Product liability insurance in the construction industry – of paramount importance
Dec 31, 2018
Upon completion and handover of a construction project, including partial handover, the contractor’s all-risk insurance policy you purchased ceases to provide coverage. Except for a defined maintenance period, which addresses damages that may occur during the maintenance work itself, the contractor’s policy does not cover liability arising from construction defects that cause damage to the person or property of a third party.
For example, if a fire breaks out in an apartment in a residential building you previously delivered, due to a fault in the electrical panel that was defective at the time of handover, you may be liable to pay compensation. This includes compensation for injuries suffered by residents as a result of the fire, as well as compensation for damage to the building and the apartment’s contents. It should be emphasized that such compensation is in addition to the costs required to repair the defect itself (the electrical panel, in this case), which constitutes a separate claim entirely.
In the absence of an effective product liability insurance policy, you would have to face such claims out of pocket, including both legal expenses and compensation payments, which can reach substantial amounts—particularly in cases of serious or permanent bodily injury and/or death.
Furthermore, if the resident(s) were independently insured through their own policies (e.g., a home and contents insurance policy), you may be exposed to a subrogation claim by their insurer. Without a product liability policy on your part, you would be required to cover legal defense costs and compensation to the injured parties from your own funds.
Source of Liability – Product Liability Law
The date of the verdict – March 2019.
What does the policy cover?
A product liability policy covers compensation for bodily injury or property damage caused to a third party after the building has left the possession of the contractor (insured) and it also applies to parts whose construction has been completed and delivered for use.
Two cumulative conditions allow the policy to be activated on the day of the order: physical damage to property or body (1) that was the result of an unexpected accident (2).
What about the maintenance period in the contractor's policy? As noted above, the contractor's work policy covers the maintenance period only for damages that will be caused as a result of the maintenance work itself.
Although there are additional elements in the definition of the maintenance period in the contractor's policy that may provide additional protection, the contractor or developer should not rely on them. The fine print plays too important a role here, and the chance of being reimbursed from the contractor's policy in such cases is small.
It should also be noted that the basis of coverage in a product liability policy is based on the "date of filing the claim." That is, if a claim is filed against the contractor based on product liability, the coverage will be valid only if the policy is valid on the date the claim is filed, and is also included in the retroactive period for coverage, which is set forth therein. Exceeding the limits of the above provision nullifies the right to insurance coverage.
A product liability policy covers compensation for bodily injury or property damage caused to a third party after the building has left the possession of the contractor, the insured. It also applies to completed sections that have been handed over for use.
Two cumulative conditions must be met for coverage to apply: there must be physical damage to property or bodily injury (1), resulting from an unforeseen accidental event (2).
What about the maintenance period under the Contractors’ All Risks policy? As noted above, that policy covers the maintenance period only for damage arising from the maintenance work itself.
Although the provisions defining the maintenance period contain additional elements that may offer further protection, contractors and developers should not rely on them. The fine print plays too significant a role here, and the likelihood of recovering under the Contractors ’ All Risks policy in such cases is low.
It is also important to understand that product liability insurance operates on a “claims made” basis. If a product liability claim is brought against the contractor, coverage will apply only if the policy is valid on the date the claim is made and the claim falls within the retroactive coverage period specified in the policy. Falling outside these parameters eliminates the entitlement to insurance coverage.
When it comes to retroactive coverage, it should be understood that this is not a trivial matter. Insurance companies are not averse to providing retroactive coverage for many years, and they will not provide insurance coverage to contractors and developers who have operated for decades without a valid product liability policy, except in very exceptional cases.
The recommendation is (of course) - "One hour earlier is better." It is advisable for the contractor/entrepreneur to purchase a comprehensive product liability policy upon commencement of his activity. He must maintain the insurance continuity of the policy when switching between insurers, while ensuring appropriate retroactive coverage.
An important issue to emphasize regarding retroactive coverage in a policy is knowledge or lack of knowledge of the insured events. According to the Supreme Court's ruling, policies that provide retroactive coverage only apply to insured events that neither party knew about at the time of entering into the contract.
As stated, "The retroactive principle therefore concerns the date of the creation of the cause, but not the date of the certain and obvious realization of the risk, and there is no reason to allow the insured to obtain retroactive coverage for damage that had already occurred at the time of the conclusion of the contract, and the insured already knew about it" (AA 1530/02, emphasis not in the original).
Not only to the past but also to the future
The recognition of the importance of a product liability policy does not, of course, only concern the past, but – like all insurance in the construction sector – has fateful implications for the future. Defects in a building may cause accidents (sudden and unexpected events) even after many years, and the contractor's liability is long-term in the broadest sense of the word. This is a liability that is often derived from the Sales Law (apartments), and which extends over 10-20 years or more.
Retroactively effective
Retroactive coverage is not a trivial matter. Insurers are reluctant to provide coverage extending many years into the past. Except in highly exceptional cases, they will not provide such coverage to contractors and developers who have operated for decades without a valid product liability policy.
The recommendation is, of course, “the sooner, the better.” Contractors and developers should purchase comprehensive product liability insurance when they begin operating. They must maintain continuity of coverage when switching insurers and ensure that appropriate retroactive coverage remains in place.
An important issue concerning retroactive coverage is whether the parties knew about the insured events. According to Supreme Court case law, policies providing retroactive coverage apply only to insured events whose occurrence was unknown to either party when the insurance contract was entered into.
As the Court stated: “The retroactive element therefore concerns the date on which the cause of action arose, but not the date on which the risk definitively and manifestly materialized. An insured should not be permitted to obtain retroactive coverage for damage that had already occurred, and of which the insured was already aware, when the contract was concluded” (Civil Appeal 1530/02; emphasis not in the original).
Looking to the future as well as the past
The importance of product liability insurance naturally extends beyond past events. Like all construction insurance, it also has significant implications for the future. Building defects can cause accidents, meaning sudden and unforeseen events, even many years later. A contractor’s responsibility is long term in the broadest sense. This liability often arises under the Sale (Apartments) Law and may extend for 10 to 20 years or more.
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