Defective Workmanship

An allegation of defective workmanship, whether yours or that of your apprentices, employees, subcontractors or agents could leave you exposed to thousands of dollars of liability, legal costs and damages.

Insurers have different approaches to the way they cover issues of faulty workmanship. This is particularly relevant for contractors that commonly work on or around other people’s property. Which cover is the right one depends on the type of work you’re doing.

It’s worth noting up front that this area of insurance can be extremely complicated. The specific detail of policy wordings, as well as the unique circumstances of every claim, play into whether an event may be covered or not. This means the claim process can become quite legalistic in some cases, turning on the intent, definition or interpretation of specific words.

The Defective Workmanship extension to a public/general/broadform liability policy typically protects the policyholder from claims related to defects in the work they have performed. This can include issues such as faulty construction or poor-quality work that exceeds acceptable tolerances.

Some insurers require physical damage to have been caused before a claim is triggered. The policy will then repair the damage and fix the defects that caused it.

For example, if a contractor installs a faulty electrical system that causes a fire, a defective workmanship extension might help cover the costs of repairing the damage and any resulting legal claims.

Other insurers don’t require actual physical damage before a claim for defective workmanship can be made.

In both cases a defect must (among other things):

1. be something that is faulty, defective or fails to perform its function
2. be unexpected and unintentional when it was created
3. be in something you have built or supplied to your customer
4. only arise after you have completed and handed over the work to your customer

To be clear, defects that arise before you have completed the contract are not generally covered by liability insurance. During the construction process it is the contractor who is responsible for remedying defects and damage, so the customer hasn’t suffered any loss that would trigger a liability claim. Accidental damage during construction should be covered by contract works insurance. Unfortunately, contract works insurance excludes defective workmanship (although it will still cover resultant damage that flows from the defect). Effectively, there is no insurance cover available for defective workmanship during the course of construction.

A defective workmanship extension may be automatically included or can be added as an option for some trades. For other trades it may be excluded, depending on the risk profile and historical claim costs from particular occupations.

Property Being Worked On

This is specifically designed to cover damage to third party property that is or was being worked on during the contract.

For example, during a bathroom renovation the plumber forgets to crimp a connection for the shower. The walls are then sealed, waterproofed and tiled. Only during subsequent testing is a water leak discovered, with the water causing damage to the downstairs ceiling and walls. It is the property being worked on extension that kicks in to remove the tiles, repair the pipe connection and waterproof and re-tile, up to the sub-limit in the policy (usually $100,000). The resultant damage to the downstairs walls and ceiling is covered by the main policy wording, up to the main policy limit.

Depending on which insurer you’re with your policy may include one or both of the above cover extensions, or neither. There are lots of exceptions and exclusions that can apply to various circumstances, so each individual claim has to be assessed on its own merits.

There are also many other factors that go into deciding which cover is best overall for any particular trade or individual business. In some cases cover may be available under one policy that is not available in another, and vice versa. This means there’s always a risk that in opting for one option the policyholder is forgoing different cover available from another insurer. A claim may be declined by one insurer that might be covered by a different one, and the reverse applies too.

Building Defects Exclusion (Water Penetration)

Neither of the above coverages will override the blanket exclusion in all public liability policies for claims arising from water penetration, mould, rot or gradual deterioration. This area is a whole other kettle of worms!

The Building Defects Exclusion is in most (if not all) construction and liability policies these days. It stemmed from the leaky homes crisis and effectively excludes any claim where water has penetrated a building through its external envelope.  This sucks for trades who are working on this envelope, such as roofers, external waterproofers and those installing cladding. It has even been extended to deny claims from people who have accidentally penetrated existing structures while doing some small job, such as installing a heat pump, TV aerial or skylight. 

This is a typical example:

We will not indemnify You for any claim under this Policy in respect of or alleging Personal Injury or Property Damage arising out of:

a) the failure or alleged failure of any building or structure to meet or conform to the requirements of the New Zealand Building Code contained in the First Schedule of the Building Regulations 1992 or any applicable New Zealand Standard (or amended or substituted Regulation or Standard) in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system; or

b) mould, fungi, mildew, rot, decay, gradual deterioration, microorganisms, bacteria, protozoa or any similar or like forms in any building or structure.

Unfortunately, insurers are unwilling to take on the risk of water penetration following the leaky homes crisis, so damage caused in this way is not insured. They take the view that any penetration that lets water in is a breach of E2, which triggers the exclusion.

Different insurers also have different interpretations of this exclusion too. For example, most won’t cover water penetration if the cause is defective workmanship, but some cover it if the cause is accidental damage (such as cracking a tile on an existing roof). One insurer has added a specific benefit to make this clear, while others just consider it part of the way they interpret this clause.

Building Defects Exclusion (Water Penetration)

Liability for defects in design and materials is not covered by public liability insurance. However, flow on damage that results from these defects can be.

In a Nutshell

Defective workmanship cover focuses on protecting the party responsible for the work from claims related to the quality of the work performed. Some insurers only cover this if it causes physical property damage, others don’t require this. In all cases the contract must have been completed before the defect becomes known, so that a third party has suffered a loss.

Property being worked on cover is intended to protect the property itself from damage or loss during the construction or renovation process. Both types of cover are important for contractors, with each being more or less critical depending on the trade and type or work being performed.

Claims arising from external water penetration or defective design or materials are not covered.