Risk Management
Construction defects fall into four main categories. Design defects originate in the architectural or engineering plans and include inadequate structural calculations, improper drainage design, or specification errors. Material defects involve the use of defective, substandard, or inappropriate building products. Workmanship defects result from improper installation, failure to follow manufacturer instructions, or deviation from plans and specifications. Subsurface defects arise from inadequate site preparation, improper compaction, or failure to address soil conditions. Water intrusion is the most common category of defect claim, often involving failures at windows, roofing, waterproofing membranes, or exterior cladding systems.
Every state has statutes of limitation and repose that govern how long after construction a defect claim can be filed. Statutes of limitation typically run from discovery of the defect, ranging from 2 to 6 years in most states. Statutes of repose set an absolute deadline from substantial completion, regardless of discovery, typically ranging from 6 to 12 years. Some states have shorter periods for certain claim types. Right-to-repair statutes in many states require claimants to provide notice and allow the contractor an opportunity to inspect and repair before filing litigation. Understanding your state specific timelines is essential for managing completed operations insurance coverage periods.
General liability policies typically exclude damage to the contractor own work (the your work exclusion) but cover resulting property damage to other property. The subcontractor exception to the your work exclusion provides coverage when the defective work was performed by a subcontractor. Completed operations coverage, which is part of your GL policy, responds to claims arising after the project is completed and turned over to the owner. Some states like Colorado have particularly aggressive defect litigation environments that have led certain insurers to restrict or exclude construction defect coverage. Products-completed operations limits that exhaust separately from your general aggregate provide additional protection.
Prevention is far less expensive than defense and remediation. Implement a quality control program that includes pre-construction reviews, in-progress inspections, and completion checklists. Require subcontractors to follow manufacturer installation instructions and document compliance. Use independent third-party inspectors for critical assemblies including waterproofing, structural connections, and building envelope installations. Maintain detailed daily logs, photographs, and inspection records. Conduct moisture testing before enclosing assemblies. Address punch list items promptly and obtain sign-off from owners and architects. Proper commissioning of mechanical, electrical, and plumbing systems prevents many post-occupancy claims.
When you receive a defect claim notice, notify your insurance broker and carrier immediately, even if you believe the claim lacks merit. Late notice can jeopardize coverage. Do not admit fault, make statements about coverage, or agree to repair without consulting your insurer and attorney. Preserve all project records including contracts, submittals, daily logs, inspection reports, photographs, and correspondence. Cooperate with your insurer investigation. If the claim involves multiple parties, coordinate defense strategies while protecting your own interests. Many defect claims are resolved through mediation before reaching trial, and early resolution typically produces better outcomes for all parties.
Construction defect claims are long-tail liabilities, meaning they may arise years after project completion. Maintain completed operations coverage continuously, as most GL policies are written on an occurrence basis and will respond to claims from prior project years as long as coverage was in force when the work was performed. Keep certificates of insurance, policy copies, and coverage documentation for at least the statute of repose period in your state. When retiring or selling a business, ensure tail coverage or extended reporting periods are in place. ALKEME helps contractors manage long-tail defect exposure through proper policy structure and documentation.
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