Local Law Blogs

Make Sure to Consider Your Developer's Commercial General Liability Insurance When Negotiating or Litigating Your Community's Transition

Condominiums and HOAs often proceed in transition with the concern that it may not get defects fixed, damages paid and/or funds contributed by developers because a developer may be insolvent, bankrupt, an inactive "shell" company or otherwise asset-less. While it is always good to enter a transition with some trepidation, any board that enters into a transition with any developer - whether solvent or insolvent - without considering the existence and provisions of its developer's commercial general liability policy ("CGL"). It is very often the case that a carrier via its CGL will have to pay developer - and then an association - for damages that resulted from faulty work done by that developer's subcontractor.

In just the past 12 months courts throughout the country have held carriers, via CGL, liable for construction-related damages. Most recently, the Florida Supreme Court unanimously ruled that a carrier must pay damages resulting from a subcontractor's defective work. In this case, the court considered whether a CGL, issued after 1986, and to a general contractor, provided coverage when a claim is made against the contractor for damage to the completed project caused by a subcontractor's defective work. In this case, after the sale of homes, damage to foundations, drywall and other interior portions was discovered. There as no dispute that the cause of this damage was a subcontractor's use of poor soil and improper soil compaction and testing. Pursuant to the CGL, the carrier agreed that there was coverage for owner personal property, but not for the cost of repairing the structural damage to the homes (i.e., foundation and wall damage).

The Florida Supreme Court ruled against the insurance carrier, concluding that defective work performed by a subcontractor that cause damage to the developer's completed project, and is neither expected nor intended from the standpoint of the developer can constitute 'property damage' caused by an 'occurrence' as those terms are defined in a standard form CGL. In turn, a claim mad against the developer for damage to the completed project cause by a subcontractor's defective work is covered under a post-1986 CGL. Since the CGL included a subcontractor-related exception to the CGL's main exclusion, coverage existed.

It is imperative that every board consider the CGL of its developer, when faced with construction defects - especially since a developer's work is almost always performed by a subcontractor. Considering, and being mindful of, this during transition can increase a community's leverage, and options, and lead to a more successful transition.

For more information please contact David J. Byrne, Co-Chair of the Community Associations Practice Group at: dbyrne@stark-stark.com, or review the Florida case,  United States Fire Insurance Co., etc. v. J.S.U.B., Inc., et al (no. SC05-1295).

Full post as published by New Jersey Law Blog on June 12, 2008 (boomark / email).