Time for a pop quiz. Answer true or false to the following four questions.
Question #1: General liability insurance and insured structural warranties do the same job?
Question #2: Insured structural warranties are a costly, unnecessary builder expense?
Question #3: Reputable builders who stand behind their work do not need structural warranties?
Question #4: If a post-sale structural issue arises, a builder’s CGL policy will usually provide financial protection?
If you answered false to all four questions, you aced the quiz! If a few tripped you up, don’t worry. Misconceptions among builders regarding commercial general liability (CGL) policies and structural warranties are common. The misunderstanding we hear most is “Insurance covers it all.” Unfortunately, that is not true and often leaves even the best builders holding bills for several thousand dollars. A sound risk management program lets liability insurance and structural warranties work together. Each does a distinct job with different coverages. That is why they work best as a team.
Risk and the Role of Commercial General Liability Insurance
CGL policies are the most common coverage for builders. Standard policies address the ABCs:
- Coverage A: Bodily Injury and Property Damage Liability – this protects a builder against losses for bodily injury or property damage to a third party arising out of non-professional negligent acts or business operations.
- Coverage B: Personal and Advertising Injury – this coverage protects the insured against liability from certain legal issues including libel, slander, copyright infringement, and invasion of privacy.
- Coverage C: Medical Payments – this coverage addresses medical payments for non-employee injuries sustained on the policyholder’s premises or during the normal course of business.
Let’s focus on Coverage A for structural defects and apply it to a real-world example.
Shifting soil around a newly constructed house causes the foundation to crack. As a result, water breaches the perimeter flooding the basement. The interior walls need restored, the contents of the homeowner’s basement replaced, and the foundation repaired.
In this scenario, most standard CGL policies would cover the costs associated with repairing the walls and replacing the homeowner’s possessions caused by the flooding. The policy also likely would cover homeowner expenses associated with losing use of the home while under repair and any builder legal defense costs should the issue head to court. However, the builder’s CGL policy probably will not cover the cost to fix the foundation itself. This is because it was a product of the builder’s work and not damage caused by an “occurrence” or accident. Most CGL policies carry this exclusion. If the foundation issue happened during a state’s statute of repose, which is generally eight to 10 years from completion of construction, the builder must make the repairs. That leaves the builder with an out-of-pocket bill for several thousand dollars. Now consider the price tag if the foundation problem exists across an entire development with hundreds of homes, or if a homeowners’ association even alleges that such a problem exists across an entire development.
In Steps the Structural Warranty
A structural warranty is an agreement that specifies the builder’s responsibilities to the homeowner related to construction quality. With typical structural warranties, the builder affirms a new home will be free of qualified structural defects for 10 years. Should a major structural defect covered by the agreement occur, the warranty provides compensation for the builder to make the repair. The warranty may also provide the builder with defense coverage in those cases where alleged major structural defects are not legitimate.
Let’s revisit the previous scenario. The structural warranty picks up where the CGL policy leaves off. Most standard structural warranties would cover the foundation repairs. But equally as important, the structural warranty could have fixed the foundation repair before the flooding occurred.
Think of liability insurance as reactive. An accident must cause damage or injury to a third party to trigger coverage. The CGL policy does not apply until the foundation crack creates flooding. A structural warranty is proactive. The agreement covers the crack before (and after) the flooding causes additional damage. As a result, builders can potentially avoid the other costs triggering their CGL policy.
Liability insurance and structural warranties offer additional builder benefits when paired together.
- Proactively correcting defects with the structural warranty prevents using the CGL policy for unnecessary damage and injury costs. That keeps loss histories cleaner and insurance premiums down.
- Insurance underwriters look favorably on builders who offer structural warranties. This can result in more favorable CGL policy negotiations.
- Structural warranties like PWSC’s Signature 10-Year Warranty offer a dispute resolution program that keeps cases out of the courtroom avoiding years of wasted time and money.
- Builders offering structural warranties are more attractive to buyers. They provide an added layer of protection for the homeowner while helping builders support and sustain customer satisfaction.
- Out-of-pocket defect costs are typically much more than the price of a 10-year warranty. Considering that one in every four new homes will experience a structural defect, warranties can be a minor investment for major protection. fi
Ready to take the next step? Talk to your insurance agent about how your CGL policy has you covered and where a structural warranty can fill in the cracks. Adding a dependable warranty provider like Professional Warranty Service Corporation levels up any risk management strategy. Our insurance-backed warranty paired with a reputable liability insurance policy gives a whole new meaning to “We’ve got you covered.”