Approximately 650,000 shekels for construction defects discovered after delivery
Sep 24, 2019
Case No.: 52432-11-13
By: Miri Lehar, Vice President, and Itzik Simon – Leading Agency for Construction Insurance
The handover of a building with construction defects can give rise to multi-million claims against anyone involved in the construction process – from the developer or management company that advanced the project, through the planners or supervisors, and of course, the executing contractor.
In many cases, once liability is established, a discussion follows regarding the allocation of responsibility for paying the compensation. A prime example of this can be seen in the following judgment, handed down by the Nazareth Magistrate’s Court in February 2019.
Parties to the case – The lawsuit was filed by a married couple who purchased a property in a rural settlement, following the discovery of serious construction defects in the house after handover. The defendants were the contracting company and its owners, the construction supervisor, and the management and development company.
Tel Aviv 52432-11-13
By: Miri Lebhar, VP, Itzick Simon - the leading construction insurance agency
Delivering a building with construction defects could result in huge claims against everyone involved in the construction process, from the developer or management company that promoted the project, to the planners or supervisors, and of course, the operating contractor.
In many cases, once liability is proven, there will be a discussion regarding the division of responsibility for paying compensation. An excellent example of this can be seen in the following ruling, which was handed down by the Nazareth Magistrates' Court in February 2019.
Parties to the proceedings – The lawsuit was filed by a couple who purchased a property in a rural community, following serious construction defects discovered in the house after delivery. The defendants are the contracting company and its owners, the construction supervisor, and the management and development company.
Circumstances of the case
At the heart of the lawsuit was the plaintiffs' home, which was built within the framework of a kibbutz expansion neighborhood in the north of the country. A neighborhood within which dozens of housing units were built simultaneously according to "model construction." The project was managed and promoted by a development company, and carried out with the help of a contracting company and a supervisor.
Upon handover of the apartment, cracks were discovered in the walls of the house, which the contractor carried out three repairs on in the months following handover. However, the repairs only involved painting and filling in cracks, and did not solve the problem.
In the legal proceedings between the parties, the court appointed an expert engineer on its behalf, who submitted a professional opinion in which various defects were found in the house. Mainly cracks which indicated, in the words of the engineer, " a structural failure originating in the area of the foundation and the failure to separate the suspended floor from the ground ." Later, the court also appointed an appraiser who estimated the decrease in value of the property at a rate of 10% after the repairs.
How much will be paid and who will pay? The lawsuit was accepted and it was determined that the plaintiff couple is entitled to compensation in a total amount of approximately 650 thousand shekels. Approximately 316,000 shekels for the cost of repairing the construction defects, 180,000 shekels for depreciation, 14,000 shekels for alternative housing (including evacuation and related expenses), 42,000 shekels for emotional distress and 47,000 in overhead costs. The defendants were ordered to pay 42,000 shekels in legal costs and attorneys' fees.
The main issue of the case was the division of liability for payment. The court discussed the matter at length and concluded that the defendants would be liable to the couple as " joint wrongdoers ." This was because it was not possible to determine the extent of the independent contribution of each of the defects separately.
Most of the responsibility was placed on the executing contractor, who was charged 60% of the amount. The balance was placed on the shoulders of the supervisor (who served as both the chief supervisor and the associate supervisor) at a rate of 30%, and the development and management company at a rate of 10%.
The date of filing the lawsuit – November 2013.
The date of the verdict – February 2019.
At the heart of the lawsuit was the plaintiffs’ home, built as part of an expansion At the heart of the lawsuit was the plaintiffs’ house, which was built as part of an expansion neighborhood of a kibbutz in northern Israel. In this neighborhood, dozens of housing units were constructed simultaneously according to a "model-based construction" approach. The project was managed and advanced by a development company and executed with the assistance of a contracting company and a supervisor.
At the time of handover, cracks were discovered in the house’s walls. The contractor carried out three repairs in the months following the handover. However, these repairs were limited to painting and filling in the cracks, and did not resolve the underlying problem.
In the legal proceedings between the parties, the court appointed an expert engineer who submitted a professional opinion identifying various defects in the house. Primarily, cracks that, according to the engineer, indicated a structural failure originating in the foundation and the lack of separation between the suspended floor and the ground. Subsequently, the court also appointed an appraiser who assessed a 10% decrease in the property’s value following the repairs.
How much will be paid and by whom? The lawsuit was accepted, and it was determined that the plaintiffs were entitled to total compensation of approximately 650,000 NIS. This included about 316,000 NIS for the cost of repairing construction defects, 180,000 NIS for loss of value, 14,000 NIS for alternative housing (including relocation and related expenses), 42,000 NIS for distress, and 47,000 NIS for overhead costs. The defendants were also ordered to pay 42,000 NIS in legal fees and attorney costs.
The main issue in the case was the allocation of responsibility for the payment. The court addressed this matter at length and concluded that the defendants would be held jointly liable toward the plaintiffs as “joint tortfeasors,” since it was not possible to determine the independent contribution of each defect separately.
Most of the responsibility was assigned to the executing contractor, who was liable for 60% of the amount. The remainder was allocated as follows: 30% to the supervisor (who served both as senior and on-site supervisor) and 10% to the development and management company.
Date of filing the lawsuit – November 2013. Date of judgment – February 2019.
Construction defects can be fertile ground for filing tort claims. In most cases, the claim will be filed against all the professional parties involved in the project, including the planners, developers, executive contractors, subcontractors, supervisors, etc. Therefore, every professional party entering the gates of a construction site must be well-equipped with an insurance policy.
As can be seen from the above ruling, when the court has difficulty determining the division of liability and individually isolating the degree of independent contribution of each defect, it is quite possible that the defendants will be determined to be "jointly wronged."
Section 11 of the Torts Ordinance [New Version] states that " If any two or more persons are liable under the provisions of this Ordinance for a particular act, and the act is a tort, they shall be jointly liable for that act as joint tortfeasors and may be sued for it jointly and severally ." In court rulings, it is customary to divide these events into three types:
- Common wrongdoers.
- Individual wrongdoers, who caused one indivisible harm.
- Separate wrongdoers who caused separate damages.
To the extent that it is determined that the defendants are jointly or severally tortious and have caused indivisible damage, the liability for compensation will be for the "full damage" in a "joint and several" manner. This is what happened in the above case. The court determined that the construction defects cannot be divided independently, and then determined that all defendants will be liable for compensation. In the next stage, the court even outlined the division of liability between them.
The legal aspect
The insurance aspect
Below we will address the insurance aspect in the above case from three angles: insurance for the contractor's work, the contractor's professional liability insurance, and the supervisor's professional liability insurance:
Contractors' insurance - The contractors' insurance policy does not cover "construction defects" (for many reasons that this is not the place to go into detail), however, damage that occurred during the construction period - and was discovered during the maintenance period of the policy, may be covered. However, it should be noted that the deductible for direct damage caused as a result of poor design/poor workmanship or defective materials - involves a significant deductible (100,000 NIS) for a single event/incident. Therefore, in most cases, such construction defect claims do not reach this threshold in the contractor's policy.
Contractor's professional liability insurance - The professional liability policy for contractors is a complex policy and is not easy to claim and obtain relief from. On the one hand - it is intended to cover claims for negligent acts and/or omissions of the contractor, and on the other hand, in most cases there are exceptions that greatly limit the coverage it may provide - such as: a repeat work exception. In the case we are discussing now - it seems that a professional liability policy would certainly provide coverage for financial damages, even if here too the deductible in most insurance companies is approximately 100,000 NIS.
The supervisor's professional liability insurance - for the supervisor. Since he is not covered for his professional liability by the developer's or contractor's policy (which, as mentioned, is doubtful whether it will provide a response to this type of claim), he must purchase a professional liability policy specifically for the engineering professions, intended to cover the professional liability of engineers, technicians, etc. - preferably one hour in advance.
We will address below the insurance aspects of the above case from three perspectives: Contractor’s All Risks (CAR) insurance, Contractor’s professional liability insurance, and Supervisor’s professional liability insurance.
1. Contractor’s All Risks (CAR) insurance – A standard CAR policy does not cover “construction defects” (for many reasons, which are beyond the scope of this summary). However, damage that occurred during the construction period and is discovered during the policy’s maintenance period may be covered. It should be noted, however, that the deductible for direct damage caused by poor design, defective workmanship, or faulty materials is substantial (around 100,000 NIS per event/claim). As a result, in most cases, claims for construction defects do not reach the threshold required under the CAR policy.
2. Contractor’s professional liability insurance – A contractor’s professional liability policy is complex and not easy to claim. On one hand, it is intended to cover claims arising from negligent acts or omissions by the contractor. On the other hand, most policies contain exceptions that significantly limit coverage, such as exclusions for rework. In the case under discussion, it seems that the professional liability policy would certainly provide coverage for financial damages, although here too, the deductible in most insurance companies is around 100,000 NIS.
3. Supervisor’s professional liability insurance – Regarding the supervisor, since they are not covered under the developer’s or contractor’s policies (which, as mentioned, are unlikely to respond to this type of claim), they need to obtain a dedicated professional liability insurance policy for engineering professionals, designed to cover the professional liability of engineers, technical engineers, and similar professions – and preferably sooner rather than later.
