Defect Correction Liability in Subcontractor Insolvency

Oct 31, 2025 Benn-Ibler Rechtsanwälte

The Austrian Supreme Court (Oberster Gerichtshof, hereinafter OGH) has recently addressed the issue of whether insurance coverage for the costs of remedying defects attributable to a subcontractor is contingent upon the insolvency of the responsible subcontractor.

In the case at hand, a business liability insurance agreement had been established between the plaintiff (the policyholder) and the defendant (the insurer). The parties further consented to an extension of coverage pertaining to the risk of defect rectification in the event of insolvency of a subcontractor.

Loss of profits arising from the insolvency of the subcontractor

The plaintiff was engaged to provide renovation services as part of a construction project and, in turn, retained a subcontractor for specific components of the work. Upon commencement of bankruptcy proceedings involving the subcontractor’s assets, the subcontractor proceeded into liquidation.

The plaintiff alleged that the subcontractor performed faulty work during the construction project. As a result, the client—the plaintiff’s contract partner—refused to pay the agreed amount and cancelled the contract. The plaintiff filed a lawsuit to recover the unpaid fees, but the court found that the client had the right to terminate the agreement. As a result, the plaintiff suffered a loss of earnings equal to the unpaid remuneration.

The plaintiff claimed lost earnings from the defendant, but the lower courts rejected this argument.

For insurance to apply, a recourse right against the subcontractor is necessary.

The OGH upheld these rulings.

Under the agreed insurance terms, coverage applies only if the insured contractor’s subcontractor delivers a service with defects. In this scenario, the client files a claim requesting that the contractor rectify these issues. Once the insured contractor addresses the client’s claim, they gain the right to seek compensation from the subcontractor. However, if the subcontractor is insolvent, the contractor cannot pursue this recourse claim. 

The plaintiff argues that they suffered a ‘loss of earnings’ equal to the unpaid compensation for their work, since they lost the lawsuit seeking payment from the client because the subcontractor performed defectively. However, the OGH decided that this did not give the plaintiff the right to coverage. Accordingly, the defendant bears no responsibility.

OGH, 7 Ob 130/25f (25 September 2025)