If you have ever faced a claim for defective construction, there is a good chance your liability insurer wrongfully denied coverage. Almost all Iowa developers and general contractors have a comprehensive general liability insurance policy. These “CGL” policies are purchased in the belief that they will protect against claims for defective construction. But once a claim is made, the builder is unpleasantly surprised when the insurance company denies coverage. Wrongful denials of coverage have cost Iowa builders millions of dollars.
For years, insurers have misinterpreted an opinion by the Iowa Supreme Court and a subsequent opinion by the Iowa Court of Appeals to claim that there is no insurance coverage for defective construction in Iowa. In a lengthy and well-reasoned decision, an Iowa court has now ruled that the insurance companies are wrong. Importantly, if you are a developer or general contractor and coverage was denied to you or a claim was made against you in the last 10 years, there is a good chance you can still get coverage.
To the frustration of many builders, insurance coverage for defective construction has been governed by the old adage “what the large print giveth, the small print taketh away.” CGL policies are written with a very broad initial grant of coverage. Builders are told that they will be covered for claims of property damage that occur within the policy period. Sounds simple. But when a claim is made, the builder receives a “reservation of rights” letter setting forth a dozen or more complicated reasons why the insurance company doesn’t owe coverage after all. Chief among these is the argument that in the insurance world an “occurrence” requires an “accident,” and defective construction can never be an accident. Frequently, the insurance company uses this argument not only to deny coverage for the claim, but also to refuse to defend the builder. Most builders decide it is too expensive to fight both the defect claim and their own insurance company, so the company’s position is never challenged.
Recently, an insurance company’s denial of liability coverage for defective construction was challenged in Iowa, and the insurer lost. The trial court ruled that the developer/general contractor’s CGL policy afforded coverage for claims based on defective work by a subcontractor. The court rejected numerous other defenses raised by the insurance company. After a 3-week trial, the jury awarded more than $12 million to the developer/general contractor represented by Belin McCormick P.C.
The legal and factual issues surrounding insurance coverage for defective construction are many and complex. But if you have faced a claim for defective construction in the last 10 years, you should talk to a knowledgeable attorney about your potential right to insurance coverage.
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