It’s All in the Details: Contractual Clarity in the Lumber Industry
Risk is unavoidable, but in today’s increasingly litigious landscape, it has developed into a serious threat for business owners. The lumber industry faces its own issues with the rising threat of long-tailed exposures. As more lumber and hardware supply businesses expand offerings to include installation services, those companies are encountering an increased frequency of construction defect claims decided in a court of law, putting reputational and financial futures on the line.
When a hardware and building supply company completes installation services, they shoulder the risk of property owners claiming the quality or installation of materials failed to meet contractual standards, leading to damage or a threat to safety. Contracts, in part, are meant to serve as a line of defense against construction defect claims, but vague language and a failure to clearly allocate risk pave the way toward potential disagreements that result in costly and time-consuming litigation.
Without a contract to define work expectations and responsibilities, disputes over liability are inevitable. Door, window, and kitchen cabinet installations are some of the most common examples of construction defect claims, and while these cases are typically smaller, they hold the potential to develop into potentially significant losses.
Contractual Clarity
Contractual structure and clarity are key to effective risk transfer. Consider the following ways agents and brokers can best support insureds facing construction defect claims.
Inform insureds on risk mitigation. Agents and brokers should work proactively to inform insureds about the factors causing construction defect claims and how best to mitigate risks associated with installation practices causing defects. Ensure policyholders are using high-quality materials and share considerations to keep in mind when policyholders are vetting third-party contractors. Additionally, insureds need to know their contractual responsibilities as well as the reality that not all risks can be transferred.
Ensure contractual risk transfer. Contract language must be airtight and prescribe responsibility clearly. It is imperative for insureds to transfer risk downstream or face the burden of potential losses. All contracts should be carefully structured to ensure risk is transferred to the workers completing the installation. Whether it is an in-house employee or a project contractor unfamiliar with the product being installed, contracts should reflect the structure of the relationship and clarify who is completing the work.
Understand local compliance. The frequency of these defects and the severity of subsequent claims can vary by locality. States like Florida or California, where large-scale development projects occur more frequently, run a higher risk of installation issues occurring. Depending on the nature of consequential loss that has been sustained, jurisdiction rules may vary on what can be covered as damages, further escalating potential costs. This makes it even more critical for agents and brokers to stay aware of regional trends and regulations to ensure policies are compliant.
Encourage proper vetting and training. Hardware and building supply companies should be scrupulous in vetting third-party contractors. If installation is performed internally, employees need to be trained in the proper handling of materials and use of tools. Any good partner should be willing to accept liability for their work, and if issues arise, policyholders should re-evaluate their partnership. Agents and brokers can work with policyholders to identify red flags and help verify contractors are properly insured.
Construction defects may not be discovered until months or even years after the initial installation. Due to the long-tailed nature of these claims, documentation connected to materials, installation, and third-party vendors can provide clarity on liability. Clearly defined, well-structured contracts can be helpful reference points during the claims process, allowing agents and brokers to keep claims from snowballing into costly payouts.
While many construction defect claims may be low severity, their rising frequency could still spiral into drawn-out legal proceedings that cause long-term financial and reputational harm on hardware or building supply companies. Agents and brokers can be an invaluable resource in educating business owners on contractual clarity and working with them to identify contract gaps before these incidents occur.
Kennealy is vice president of claims at Pennsylvania Lumbermens Mutual Insurance Company (PLM).