If there is a design defect to a part of your property, then most insurance policies will contain exclusions for those design defects. Depending on the type of policy that you have and it’s wording, if a separate loss occurs as a result of a design defect, it may be covered under your policy. Well what type of loss could follow from a design defect? There are too many possibilities to try to explain in a list, but consider a wall not designed correctly that falls down and causes direct damage to other areas of the insured property. Replacement of the improperly designed wall may not be covered, but if the claim involves the cost of repairing other areas of the insured property damaged when the wall fell, that should be covered.
A Florida Supreme Court opinion, Swire Pacific Holdings v. Zurich Insurance Company,1 is instructive on this issue. The case involved a builder’s risk policy and whether it covered increased costs spent by the developer of a condominium high-rise project to correct design defects in engineering specifications that did not meet code requirements. The policyholder had to spend $4.5 million correcting these design defects, and submitted a claim to Zurich. Coverage was denied on the ground that the claim dealt with the cost of correcting a design defect and not any physical loss or damage resulting from the defect.
The design defect exclusion clause at issue in the Swire-Zurich policy excluded coverage for:
Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.
The Florida Supreme Court noted and held:
Swire’s sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted to invoke the exception to the exclusionary provision. Under the precise terms of this Builder’s Risk Policy, the expenses claimed are clearly excluded under the first provision of the design defect exclusion clause, which states the policy does not cover “[l]oss or damage caused by fault, defect, error or omission in design, plan or specification.” No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude that under the clear contractual provisions … Swire is not entitled to recover the expenses associated with repairing the design defect. (Emphasis added).
Had the claim involved a situation where a separate loss occurred as a result of the design defect, the policyholder may have been able to recover the damages associated with repairing that separate loss. The type of policy involved was a builder’s risk policy intended to provide coverage for fortuitous losses that occur during the construction of the building, and is a type of all-risk policy.