Across the country, construction defect litigation is taking a toll on contractors and on their insurance companies. These types of claims are most prevalent in residential construction projects, especially when the completed unit is owned by an individual as opposed to a business. For that reason, many insurance companies, particularly non-admitted insurance companies, add residential exclusions to their Commercial General Liability and Umbrella/Excess Liability policies.
Residential Exclusion | Overview
Residential exclusions are not standard, so it’s important to read such exclusions carefully and to compare them to the type of work done now and in the past. Some exclusions apply only to single family homes, town homes, condos and similar projects. Some specifically state that apartment buildings are not residential projects. Other exclusions are broader and could be interpreted to exclude coverage for buildings such as assisted living facilities, hotels, and college dormitories. Many endorsements exclude all operations on properties defined as residential, while some leave coverage intact if only repair or remodeling work is being done.
Another type of exclusion involves conversion of commercial or industrial buildings to residential properties. As an example: ABC Contracting built an office building many years ago. The building is now being converted to a residential condominium building. Although ABC has nothing to do with the renovation, and may not even know that such plans are underway, this type of exclusion could take away coverage for claims arising from ABC’s original work.
When reviewing a residential exclusion, it’s important to ask:
- How does the endorsement define residential? Compare excluded work to projects being done now, to past work, and to projects being considered for the future.
- Does the endorsement apply to work in all states? Some endorsements exclude only states where construction defect claims are most problematic.
- Does the endorsement apply if a contractor’s non-residential project is converted to a residential property? Does the contractor need to be involved in the conversion?
A residential exclusion is never something a contractor or an insurance agent wants to see on a policy. A thorough review of the endorsement and a comprehensive comparison to a contractor’s work can help ensure that important coverage is preserved.