Contractual Liability Coverage Under Builder's Warranty to Insured Homeowner

We have a question about coverage under the contractual liability provision of a homeowners policy. The insured was building his dream house. When the home was almost fully completed and the insured had already moved in, he noticed some defects on the home's exterior. This led to a thorough inspection of the home. Numerous serious defects were noted, including improper roof sheathing and improper exterior wall sheathing.

The insured has a signed warranty from the builder. Under the theory that this warranty constitutes a written contract relating to the ownership, maintenance, or use of the insured location that was entered into before a loss, the insured is arguing that he is now due contractual liability coverage for his future liability to a future buyer.

It is our understanding that the warranty between the builder and the insured does not make the insured contractually liable for the builder's negligence. Furthermore, the claim seems to be for something that has not yet happened. Can you give us your opinion?

California Subscriber

There is no coverage under the circumstances that you describe. The insured seems to be confused about the nature of contractual liability coverage. That coverage applies, under the conditions described in the policy, when an insured has agreed to assume another party's liability, should it arise.

No liability exists at the time that a contract is made (since the contract must be entered into before the occurrence). So the mere existence of a contract to take on someone else's liability does not give rise to an enforceable claim.

As you point out, the warranty does not make the insured take on responsibility for the builder's liability. What the insured is really concerned about is his own future liability, not any present vicarious liability. So, "the claim must fail" for two reasons. The warranty does not bestow the builder's liability on the insured; and insurance does not cover prospective losses, since such losses may end up not taking place.

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