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Mandatory Insurance for Contractors and Developers Seen as a Solution to Defunct Companies

In New Jersey, new home builders are not required to have general liability insurance. As a result, purchasers of new homes and condominium units are sometimes left without recourse in the event that their home was not constructed properly.

As discussed in several Superior Court opinions, the New Home Warranty Program is ineffectual at best and is rarely an advisable option. Therefore, homeowners and condominium associations are often times forced to sue the developer of their property in an effort to obtain money for necessary repairs. Unfortunately, it often happens that home builders and condominium developers create a corporation or limited liability company for a specific project. The company is minimally funded, and it hires only independent subcontractors. The company is then shut down when the project is completed. A judgment against this company would be completely worthless. In other instances, if a project is not particularly profitable, the developer company may file for bankruptcy protection and whatever limited assets it has would be disbursed to the various creditors. In these situations, if the homeowner or association discovers defects in the construction after several years, there would be no source of recovery. The warranty program provides almost no assistance, and suing a defunct corporation is a waste of time. Therefore, the homeowner or association would be stuck paying for costly repairs. However, if the developer had general liability insurance in place during the project, those insurance policies could provide coverage for the construction defects. Unfortunately, in New Jersey and many other states, builders are permitted to develop land and build homes with minimal or no insurance in place.

In order to prevent these problems and protect new homeowners, the Nevada Assembly has proposed a bill that would require all licensed contractors to carry liability insurance. The bill would require all contractors to carry between $300,000 and $3 million worth of insurance, depending upon the size of the contract. According to the bill's sponsor, Majority Leader John Oceguera, this would protect homeowners from having to sue and/or negotiate with shell companies that are no longer in business, or companies that have filed for bankruptcy protection. Not surprisingly, the Associated General Contractors organization in Nevada objects to the proposed requirement, claiming that insurance is an expensive product, that it would put a significant burden on the contractors and that the cost would be passed directly to the homeowners. The bill has not yet passed, and faces strong opposition as well as a competing bill from the Nevada Senate.

In the last several years, the New Jersey legislature sought fit to require home improvement contractors to carry liability insurance, but has thus far not applied such a requirement to new home builders and developers of cooperatives and condominiums. We will continue to monitor the situation, and update our readers in the event that additional information becomes available.

Full post as published by New Jersey Law Blog on April 30, 2009 (boomark / email).