September 1, 2011

Protect yourself with construction liability insurance

Liability insurance policies are designed to respond to claims made by other people. They are not designed to cover damage to the insured’s own person or property. Liability policies generally provide the insured with two types of coverage, the duty to defend and the duty to indemnify.

Where a third party’s claim falls within the scope of a policy’s coverage, the duty to defend requires the insurer to pay for a lawyer to defend the claim, while the duty to indemnify requires the insurer to pay any amounts which the insured might become legally obliged to pay if the claim is successful. It should be noted that the insurer also has the right to defend. You should accordingly not deal with or defend a claim on your own, without giving the insurance company the opportunity to do so. If you do, you might prejudice the insurer such that it will be relieved of its obligations under the policy.

Liability policies are never all inclusive. They are drafted to respond to certain types of claims They also generally include specific exclusions. In the construction context, liability policies can be broken down into two basic categories: errors and omissions insurance (E&O) and comprehensive general liability insurance, otherwise known as commercial general liability or CGL insurance. Which type you might require will depend on the services or materials you provide. As will be seen below, in some circumstances both types of coverage should be in place.

Errors and omissions insurance covers errors and omissions in your work. In construction, and depending on the terms of the policy, E&O policies cover errors in design, inspection, supervision and, at times, contract administration. If your role in construction includes the role of consultant or designer, you need errors and omissions insurance.

Contractors, subcontractors and suppliers generally carry CGL insurance. These policies are intended to respond to claims by third parties who allege either personal injury or property damage resulting from an occurrence.  An occurrence  is most often defined to refer to some kind of “accidental event.”  

In construction, the insured’s own work is generally excluded from the scope of coverage under a CGL policy, as are any obligations which the insured assumes under contract. CGL policies are thus not designed to cover the contractor’s own deficient work. CGL insurance policies will generally cover, however, damage caused by a construction deficiency to other persons, or other person’s property.

In real life
An example helps make the distinctions clear. If you as a contractor make a mistake in constructing a retaining wall, such that it falls down, your CGL policy will generally not cover the cost of repairing or rebuilding the wall. From the insurer’s perspective, you did exactly what you wanted to do: there is no “accident.” Further, the provisions which exclude coverage for the contractor’s own work, and for contractual obligations, will generally apply. You will therefore have to rebuild the wall on your own account.

If the wall falls on a neighbour’s car, however, the CGL policy will generally respond to the car owner’s claim against you for liability. The damage to the car can be considered an accident. It is an unforeseen consequence of the construction deficiency, unrelated to the work itself. These types of losses are generally described as “consequential” damages, to which the CGL policy usually responds.

Consider, however, where the wall was constructed by a subcontractor you retained to build the wall on your behalf. In this circumstance, the CGL policy may or may not respond, depending on the wording of the particular policy. Some CGL policies expressly cover the deficient work of subcontractors, while some do not. Where the policy covers your subcontractor’s work, it will also generally require you to ensure that the subcontractor itself carries CGL insurance.

Consider the situation where you have both designed and built the wall. If you have built it according to your design and the wall falls down due to a design error, the CGL policy will generally not respond. This is because the CGL policy generally excludes liability for inadequate or deficient design. As discussed above, errors and omissions insurance is intended to respond to this type of risk. It is accordingly very important that design-build contractors obtain both types of insurance coverage.

Time is money
What about where the wall falls down and your client claims damages for delay? For example, if because of the problem your client was unable to open his store for a week, your client might claim the losses he suffered in the store from you. Neither the CGL nor the errors and omissions policy will generally respond to this type of claim, because the policies are generally only intended to respond to claims for property damage and personal injury. They are not, generally, intended to respond to what are often described as purely “economic” losses. Contractors, subcontractors and suppliers should accordingly consider, where possible, including provisions in their contracts which limit their liability exposure for negligence to personal injury damages and property losses, towards avoiding liability for such pure economic losses.

Contractors, subcontractors and suppliers should review insurance coverage and needs with their brokers to ensure they are properly protected. This is particularly true if the scope and type of your work changes over time. You should also, where possible, include in your contracts a provision limiting your liability to the limits of your insurance. Again, this is towards ensuring you are not liable to pay more than what your insurance policies will cover. Finally, contractors and subcontractors should include contractual provisions which will require the person they contract with to give them timely notice of any claim for which they might face liability.

Rob Kennaley practices construction law in Toronto. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 or at This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.