Wally Zimolong | Supplemental Conditions | November 21, 2018
I received several emails regarding the expose by Caitlin McCabe and Erin Arvedlund in the Philadelphia Inquirer titled “Rotting Within.” The story outlines the epidemic of defective stucco and other “building envelope” issues in Southeastern Pennsylvania that is causing homes to literally rot from within. Having litigated several of these cases, they are frustrating for both the attorneys that handle them and the homeowners who must deal with the reality that their home is rotting away. The story points to the multiple (and all too common) causes for the epidemic: unskilled subcontractors, lack of oversight and care, and poor construction drawings. The is no quick solution to the crisis and litigation regarding these defects is sure to proliferate.
However, there is one potential solution that the story does not cover and which could help alleviate some of the challenges homeowners face in recovering damages for their claims. The Pennsylvania Legislature must act to change the insurance laws in Pennsylvania to make defective construction covered by a developer’s, contractor’s, and subcontractor’s commercial general liability policy (“CGL”). Most homeowners and many attorneys incorrectly assume that defective construction is covered by insurance. This assumption makes sense. If someone operates a car in a negligent manner and hits your car and causes damage, the negligent driver’s insurance company with cover your loss. In reality, Pennsylvania courts follows a minority of states that holds that generally speaking defective workmanship is not a “covered occurrence” under an insurance policy. (There are several exceptions to this rule and thorough discussion is beyond this blog post and would probably bore you.)
Why is coverage for defective workmanship so important (beyond the obvious reasons)? First, many contractors and subcontractors are small businesses with little to no assets. Therefore, even when liability is clear, many times plaintiffs are faced with the prospect of a judgment but no ability to collect on it. However, insurance policies contain an indemnification provision that require the insurance company to pay a judgment against its insured. Second, most insurance companies take the position that because the claims are not covered by a policy they have no indemnification and, therefore, no obligation to pay a judgment against their insured. This means insurance companies feel no pressure to settle a claim. The insurance companies believe they will not be required to pay a judgment anyway, so why settle.
Critics (including most contractors and home builders) will howl that making coverage of defective workmanship claims mandatory will increase the cost of insurance with the cost being passed on to the home buyer. They are right. But, I doubt the homeowners that have been impacted by this crisis would mind paying a few dollars more for a home knowing an insurance company would step up to the plate to cover their damages. (Plus,any additional cost would be negligible anyway when prorated over the a typical thirty year mortgage).
Until then, I hope the attorneys mentioned in the article that are prosecuting these claims get their clients the justice they deserve.