We tend to regard our heath care facilities as much more than the buildings they occupy. They are, after all, the unique venues for the administration and delivery of our nation’s medical care, and are a critical component of the well being of our communities. But they are also buildings, and, like all real estate improvements, they are subject to the nuances of construction law. Whether at the stage of initial construction, or as part of a renovation or repair, issues relating to a health care facility project will be governed by the applicable construction contract documents.

One aspect of construction contracts that all too often receives only passing attention is the requirement that the contractor provide liability insurance. Such policies of commercial general liability, known as CGL policies, are intended to protect the owners and contractors involved in a construction project from claims for property damage and bodily injury. Whether a claim will be covered, however, will depend on whether it is the result of an insurable occurrence under the terms of the applicable policy.

In defining the scope of coverage, most CGL policies contain limiting provisions and specific exclusions that define events that are deemed not to constitute occurrences with the meaning of the policy, or that are excluded from matters for which coverage is available. Certain of these provisions have become particularly troublesome for the construction industry, and are potential sources of problems for health facility projects.

Defective Work
Property owners often think of insurance in building projects as relating to claims arising from events manifesting themselves during construction, such as an injury to a person on the job site, or damage to a vehicle or equipment during the course of the job. But one of the most significant sources of claims is defective work in the construction itself. Indeed, such claims have the potential to result in protracted and costly litigation, and can involve substantial damages relating to the cost of correction and repair. However, most CGL policies are written and interpreted so that there is no coverage for defective work, because most contain an exclusion as to what constitutes an expected or intended injury. Indeed, under Maryland law, for example, it has been held that typical CGL policy language does not cover the cost to repair defective work of a subcontractor, because the damage was not caused by an “occurrence” within the meaning of the policy. French v. Assurance Co. of America, 2006 WL 1099471 (4th Cir. 2006). Coverage is limited to damage to non-defective building components caused by the faulty work, such as consequential damages from water leakage through defectively installed waterproofing systems. The policy would cover water damage to the non-defective components, such as the interior finishes, but would not pay to correct the improper waterproofing itself.

Mold Exclusions
The presence of mold in buildings has developed into a serious issue that has potentially far reaching consequences for property owners and managers, as well as for the construction and insurance industries. Mold is a building issue, deteriorating components on which it feeds and necessitating repairs, both to eliminate the moisture source that is responsible for the mold growth and to repair affected elements. It also gives off odors and diminishes aesthetic appearance, thereby degrading the indoor environment and decreasing property values. But molds are also allergens that reproduce by means of airborne spores, which gives rise to health concerns that are particularly problematic in health care facilities.

Historically, insurance claims for mold were permitted under property damage insurance policies. However, as mold-related claims have increased, insurers throughout the country have sought to exclude mold from coverage. In mid-2003, the Maryland Insurance Commissioner reversed a ruling by his predecessor and made mold exclusions permissible. In Maryland and many jurisdictions, separate coverage must be purchased to secure coverage for mold remediation.

Residential Exclusions
Many CGL policies applicable to construction projects exclude coverage for property intended for habitation. The ultimate presence of residential occupancy increases liability and risk with respect to the proper construction of the building in accordance with code requirements and industry standards applicable to residential construction. While some such exclusions refer expressly to multi-family housing, many are couched in broad language relating to residential purposes generally. These broadly worded provisions can be read to include any facility with beds or overnight accommodations, and, as a result, may be deemed to apply to hospitals, nursing homes, and other health care facilities.

Unless the residential use issue is clearly addressed in obtaining insurance coverage, there is a very real risk that there may be no coverage for a health care facility project, merely because its function involves patients who stay on the premises so as to be deemed residents for insurance purposes.

Read the Policy
In most cases, proof of the required insurance for a construction project is provided through a certificate of insurance produced by the contractor’s insurance agent. Proper due diligence, however, requires that property owners know all of the terms of coverage so that they can avoid the possibility of a coverage gap created by an exclusion. Owners need to read their contractor’s policies and determine whether it is necessary to require additional coverage or obtain their own umbrella coverage. Otherwise, the owner bears the dangerous risk of taking possession of a project without adequate protection from potential claims.

Raymond Daniel Burke has more than 25 years experience in complex litigation and construction law. He is a principal in our Baltimore office.