Insurance considerations
The policies a board reaches for first are usually the ones that pay the least.
An association's master insurance policy usually excludes the cost of the defect itself, and the contractor's general liability policy usually excludes their own bad work too. Coverage exists mainly for damage the defect causes to other property, and for board members personally through D&O insurance, so read the actual policy before assuming anything is covered.
Your master policy usually will not pay to fix the defect itself
The board's first instinct after a defect surfaces is often to file a claim on the association's own master property policy. That usually does not work for the defect itself. Property policies, including HOA master policies, commonly carry a faulty or defective construction exclusion covering planning, design, workmanship, and construction.
"Faulty, inadequate or defective: (1) Planning, zoning, development, surveying, siting; (2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction..."
Source: Ensuing Loss: Getting Around a Property Policy's Defective Construction Exclusion, IRMI
There is one exception worth knowing: an ensuing loss provision. If a covered cause of loss results from the excluded defect, the resulting damage can still be covered even though the original defect is not. A named community association attorney states that many master policies exclude or significantly limit construction defect coverage, and the exact wording, limits, and endorsements vary by carrier and policy, so check the association's actual policy language rather than assuming.
The contractor's own liability insurance usually will not pay either
Boards often assume the contractor's commercial general liability (CGL) policy will pay to redo bad work. Standard CGL policy language specifically excludes property damage to the contractor's own completed work, through what is called the "your work" exclusion.
"This exclusion [exclusion l.] does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."
Source: The Hazards of Products and Completed Operations: Understanding the Fundamentals, IRMI
The exclusion has a carve back: if a subcontractor performed the damaged work rather than the general contractor itself, coverage can be restored. Whether that carve back applies to a given claim depends on the exact policy the contractor carries, not on the general rule alone.
Naming the HOA as an additional insured, and who collects afterward
An association can sometimes reach a contractor's CGL policy directly by being added to it as an additional insured, meaning it can make claims under that policy the same way the contractor can.
"The only way to secure additional insured status for the HOA is to schedule it individually and have your client pay the corresponding premium."
Source: Including an HOA as Additional Insured on Contractor's CGL, IA Magazine
Standard endorsement forms differ on whether a written contract with the association has to exist before that status attaches, so the contract and the endorsement need to be checked together, not assumed. Separately, once the association's own insurer pays a covered loss caused by a contractor, that insurer can step into the association's shoes and pursue the contractor for what it paid out, a process called subrogation. Waiver of subrogation clauses in bylaws or policies are the main obstacle to that recovery, and how they play out depends heavily on state law, so this is worth confirming with the association's insurance broker or counsel.
D&O insurance protects the people, not the building
None of the coverages above protect an individual board member accused of mishandling a defect issue. D&O insurance is the policy built for that.
"Construction defect. A common exclusion in newer communities. Developer transition communities should evaluate the specific construction defect carve-back language carefully."
Source: D&O Insurance for HOA Boards: What Directors Need to Know, Pro Insurance Group
D&O can protect board members personally against a claim that they were negligent in how they handled the defect issue, but construction defect is a common exclusion in newer communities' D&O policies, exactly the communities most likely to face a defect claim. A board still in developer transition should have someone read that carve back language line by line.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A pipe fails inside a wall due to defective installation, and the leak damages drywall and flooring beyond the wall itself. What will the association's master property policy likely cover?
A general contractor's own drywall work was defective and has to be redone at the contractor's expense. Will the contractor's CGL policy pay for that repair?
A board member is personally named in a lawsuit alleging negligence in how the board handled a construction defect claim. What coverage might protect that board member personally?
Sources
- General Contractors and Construction Managers Can Get Insurance Coverage for Construction Defect Claims, Anderson Kill P.C.
- The Hazards of Products and Completed Operations: Understanding the Fundamentals, IRMI
- Ensuing Loss: Getting Around a Property Policy's Defective Construction Exclusion, IRMI
- Construction Defect Claims and Insurance Defense: What Community Associations Need to Know, KSN Law Firm
- Including an HOA as Additional Insured on Contractor's CGL, IA Magazine
- Subrogation and Intervention in Construction Defect Case Involving Water and Mold, IRMI
- Subrogating Condominium Damage, Matthiesen, Wickert & Lehrer, S.C.
- D&O Insurance for HOA Boards: What Directors Need to Know, Pro Insurance Group
Construction Defects
Once you know what your policies will and will not cover, the next question is how a settlement gets spent responsibly. See Settlement considerations.
Whether a master policy, a contractor's CGL policy, or a D&O policy actually covers a given claim depends on that policy's specific endorsements and exclusions, and whether a subrogation waiver applies depends on state law and the association's own governing documents.