As you may or may not have heard, there is currently a bill sitting in the New Jersey Legislature, which, if passed, would swiftly alter the landscape of commercial liability policies for New Jersey construction contractors.
The bill, found here, has been sponsored by Gary S. Schaer of District 36 and was reintroduced in January 2014. The bill has been referred to the Assembly Financial Institutions and Insurance Committee and is awaiting further review.
If passed, the bill purports to require commercial liability insurance policies to include explicit clauses defining the term occurrence. Under the bill, an occurrence must be defined as:
- An accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
- Property damage or bodily injury resulting from faulty workmanship.
Why is this bill necessary? The stated purpose of this bill is to define coverage more strictly over faulty workmanship. In the past, the Supreme Court of New Jersey has held that a commercial liability policy would not include faulty workmanship under the definition of occurrence. This exclusion left a building owner on his/her own to go after a contractor for faulty workmanship, rather than go through their insurance policy. Obviously, this creates risks that property owners need to manage, as the contractors may not be able to cover the cost of resulting damages.
Will this affect current policies? Current commercial liability policies would not be affected. It’s likely the bill would apply only to policies executed following its passage. However, it would still be prudent to agree to appropriate endorsements in the case of undefined occurrences. This is an easy, cost-effective way to reduce possible litigation costs in the future.
Will this restrict the scope of coverage? Given the current state of the bill, the answer is no. Parties to future commercial liability policies will still be able to contract around these clauses, if they wish, through appropriate exceptions and exclusions. However, contractors, insurance carriers, brokers and property owners should still be cognizant of potential alterations to the bill that could limit exceptions and exclusions to policies.
While it may seem that property owners are not as greatly affected by this pending legislation since they are not a party to the commercial liability policies, they do stand to lose or gain a great deal. What should property owners do to mitigate these risks? In suits over faulty workmanship, the property owner will likely be the party suing the contractor, either on its own claim or as to indemnify against a third-party claim. Therefore, the best way for property owners to mitigate the risk of litigation is to ensure compliance of all contractors working at their site. This would entail engaging an independent third party to review all commercial liability policies to confirm that the definition of occurrence includes faulty workmanship, or, if it has been excluded, the exclusion is known and has been properly negotiated. By engaging independent risk management consultants to handle the process and to identify the nuances of compliance, construction contractors can maintain proper review standards in order to protect property owners against losses relating to faulty workmanship.
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