Editor's note: The following article contains information regarding CNA's insurance policies. CNA did not pay for nor request the information regarding its policies be provided. The recommendations made are that of the author alone.
Hundreds of court cases have addressed whether a claim against a roofing contractor alleging defective workmanship is covered by commercial general liability (CGL) insurance. Because CGL polices are triggered by an occurrence that is defined as an accident, many insurers have argued a lawsuit against a contractor based on defective workmanship is not covered by CGL insurance because defective workmanship is not considered an accident and, therefore, does not meet the occurrence requirement in CGL policies. Insurers also have sought to avoid coverage on the grounds that only claims alleging negligence are eligible for CGL insurance and claims based on an alleged breach of contract are not covered by CGL insurance.
Fortunately for contractors, the outcome of recent court cases indicates contractors have coverage for defective workmanship, bodily injury and/or property damage. Repair or replacement of insured contractors' work is not covered by CGL policies because they contain a "your work" exclusion. In other words, a roofing contractor's CGL policy will apply to a claim alleging defective workmanship as long as the claim includes some property damage other than the roof itself, such as damaged personal property inside the building or damage to other parts of the building, but will not apply to a claim seeking only replacement or repairs to the roof.
Errors and omissions insurance
In 2014, CNA, Chicago, began offering an insurance policy that includes coverage for repairs or replacement of roofs caused by a contractor's defective workmanship. CNA's "E & O" policy provides coverage for errors and omissions liability and pollution incidents and is intended to meet a need of trade or specialty contractors that was not covered by traditional professional liability or CGL policies.
If you have CNA's errors and omissions liability coverage, it will be triggered by a claim against you alleging a "wrongful act" while you were acting in the business capacity identified in the policy that resulted in property damage to "your work" or an "installed product."
The policy defines wrongful act as a "negligent act, error or omission" by a contractor or the use of defective materials or products in the work. The policy's "your work" definition includes coverage for "warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work."
Although insurance coverage of your work caused by your defective workmanship or use of defective materials or products is the most significant and unique aspect of CNA's errors and omissions policy, the wrongful act definition also includes a negligent act, error or omission when design services are being provided by a person employed or retained by you who is duly licensed in the applicable jurisdiction.
The CNA policy, which can be purchased with limits of liability up to $5 million, covers claims alleging defective workmanship, defective materials or defective design services regardless of whether a legal claim is brought as a negligence, breach of contract or warranty claim. Defective workmanship includes failure to comply with applicable contract specifications.
If, for instance, in a lawsuit against you it is alleged you breached the contract by failing to adhere insulation boards or a roof membrane adequately in contravention of contract specifications, damages for repairing or replacing the roof would be covered. If a roof failed a wind-uplift test and the cause of the failure was found to be a result of your workmanship or a material deficiency, the policy will apply.
The CNA policy is not intended to cover defective work of construction subcontractors retained by the insured trade contractor.
The policy excludes material or product substitutions that were not specified in the contract documents unless there has been written authorization for a substitution. The policy also does not cover job-safety obligations, delay claims (claims for liquidated damages or actual delay damages), losses that result from bid inaccuracies, cost estimates being exceeded or failure to maintain contractually required insurance. The policy is not intended to cover inadequate project management or construction management services.
The policy includes coverage for claim expenses resulting from a wrongful act that is covered by the policy. Claim expenses include attorneys' fees, experts' fees and other costs incurred while investigating, defending and appealing a covered claim. Claim expenses come from within the coverage and erode it.
For example, if a policy has a $2 million limit and defense costs are $150,000, $1.85 million remains available to contribute to a settlement or pay a judgment. As with CGL policies, CNA has the right and duty to investigate and defend any covered claim, settle any claim, and designate or approve counsel to defend a claim. If a claim is subject to mediation or arbitration, CNA is entitled to exercise the contractor's rights in the choice of mediators or arbitrators and in the conduct of the mediation or arbitration proceeding.
Premiums and self-insurance
Per the policy terms, CNA is to pay all amounts in excess of self-insured retention and up to the limit of liability stated in the policy the contractor is legally obligated to pay. The insured contractor is required to contribute to the cost of the defense and a negotiated settlement or judgment rendered against the contractor through payment of the self-insured retention and possibly a co-insurance percentage stated in the policy's declarations. In CNA's marketing literature, the minimum premium for a policy with a $1 million limit is $3,200 for errors and omissions coverage only and $4,200 for errors and omissions and pollution coverage combined.
The amount of the self-insured retention is based on a contractor's business volume. There is a minimum self-insured retention of $3,000. For a contractor whose annual sales volume is less than $2 million, the minimum self-insured retention would be in the $3,000-$5,000 range. For a contractor whose volume is between $2 million and $10 million, the minimum self-insured retention would be between $5,000 and $10,000.
For a large contractor with annual construction revenue between $10 million and $50 million, the minimum self-insured retention would range between $10,000 and $25,000. CNA also may include a co-insurance percentage, which generally is 5 percent or lower and not included in many cases.
By way of example, the self-insured retention for a contractor with contract revenue between $50 million and $100 million might be $25,000 on a $2 million errors and omission policy without pollution coverage and the co-insurance percentage per claim might be 2.5 percent on the first $1 million in damages above the applicable self-insured retention.
Rigid time requirements
Before coverage is granted, the strict time requirements stated in the CNA errors and omissions policy governing the occurrence and reporting of claims must be satisfied.
First, the wrongful act that is the basis of the claim must have taken place during the period the policy was in effect. Specifically, the wrongful act must have happened on or after the retroactive date stated in the policy. Usually, the retroactive date will be the policy's commencement date. Assuming the contractor continuously renews the policy, the retroactive date would be the date the contractor first purchased the policy as long as the contractor continuously maintains the policy. A lapse in coverage will result in a new, later retroactive date. CNA has indicated if a contractor purchased contractors errors and omissions coverage from another insurance carrier in the past and never had a lapse in coverage, CNA will use the first date of continuous claims-made coverage as the retroactive date and will honor prior carrier retroactive dates.
Second, CNA's policy applies only to a claim first made against a contractor during the policy period. If a contractor knew or should have known an act, error or omission might reasonably be expected to result in a claim at the time he or she first purchased the policy or if the contractor previously gave notice to a prior insurer, the CNA policy does not apply.
Unlike CGL insurance policies that are "occurrence" policies, the CNA errors and omissions policy is a "claims-made" policy. An occurrence policy provides coverage for an indefinite time period. If the CGL policy was in effect at the time of the occurrence or act that triggered coverage, the CGL policy applies even if a claim is brought years after the end of the policy period, after the contractor has purchased CGL insurance from another insurance carrier or after the contractor no longer is in business. A claims-made policy requires the claim to the insurer must be made during the policy period.
Third, for the CNA policy to apply, the claim also must be reported promptly and in writing to CNA within the policy period or no later than 60 days after expiration or termination of the policy. CNA has indicated an optional extended reported period can be obtained for one to five years. CNA offers an extended reporting period for one, three or five years for an additional policy premium of 100 percent of the current policy term premium, 190 percent of the policy term premium and 250 percent of the policy term premium, respectively.
Because claims against roofing contractors commonly are asserted several years after construction has been completed, purchasing a claims-made policy that requires the wrongful act and claim to be made and reported during a one-year policy period is of limited value, applying only to claims that arise during or soon after installation. To gain the most benefit from this policy, you should intend to purchase the policy each year and maintain the policy continuously without interruption.
CNA offers its errors and omissions coverage as part of a policy that also covers pollution incidents. Many contractors already have or desire pollution policies. Contractors can purchase the CNA coverage without pollution coverage. For a roofing contractor, CNA has reported the pollution premium usually is in the range of 35 to 45 percent of the total premium for the policy.
CNA offers this policy in all 50 states and the District of Columbia and apparently is the only nationwide insurance carrier that offers insurance coverage to contractors for replacement or repairs to the insured contractor's work caused by defective workmanship and defective materials.
If you desire to obtain this added coverage, investigate obtaining CNA's errors and omissions coverage and check with your insurance adviser to see whether there are other insurers who provide similar coverage. The CNA errors and omissions policy helps fill a substantial gap in a contractor's overall insurance and risk management program. If a lawsuit or other claim is brought against a roofing contractor for breach of contract or negligence seeking damages for roof replacement, this coverage could prove to be extremely valuable.
Stephen M. Phillips is a senior partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Siegel.