Report: Construction Defect Claims on the Rise

Long after the last nail is driven, construction defects can come back to haunt builders — in fact, several of the nation’s largest homebuilders are facing a surge of construction defect allegations, according to a recent Wall Street Journal report. Homeowners across multiple states have filed lawsuits against builders such as D.R. Horton, Lennar, and PulteGroup, alleging problems ranging from foundation movement and water intrusion to mold and other defects that were reportedly discovered after the homes were completed.

Homeowners have argued that today’s builders are cutting corners and producing “shoddier, error-ridden homes,” the publication reported, while builders say the claims account for a small fraction of their homes — and believe plaintiffs’ attorneys may be recruiting homeowners into questionable lawsuits.

Construction defect claims are “100% trending right now,” said Ryan Wallace, Broker, Professional Liability, Burns & Wilcox, Indianapolis, Indiana. “We are in a very litigious environment.”

[Construction defect claims are] 100% trending right now. We are in a very litigious environment.

As lawsuits grow, some major builders have substantially increased the funds they set aside for current and future claims, the newspaper reported. Depending on the allegations, claims may involve both construction-related issues and professional services, making it important for contractors, architects, engineers, and other professionals to carry Construction Insurance policies such as Commercial General Liability (CGL) Insurance, Professional Liability Insurance, and Excess Liability Insurance.

“There is often a Professional Liability exposure as well as a General Liability exposure,” said Doug Looper, Underwriter, Commercial Insurance, Burns & Wilcox, Woodland Hills, California. “If they are not properly insured, a bad claim scenario can put somebody out of business.”

There is often a Professional Liability exposure as well as a General Liability exposure. If they are not properly insured, a bad claim scenario can put somebody out of business.

Labor shortages, demand may fuel defect claims

Several factors may be contributing to the increase in construction defect claims activity, Wallace said, including labor shortages, supply chain disruptions, and increased demand for new housing. The construction industry was expected to need an estimated 349,000 net new workers in 2026 to meet anticipated demand, according to Associated Builders and Contractors.

Labor shortages, rising costs, and pressure to complete projects quickly can create conditions that increase the risk of construction defects. “The labor shortages are leading to inexperienced workers, and when you get inexperienced workers, they might not know what they need to be doing,” he said. “That can affect the building process.”

Cutting corners is another concern, whether due to supply shortages and substitutions or rushing, Wallace added. “Development is just huge right now. There is increased pressure to build these homes quickly to meet the demand of the homebuyers,” he said. “Homeowner awareness and their willingness to pursue litigation” is another factor, he said.

While Looper said he has not noticed an unusual uptick in construction defect claims, recent increases in new construction activity may be contributing to the trend. When claims occur, common allegations involve structural defects, water intrusion, electrical problems, improperly designed landscaping that leads to flooding issues, and plumbing errors.

“What we see commonly are the latent defects — it is a new home build but the claim is coming in two or three years down the road,” Looper said. “It is not something that was necessarily visible at the time but has developed and shown itself later down the road.”

What we see commonly are the latent defects … It is not something that was necessarily visible at the time but has developed and shown itself later down the road.

How insurance policies can respond to construction defects

According to the Wall Street Journal report, recent construction defect cases include allegations from the Seminole Tribe of Florida that homebuilder Lennar built more than 450 homes with roof problems, and claims from thousands of homeowners in Louisiana that their homes by D.R. Horton failed to keep out moisture. In Las Vegas, about 50 homeowners in a retirement community have been in a dispute with PulteGroup over alleged sinking foundations and other construction issues, FOX5 recently reported.

Construction defect lawsuits often expand beyond a single construction firm and may name the general contractors, developers, architects, engineers, design-build firms, and specialty subcontractors involved in the work.

“An artisan contractor, roofing contractor, or even the construction managers overseeing the project could be named in the lawsuit,” Wallace said. “Even firms with a limited role often get pulled into litigation simply because they were involved in the project.”

Allegations involving bodily injury or property damage may trigger CGL Insurance, while claims stemming from professional services may require Professional Liability Insurance, also known as Architects & Engineers Professional Liability Insurance. These policies can help respond to covered legal expenses, settlements, judgments, repair costs, and more.

“Many of the construction defect allegations we are seeing stem from professional services,” Wallace said. “CGL Insurance policies may not respond to claims that arise from design decisions, plans or specifications, or professional advice. The Professional Liability Insurance is going to fill that gap for the financial damages caused by errors or omissions or negligence in professional services.”

Many of the construction defect allegations we are seeing stem from professional services.

Contractors can also face professional liability exposures when they are aware of potential issues but fail to take action, Looper noted. “If a contractor looks at these plans and is building this house and says, ‘This does not look right to me,’ and they do nothing about it, they open themselves up to the exposure of a claim,” he said.

Having both CGL Insurance and Professional Liability Insurance is “highly recommended,” Looper said. “Even if you think you do not need it, you have to really look at the wide variety of claims that could occur. The best case is you never need it, but that is not always the case,” he said. “There is that gray area between what is a CGL claim versus a Professional Liability claim. You want to make sure any potential exposures are covered.”

Preparing for the risk of long-term claims

Because construction defect claims can surface years after work is complete, maintaining continuous coverage is important. Wallace noted that Professional Liability Insurance is typically written on a claims-made basis, making Extended Reporting Periods (ERP), also known as Tail Coverage, worth considering when a business is sold or ceases operations. “Contractors will want to have continuous coverage in order to make sure they are properly covered years down the road,” he said.

Builders should maintain detailed project documentation and keep files for at least 10 years, Looper said. They should also carefully vet subcontractors and ensure their contracts contain appropriate hold-harmless and indemnification provisions. “Make sure subcontractors have adequate insurance with a reputable insurance company and that their limits are equal or greater to your own,” he advised.

Many construction firms may also need additional coverages, such as Excess Liability Insurance or Contractors Pollution Liability Insurance. “We always say the smartest thing you can do is to carry Excess Liability Insurance,” Looper said.

Due to the overlap of responsibilities on design-build projects, Wallace said, finger-pointing is common when allegations arise. Even when a firm feels they are not responsible for a defect, “the defense costs can add up quickly,” he said. “Everything today is more and more expensive.”