Prompt notice of a construction defect claim protects a contractor’s financial interests. Construction defect claims can be costly when factoring in costs for repair, legal fees, and settlement. When a claim is tendered to a CGL insurer, a contractor seeks to shift the financial burden to a CGL insurer in an effort to reduce the contractor’s exposure, assuming there is coverage under the subject policy.
Failing to promptly notify a CGL insurer after learning of a construction defect may lead to significant out-of-pocket expenses. Embroidme.com, Inc. v. Travelers Prop. Ca. Co. of Am., 845 F.3d 1099 (11th Cir. 2017). For example, in Embroidme.com, Inc., Embroidme.com decided to litigate a copyright infringement case filed against it on its own and spent about 18 months after the complaint—accruing more than $400,000.00 in attorneys’ fees—before tendering notice to Travelers (its CGL insurance carrier). Embroidme.com, among other things, sought reimbursement for its pre-tender legal fees. Upon notification of the claim, Travelers refused to pay Embroidme.com’s pre-tender legal fees because Embroidme.com did not obtain Travelers’ consent prior to incurring its legal fees in relation to its copyright infringement case. The court agreed with Travelers and ruled, in part, that Travelers did not have an obligation to reimburse Embroidme.com for pre-tender legal fees without first obtaining permission from Travelers to incur said legal fees. This case demonstrates the financial hardship a contractor may face should they fail to promptly notify their CGL insurer after receiving notification of a claim.
In fact, CGL insurance policies often include provisions that mandate prompt notice to their CGL insurer after learning of potential claims against the contractor. Builders Mutual Insurance Company v. Wedge Construction, Inc., 423 F. Supp.3d 253, 256 (2019). As a result, failing to timely notify the CGL insurer may be construed as a material breach of the policy’s notice provision and could result in a denial of insurance coverage. For example, in Builders Mutual Insurance Company, Wedge Construction did not provide notice to its CGL insurer of an impending negligent performance and breach of construction contract lawsuit filed against it for 15 months. The court ruled that Wedge Construction’s delay in notifying the CGL insurer was “substantial and material and constituted a breach of the notice provisions of the policy.” As such, Wedge Construction was not entitled to insurance coverage under its insurance policy. Given this result, it is critical to analyze and comply with the language in your CGL insurance policy to prevent financial burden and potential denial of insurance coverage that a party may otherwise be entitled to.
Promptly tendering notice of a construction defect claim may also mitigate damages by way of early repairs and may lead to an expedited settlement of a claim because a CGL insurer has more time to evaluate a claim and make knowledgeable decisions about settlement. National Trust Ins. Co. v. Graham Bros. Constr. Co., Inc., 916 F. Supp.2d 1244 (2013). See also NVR, Inc. v. Motorists Mutual Insurance Company, 371 F. Supp.3d 233 (2019). Tendering early may also prevent the construction defect from further deterioration, preserve evidence, and ultimately may reduce the total cost of the claim and risk of future liability. National Trust Ins. Co., 916 F. Supp.2d.