The stars of HGTV’s Windy City Rehab are being sued by the buyers of a luxury home they renovated. The homeowners said their $1.36 million dream house became a nightmare, alleging the contractors are responsible for water leaking into the kitchen from an upstairs bathroom, a roof that was never replaced as promised, crumbling mortar and other major construction issues.
The home in Lincoln Square, Chicago was featured in an episode of the reality show, which follows designer Alison Victoria Gramenos and lead contractor Donovan Eckhardt as they renovate neglected properties. The lawsuit, filed late last month, alleges consumer fraud and breach of contract, detailing ongoing problems with the 4,000-square-foot residence and demanding a reversal of the sale plus $80,000 in repair expenses and unspecified damages for emotional distress.
Gramenos has reportedly said she is interested in buying back the property and living in it herself.
This high-profile lawsuit serves as a stark reminder of the potential risk involved in any home construction project.
“The contractor’s exposure to loss can be very high-dollar,” said Paula Simon, Director, Commercial Insurance, Burns & Wilcox, Dallas/Ft. Worth, Texas. “You could lose your business and there could be significant bodily injury as a result of the work.”
Construction errors carry hefty costs
This case is not the first time that HGTV’s Gramenos and Eckhardt have been in the news for construction issues. In July 2019, city officials in Chicago suspended permit privileges for the development group associated with the pair’s projects, citing work that took place without permits, deviations from approved plans and missing inspections. The city is also reportedly suing the Windy City Rehab stars over “dangerous and unsafe conditions” found at four of their properties.
“The contractor’s exposure to loss can be very high-dollar. You could lose your business and there could be significant bodily injury as a result of the work.” –Paula Simon, Burns & Wilcox
While most construction-related cases are not so public, the repercussions of any project mishap can be significant for all involved. In addition to the immediate costs, “a lawsuit certainly could hurt a contractor’s reputation,” said Bonnie Steen, Vice President and Associate Managing Director, Burns & Wilcox, New Orleans, Louisiana. A contractor’s reputation is vital to his or her success, she added.
While errors can occur at any stage during home renovation, some construction problems are more costly than others. Architectural design flaws can contribute to accidents or even loss of life; the American Society of Civil Engineers reports the average direct and indirect cost of design errors ranges between 6.85 to 7.36 percent of a contract’s total value. This is why contractors should ensure that Architects and Engineers Errors & Omissions Insurance (E&O) coverage is held by their architectural and design partners on any construction project that includes those services.
Problems related to work by artisan contractors like tile installers or plumbers can also cause major losses—one of many reasons experts urge home renovators to have the appropriate Commercial General Liability (CGL) or Contractors Insurance for their particular specialty.
“If an error is made during plumbing installation and you start having plumbing problems, that is typically a large claim,” Steen said. “A plumbing claim involving leaking water can lead to extensive damage on the floor where the leak occurs, and potentially to the floors below as well.”
Concrete work, which is critical to a home’s foundation, can also lead to significant losses when problems occur.
“Water and concrete work are both very costly,” Simon added. “Water can seep into so many crevices, corners and parts of the house or structure and can cause long-term damage. If the residence or the commercial building is occupied and it contains mold, there can be health issues related to toxicity.”
Construction fraud—from substandard repairs by subcontractors to suppliers who provide low-grade materials—is also a cause for concern. In Canada, construction fraud alone creates annual costs of more than $628 million. One recent case in the U.S. involved Milwaukee Bucks forward Giannis Antetokounmpo, who sued his home remodeling contractor for failing to perform work and allegedly obtaining more than $144,000 via fraudulent means.
Climate change, boom in ‘home flipping’ heighten risks
The U.S. remodeling industry generated $85 billion in revenue last year, continuing a five-year trend of growth due in part to increased private consumer spending on home improvements and a decline in unemployment. Rising home prices are also boosting demand for remodeling services. In 2018, home improvement industry sales in Canada reached $45.6 billion, up from $44 billion in 2017.
Home flipping—or purchasing real estate at a low price, improving the property and selling it quickly for profit—has also been on the rise in the U.S. for many years. In the first quarter of 2019, the rate of home flipping reached a nine-year high, with the 49,059 homes flipped representing 7.2 percent of all home sales.
“You see an increase in faulty workmanship claims after a storm hits, as many new contractors converge on a damaged area to meet the higher work demands. A contractor might not have the right experience, but may be hired because of a labor shortage.”–Bonnie Steen, Burns & Wilcox
While some experts believe the trend has recently peaked, the overall increase in real estate investors looking to cash in on home flipping can mean some individuals get into the business without proper knowledge of the industry.
If a contractor is not knowledgeable about costs, construction and renovations this poses risks for the future home buyers, Steen pointed out. “You have to look at the construction experience of who is renovating the home.”
Increasingly frequent weather-related disasters can also create higher demand for renovation contractors, whose services are needed in the aftermath of hurricanes and other severe weather events. With tropical cyclone rainfall rates expected to increase due to climate change, construction errors related to repairing storm damage may be more common.
“You see an increase in faulty workmanship claims after a storm hits, as many new contractors converge on a damaged area to meet the higher work demands,” Steen explained. “A contractor might not have the right experience, but may be hired because of a labor shortage.”
Address risks to all involved parties
When faced with construction issues, homeowners and contractors can be uncertain about who is responsible and whose insurance policy might provide coverage—especially since an individual’s Homeowners and Dwelling Insurance will typically exclude construction defects.
“You could have a lot of finger-pointing going on,” Steen said.
CGL or Contractors Insurance—or a combination of policy types—is critical for anyone involved in a home renovation, and homeowners looking to hire a contractor should require their contractor to carry the appropriate coverage. In New York City, 1,116 complaints were filed against home improvement contractors in 2017 and complaints against contractors ranked in the top five complaint categories that year. While faulty workmanship is excluded from Contractors Insurance, the resulting damage is generally covered.
“If the product that is installed is faulty, it is not going to be covered, and neither is any shoddy workmanship if that were to cause the loss,” Simon said. “Subsequent damage is what the insurance is designed to cover.”
To obtain appropriate coverage, contractors need to be open with their insurance broker or agent about the full scope of their work—including the states they work in and any “side” jobs they may take on, such as an electrician who does occasional plumbing work.
“Failing to ensure that subcontractors have coverage, or hiring “day laborers” who do not have CGL or Contractors Insurance may result in a lack of coverage in the event of an error or accident.” –Simon
While the HGTV incident involved a luxury home, catastrophic losses can take place at homes in all price ranges, especially when injuries are involved. “You need to have adequate limits,” Steen added.
In addition to obtaining CGL or Contractors Insurance, general contractors and “paper contractors”—those who do not perform the physical work and instead supervise various artisan contractors or subcontractors—will generally require that all subcontractors carry Contractors Insurance and are covered with the same limits they have.
“We recommend all subcontractors have the same or higher limits of coverage in their Contractors Insurance policies,” Simon explained. “Ultimately, the general contractor at the top is responsible for each one of the subcontracted entities to have adequate insurance, so if something happens, the general contractor is covered.”
Failing to ensure that subcontractors have coverage, or hiring “day laborers” who do not have CGL or Contractors Insurance, Simon warns, may result in a lack of coverage in the event of an error or accident.
“If a general contractor does not properly vet subcontractors, then there is no recourse if something happens,” Simon emphasized.
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This information was provided by Burns & Wilcox, North America’s leading insurance broker and underwriting manager. Burns & Wilcox works exclusively with retail insurance brokers and agents to assist clients like you with their specialty insurance needs. Ask your insurance broker or agent about Homeowners and Dwelling, Commercial General Liability or Contractors Insurance that might be right for you.