Protecting LBM Businesses from Construction Defect Claims

By Carolyn Casey, Litigation Claims Manager

Construction defect claims have become more common and complex across the lumber and building materials industry in the past year due to a combination of industry growth, project complexity, labor shortages, shifting litigation trends and other factors, leading to significant financial losses and operational disruption. This growing risk places increased pressure on contractors, suppliers and building materials companies to strengthen risk management practices. Business owners who are aware of the most common construction defect-related risks and take proactive steps to avoid them will be better positioned to avoid liability issues and prevent costly claims.

Common Construction Defect Claims

Understanding where and how construction defect claims most commonly occur can help lumber and building materials companies strengthen their risk management efforts and protect against financial loss. The most common construction defect claims often fall into one of three categories:

• Workmanship defects: Workmanship defects are the most common examples of claims we see at PLM. These issues typically derive from installation mistakes or missed details during project execution, such as improper flashing, defective finishes or uneven concrete. These minor missteps can result in bigger, more costly issues like water damage, mold or foundational damage if not properly addressed.
• Material defects: These defects are related to the actual materials used and can often stem from manufacturing mistakes. For example, contaminated lumber or faulty engineered wood products can lead to premature deterioration and structural weakness that may not surface until several years after installation.
• Design defects: Design defects start early in the building process, originating from flaws with the architect, contractor’s or engineer’s designs. These defects can cause widespread failures that are out of the builder’s control.

Missteps That Can Lead to Claims

There are a few key factors that can contribute to these issues and escalate them into costly losses. Poor documentation and unclear contractual language are often major drivers of claims. Missing change orders, unclear scopes of work or incomplete project records can make defending claims much more difficult, leaving lumber and building material business owners at higher risk of losses. The risk of construction defect claims escalates when multiple parties are involved, such as subcontractors, owners and engineers. Without liability clearly assigned in the contract language and clarified on the job, responsibilities become blurred and claims grow more complex.

Additionally, failure to meet building codes and standards are a significant driver of defect claims. When construction does not comply with building codes or industry standards, defects become harder to defend, quickly shifting liability onto builders or contractors.

Proactively Reducing Risk

While construction defect claims can be difficult to eliminate entirely, there are a few simple precautions business owners can take to help reduce their risk.

• Contractual clarity: Well-defined contracts that specify responsibilities, define scope of work and include indemnification language can help to significantly reduce the severity of claims. Contract language also helps transfer risk and protect your business in the case of a claim where liability may be unclear, such as when subcontractors are involved. Flow-down provisions can also help ensure obligations assumed by general contractors are also applied to subcontractors and suppliers performing the actual work.
• Strong oversight and documentation: Companies should consistently review certificates of insurance, perform site visits to ensure quality control and confirm compliance with insurance standards and building codes. Keeping daily logs and records of responsibilities can also help establish liability and limit losses in the case of a claim.
• Proper insurance coverage and limits: To protect against construction defect claims, companies should maintain a combination of professional liability, commercial general liability and builders’ risk coverage. It’s important to note, however, that general liability policies will typically only cover consequential property damage from the defects, not the defect itself. At PLM, we can help lumber and building materials business owners evaluate their insurance portfolios and identify any gaps in coverage to protect against construction defect claims.

As construction defect risks evolve, companies should prioritize proactive risk mitigation as a core business strategy. Through insistence on strong contract language, thorough oversight and proper recordkeeping, companies across the lumber and building materials industry can effectively reduce risk before claims arise.