Damage resulting from remedial work and consequential damage due to defects. Which insurance policies in Germany are relevant?

Insurance Coverage for Consequential Damages During Remedial Work

In the case of consequential damages during remedial work, the German contractor’s or business owner’s general liability insurance usually covers the costs. However, this depends on the specific circumstances of the damage. Consequential damage during remedial work occurs when additional damage is caused during the rectification of work already performed (e.g., during a repair or defect correction). Example: A roofer has to carry out waterproofing work on a building and seal floor slabs using welding membranes. After completion of the work, it is discovered that the slab waterproofing was not carried out correctly and is allowing moisture to penetrate. The slabs must be replaced and the waterproofing rectified.

The following insurance policies offer coverage in this case in Germany:

General liability insurance

This covers damages caused to third parties during business operations. Therefore, if additional damage occurs during remedial work (e.g., due to an error during rework), this would generally be a case for general liability insurance.

Construction all-risk insurance

If the damage occurs on a construction site, construction all-risk insurance (often referred to as construction insurance) may also apply. This insurance covers unforeseen damages during construction, including those that may arise from remedial work.

Product liability insurance

If the consequential damage during remedial work was caused by a defective product, the manufacturer’s product liability insurance may apply.

When do German liability insurance and construction all-risk insurance not provide coverage?

Liability insurance policies generally exclude pure remedial costs or so-called performance damages, i.e., costs for correcting an already existing defect. They only cover damages that go beyond the mere correction of the defect (the so-called “consequential damages”).

Insurance Coverage for Consequential Damages

Consequential damages are damages that arise from a defect in a work or service, but do not affect the defect itself, but rather damage other areas. In contrast to pure defects or performance damages, which are caused by the rectification of the defect itself, consequential damages concern the consequences of a defect that occur in other parts of the work or to other goods. Example: A leaky roof installation leads to water entering a building and damaging the building’s contents or structure. The defect itself is the leaky roof, but the consequential damage is the water damage to the underlying building structure.

Business Liability Insurance

Consequential damages are generally covered by business liability insurance in Germany. This insurance covers damages caused to third parties by the rectification of the defect. Therefore, if other parts of the building or the client’s property are damaged due to the defect (e.g., the leaky roof), the business liability insurance will provide coverage. It is important to note that German liability insurance only covers the consequential damages, but not the cost of rectifying the defect itself. This means that the costs for repairing the leaky roof would not be covered, but the costs for the water damage caused by the roof would be.

Construction All-Risk Insurance

In construction projects, construction all-risk insurance can also cover consequential damages. This insurance protects clients and contractors against unforeseen damages during the construction phase, including those caused by defects and resulting in consequential damages.

Product Liability Insurance

If the defect is due to a faulty product (e.g., a defective component) supplied by a manufacturer, the manufacturer’s product liability insurance may cover consequential damages. This is relevant, for example, if a defectively manufactured pipe leads to water damage when used by the customer.

In German insurance law, there is an important distinction between:

Consequential damage (Folgeschaden / weiterfressender Schaden)

and

Damage incidental to rectification (Kosten der Mängelbeseitigung / Mangelfolgekosten)

Although both may result from a defect, they are treated differently in terms of coverage.

Consequential Damage (Folgeschaden)

• This refers to damage caused by a defect to other property or interests beyond the defective item itself.

• In other words: the defect “spreads” or causes a secondary loss elsewhere.

• Example: A defective machine part causes overheating and sets fire to a production hall.
  → The damage to the building and other machines is consequential damage.

• In liability insurance, consequential damage is usually covered, because it affects third-party property or other interests.

Damage Incidental to Rectification (Kosten der Mängelbeseitigung / Nachbesserungskosten)

• This refers to expenses necessary to repair, remove, or replace the defective product itself, or to access it for repair.

• Example: A defective valve must be removed from an installed system; pipes have to be opened to replace it.
  → The removal, reinstallation, or other rectification costs are incidental to rectification.

• These costs are typically excluded from insurance coverage, because they are part of the contractual performance risk – i.e., the cost of fulfilling or correcting one’s own work.

Simplified distinction: