Instead, you will have to hope that the contractor has the means to do so, which is far from guaranteed.

Construction Lawyers at the Katz Law Group

The only winners in this case are insurance companies. In theory, they would lower the costs of their general commercial liability policies for general and subcontractors due to the reduced exposure that they now have.

Whether you are a general contractor, a subcontractor, or a homeowner, if you need legal assistance from a Massachusetts construction lawyer, call the Katz Law Group at (508) 480-8202 or contact them online.