From crumbling foundations to leaky roofs, construction defects aren’t just technical problems—they’re disputes that strike at the heart of trust in the building process. When something goes wrong, the finger-pointing begins: is the contractor responsible, or should the insurer step in?
The answer isn’t simple. In many jurisdictions, courts and legislatures have wrestled for decades with what counts as a defect, when it qualifies as an “accident,” and whether insurance will cover the cost under a policy. For contractors, insurers, and property owners alike, these questions aren’t abstract legal puzzles—they’re issues that can mean the difference between a project setback and financial survival.
At its core, a construction defect is flawed work or materials that cause damage. But whether insurance covers that damage depends on a maze of definitions, exclusions, and state-specific laws.
The First Question: Was It an Occurrence?
Most construction disputes turn first on whether the alleged defect counts as an “occurrence” under a standard commercial general liability (CGL) policy. CGL policies generally define an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”.
The challenge: the word accident itself is rarely defined. States are divided—some courts see defective work as a business risk (something a contractor should control), while others recognize unintended defects as accidental occurrences, particularly when the damage extends beyond the contractor’s own work.
For instance, Colorado’s legislature passed HB 10-1394 to resolve ambiguity by presuming construction work that causes property damage is accidental unless done intentionally, and courts should presume it to be accidental under a liability policy. That kind of legislative clarity is rare, which is why similar claims might be treated differently in Ohio, Florida, or California courts.
The Second Question: Did the Construction Cause Property Damage?
Even if the work qualifies as an occurrence, insurers next ask whether it caused covered property damage. According to federal guidance, property damage generally includes “physical injury to tangible property” or “loss of use of tangible property”.
While most courts agree that a policy will not pay to fix a contractor’s own defective work, but it will cover damage that spreads to other property, some jurisdictions courts may draw distinctions. Think of it this way: if a subcontractor installs a roof improperly, the cost of replacing the roof itself is usually excluded. But if the faulty roof allows rainwater to leak inside and damage flooring or drywall, those secondary damages are often covered—assuming the policy language and state law support that interpretation.
The Third Question: Do Exclusions Apply?
Finally, insurers turn to exclusions built into CGL policies. These “business risk” exclusions are rooted in the idea that liability insurance shouldn’t guarantee the quality of a contractor’s own work. Instead, the contractor is expected to manage that risk directly.
One of the most debated exclusions is the “your work” clause, which denies coverage for damage to a contractor’s own completed work. Yet many policies include a subcontractor exception—if the damage stems from work performed by a subcontractor, the exclusion may not apply.
This nuance matters. Courts in some states, like Illinois, have limited the subcontractor exception for general contractors, while other jurisdictions enforce it as written, leaving contractors and insurers to navigate inconsistent outcomes.
Why All the Fuss?
The reason you hear so much about construction defect coverage is uncertainty. Legislatures and courts across the country interpret the same contract language differently, and the rules keep evolving. Some states, like Colorado, have tried to create predictability through statutes. Others rely heavily on judicial precedent, which can shift with new cases.
This patchwork means a contractor building in multiple states faces different coverage expectations depending on the jurisdiction. For insurers, it complicates underwriting and claims handling. And for property owners, it affects how quickly and fairly defects are resolved.
As the U.S. Department of Labor notes, the construction industry already faces unique safety, legal, and financial risks. Adding uncertainty about defect coverage only raises the stakes for all parties involved.
The Bottom Line
So, is construction defect damage covered by liability insurance? The answer remains: it depends.
- Some states hold that faulty work causing property damage is an occurrence; others do not.
- Most policies won’t cover the cost of redoing defective work itself, but many will cover damage caused to surrounding property from that work.
- Exclusions, and especially subcontractor carve-outs, can make or break a claim.
Until federal standards or more widespread state reforms emerge, the only certainty is that construction defect coverage will remain a moving target—one with enormous financial implications for contractors, insurers, and property owners alike.
The information provided in this article is for general informational purposes only and does not constitute legal advice. We recommend consulting with an attorney to ensure compliance with all applicable laws and to receive legal advice tailored to your specific circumstances
