The facts
A major project involved the construction of a large underground parking garage with two condominium towers. The project took 30 months to complete, and no claims were reported during construction.
Four (4) years after the project was completed, the condominium corporation hired a building envelope inspector. The inspector found some deficiencies in the work of several subtrades. The condominium corporation initiated an action against the developer, the general contractor and several of the subtrades, alleging faulty workmanship as well as property damage.
How can a wrap-up policy be triggered several years after a project completion? A number of factors come into play:
- Wrap-up policies typically have 12 or 24 months completed operations coverage. The intent of this coverage is to indemnify the insured for occurrences in the first 12 to 24 months following the completion of the construction project.
- The Supreme Court of Canada ruling from 2010 (Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada) concluded that an insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the policyholder for the claim. In other words, it is only required that there be a mere possibility of the claim falling within the insurance policy, and coverage will be triggered.
- In the case above, despite the action being taken after expiry of the completed operations period, the policy is still triggered because the allegations are for faulty workmanship and property damage. The allegations are that the property damage began within the completed operations period.
- The statement of claim was broadly worded by the plaintiff’s counsel, triggering the wrap-up policy and the duty to defend. Had the allegations only been for faulty workmanship (which is excluded by the wrap-up policy), the wrap-up policy would not have responded.
Wrap-up policies typically have the project owner and general contractor as ‘named policyholders’ and include all the subtrades as additional insureds. Furthermore, wrap-up policies include cross liability and severability of interest clauses, meaning it’s as if each policyholder had access to their own policy. Due to the cross liability and severability of interest clauses, a separate legal defence had to be provided to each of the defendants, tremendously inflating the overall claim cost.
The insurance claims adjuster attended the site to investigate the allegations and found faulty workmanship by several of the subtrades which led to resulting property damage to some of the units and common areas. All the subtrades involved in the allegations were new to the general contractor and were the low bidders on the subcontracted work.
The result
It took 4 years to resolve the action and the claim was finally closed 8 years after the completion of the project.
The total claim cost was over $2 million including settlement and defence costs. The defence costs were almost as much as the actual amounts paid in the settlement because of the legal fees defending the various policyholders under the wrap-up policy (75% of which went to defend several subcontractors that performed the faulty work). The loss was tagged to the general contractor’s loss experience as they purchased the wrap-up liability policy.
Risk factors
On larger construction projects, general contractors must obtain bids from sometimes dozens of subtrades. Going with the lowest bid is not always the best choice. Evaluating a number of factors, such as price, reputation, experience (including experience of key staff) as well as product choices, is key in making a final decision on your subcontractors.
Risk factor #1
Evaluating all factors in a subcontractor’s bid is key, do not focus on price alone. Reputation, experience (including experience of key staff) as well as product choices are key to having a construction project run smoothly.
Risk factor #2
Condominium projects such as this one are typically covered by a provincial new home warranty program.
For example: Tarion in Ontario. There are different warranty periods for the different parts of the building—such as 2 years for defects in materials and labour, 5 years for defects in the building envelope and 10 years for structural defects (not all provincial warranty programs are the same). These warranty periods are important because condominium corporations will typically schedule inspections of the building coinciding with their warranty coverage, and specifically to identify any deficiencies.
Even a solidly constructed building will likely have at least a few deficiencies highlighted by an inspection. The provincial warranty provider will sometimes be named in the action but some of the items claimed by the condominium corporation will invariably be excluded by the warranty. Therefore, it is common for the general contractor, the developer, the subcontractors and even the design professionals to also be named in the action.
Due to inspections that are completed years after the project completion, adequate supervision during construction is imperative to ensure all steps in the construction process are completed correctly the first time around—and to minimize the risk of deficiencies that can develop later.
Risk factor #3
Some wrap-up policies will protect the loss ratio of the owner and general contractor (i.e., the purchasers of the wrap-up policy) through a coverage called Contractor’s Completed Operations Excess (CCOE). This coverage stipulates that the wrap-up policy is excess over the subtrades’ own annual Commercial General Liability (CGL) policies. This means that in a claim situation as described above, the subtrades responsible for the poor workmanship will have their own CGL policies respond to the loss, lowering the loss ratio for the project owner and the general contractor. A lower loss ratio for the ‘named policyholder’ (the project owner and the general contractor) will eventually result in premium savings when purchasing future wrap-up policies.