Pre-empting Defect Claims By Pre-Proving Work

Developers and contractors, and the insurance companies that write developer and contractor CGL policies, can help minimize and possibly even prevent defects and defect claims with some elementary and relatively inexpensive quality control procedures. Many of these procedures are already well within the lexicon of the construction industry but as a rule are not employed especially in the multi-family housing development industry. Given the enormous costs of construction defects lawsuits, it is unfortunate that developers and contractors regularly fail to incorporate readily available quality control and claim prevention measures that can give them some protection, and greatly reduce their costs in the arena of construction defects claims. It is surprising as well as unfortunate, that their insurers do not help them, or even somehow induce them through economic incentives to do so.

Most defect claims find their origins in catalyst issues involving water intrusion, cracks, or noise. Simple programs for self-inspection, monitoring, testing and certifying critical components offers contractors opportunities for minimizing or eliminating defects and defect claims involving these components. Indeed, any critical building component that becomes concealed during the construction process that has to be uncovered if a claim is made is a primary candidate for such a program.

For example, in the case of low-rise condominium construction, a basic cost-effective program of defect loss prevention would include:

• inspections of shear wall nailing; shear wall construction is one of the most productive areas of inquiry for plaintiff attorneys and experts. Typical defects with shear wall includes using box nails instead of common nails, driving nails too close to the edge of the plywood panel, spacing nails too far apart, or the nail head's fracturing the surface of the plywood;
• inspection of weather-resistive barrier insuring that the individual components have been adequately lapped or otherwise integrated. Leaks due to incorrect installation of the weather barrier are the primary cause of most defect claims in this type of construction;
• inspection of flashings around windows and doors insuring that they have been properly shingled into the weather-resistive barrier;
• inspection of stucco to insure it has been applied to the correct thickness, with correct jointing, and weep screeds and properly cured;
• inspection of below grade waterproofing, to insure that the system as a whole has been properly installed;
• inspection and testing of the sound attenuation components.

Inspecting and testing these components after a claim is made is very costly. Remediating defects in them is exceedingly so. Such work typically involves the partial or complete removal of finished surfaces both interior and exterior. Providing temporary quarters for owners displaced during the work, and security for their property, adds to the costs.

One of the problems with contractors or developers spending the money to "pre-prove" that their work met specifications is that such an expenditure further erodes their profit margin. Any potential reduction in awarded damages represents a savings to their insurer, not to them. There is, therefore, financial disincentive to provide these protective measures or to implement added quality control.

Insurers should recognize this fact and assist conscientious developers and contractors by establishing some sort of a rebate program, or with a rating system similar to that in the automobile insurance field that will provide an incentive for the developers and contractors to better protect themselves, and hence, their insurers.

The benefits to be gleaned from the above-described program are in direct proportion to the competence and quality of the firm or individuals chosen to do it. An independent professional firm would offer the greatest benefit and would cost the most. A "homemade" inspection and testing program would cost the least but would offer the least benefit. Obviously, in the case of a small subcontract in the range of $25,000 to $50,000, that had essential components deleted for a few thousand dollars in cost savings to the owner or general contractor, employing an independent professional at the expense of the subcontractor is not practical. On the other hand, contribution toward the expense of the best program by all those who stand to benefit from it is very practical. Designers, owners, general contractors, involved subcontractors, and their insurers, if they worked together in advance of a problem like they do in mediation after a problem, could save vast amounts of money in resolving defect claims, and could eliminate a great many of those claims before they are ever made.

There are other common sources of defect claims, in addition to the ones mentioned above, to which this system of pre-proving good work would apply, such as improper compaction of engineered fill, failure of post tensioned slabs, inadequate site drainage, and roofing, decking, and waterproofing applications. Confronting these recurring problems at the beginning of a project can save all parties the high expense associated with claim defense, inspection and testing, and remedial work and repairs.¹

¹Construction Defect Claims and Litigation (Aspen Publishers, Inc. 1995).

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