This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
In the commercial construction industry, securing all necessary insurance — workers’ compensation, general liability, builders’ risk, etc. — can be a costly and sometimes painful exercise. There’s no getting around it, and the responsibility applies to companies of all sizes from small, specialty subcontractors to the biggest multinational enterprises. Without insurance, companies can't perform work or most cases, even bid on work.
Insurance is such an integral part of a project that it is front and center in most contracts. In the 2017 update to its popular series of contracts and other forms, the American Institute of Architects (AIA) even gave insurance its own exhibit — to be used with the ubiquitous “AIA Document A201 - General Conditions of the Contract for Construction” — that allows parties to go into even more detail about a project’s insurance requirements.
But even with pages and pages dedicated to insurance, surprises await the contractor who doesn’t pay enough attention to the details of commercial general liability (CGL) coverage. Unlike workers’ compensation insurance, for instance, for which most terms are pretty cut and dry, CGL policies probably don’t cover everything many contractors think they do.
One of the interesting things about a CGL policy, said J. Gregory Cahill of Dickinson Wright in Phoenix, is that it includes a paragraph called the Insuring Clause followed by 15 or 20 pages noting what the policy does not cover. “[The policy] has a very narrow scope of what’s covered, and then it takes away some of that through exclusions.”
The 'your work' exclusion
If a construction company’s CGL policy includes a "your work" clause, it means that the insurance company will not cover defects in the insured company’s work nor damage caused in the performance of that work. “You have to be very careful of the work exclusion if you’re self-performing,” Cahill said.
However, that exclusion will not preclude recovery if the defective work causes damage to “other” property.
Additionally, to that exclusion there is usually an exception for work performed by subcontractors. For example, if a general contractor self-performs roofing work and there are leaks that cause damage to the owner’s property, the general contractor is liable for damages resulting from the leaks. The insurance policy won’t cover the cost to repair the roof, but will most likely cover the cost to repair damage to other property, such as stained drywall, caused by the defective work.
However, if a roofing subcontractor performed that job, the general contractor’s policy will cover the expenses to repair all the owner’s damaged property. Of course, the general contractor and its insurance company will typically pursue the subcontractor for reimbursement.
As for the roof, that work would usually be covered under a warranty provided by the installer and must be fixed regardless. Plus, the roofing subcontractor will likely have a “your work” exclusion in its policy and roof repairs will have to come out of pocket.
Contractual liability exclusion
The contractual liability exclusion also might leave some contractors scratching their heads. This provision, Cahill said, excludes liability that a contractor agrees to assume under its contract. This can be found in agreements between both the owner and general contractor and between a general contractor and subcontractor.
Some would say that if an insurance policy excludes every liability under the contract, it effectively covers nothing. That might be true if not for some major exceptions, Cahill said, including two that almost “swallow up” the exclusion.
First, the exclusion does not apply if the liability in question exists even in the absence of a contract. For instance, the duty to perform work safely and build according to prevailing regulations and building codes are requirements whether there is a contract or not.
The next exception is called an “insured contract,” in which the general contractor or subcontractor agrees to pay for bodily injury and property damage caused by its work.
Another exception to the contractual liability exclusion, said attorney Jeffrey Schulman of Pasich LLP in New York, is for incidental contracts. For example, a contractor hired to remodel the interior of a building might hire an electrician to perform the electrical work. If the electrician fails to properly perform wiring work, for example, the hiring contractor’s CGL policy will provide coverage for the legal costs associated with the electrician’s faulty work.
Certificates of insurance
A certificate of insurance is an important document issued by the insurance company that proves a contractor or subcontractor has the required insurance coverage — or does it?
“It’s not proof of insurance,” Schulman said. “It provides only the most basic information, like the policy period, the type of policy it is — the limits. It doesn’t tell you what kind of coverage you have or, more importantly, what kind of coverage you don’t have. It doesn’t tell you much of anything."
This might come as a surprise to general contractors that regularly collect certificates from their subcontractors and to subcontractors that collect them from lower-tier contractors. Securing a certificate of insurance, a standard industry practice, is as far as most contractors go in ensuring subcontractors or sub-subcontractors are insured adequately.
“The pitfall is that people have a false sense of security when they get the certificate of insurance. They think that no matter what happens … they’re covered, because here is this one page that says [the subcontractor] has insurance,” Schulman said.
The only way to make sure a subcontractor has the right coverage is to obtain and review a copy of the actual policy, he said.
Notice provisions in the insurance policy are also very important to keep in mind, Schulman said.
The insured is under obligation to give the insurer notice, he said, about a claim or potential claims as soon as possible. If the insured contractor does not notify the insurer in the time period allotted in the policy, the insurance company could deny coverage.
Some contractors, the lawyer said, are hesitant to notify their insurance companies of a potential claim for fear that their premiums will go up or that their policies will not be renewed, Schulman said. But that approach means they’re foregoing the benefits of an asset the company purchased. “That never made any sense to me,” he said.
Another time-sensitive issue is the deadline for taking action against the insurance company for a claims decision or anything else. Sometimes, Schulman said, the statute of limitations is greater than the time period allowed in the policy. The state’s statute of limitations could, for instance, allow six years for a breach of contract case to be brought in court, but the insurance policy could limit that time to as little as a year.
Most contractors have a get-it-done mentality. Unfortunately, when it comes to insurance, that is usually not the best way to tackle a general liability-related issue.
But sometimes a contractor, whether in the interest of expedience or in an attempt to set things right, might write a check to resolve a liability and then send the bill to the insurance company to reimburse it or apply it to the firm's deductible.
While perhaps admirable, it could be considered a voluntary payment made outside the policy.
So, for example, if a contractor accidentally drops a wrecking ball on somebody’s truck and gives the owner $5,000 on the spot to rent a vehicle, the contractor could be out of luck if it’s expecting reimbursement from its insurer.
“You can absolutely write that $5,000 check,” Schulman said, “but whether an insurance company will be willing to write you that check back is another question.”
The more prudent course of action, he said, is to explain the situation to the insurer, discuss the options and then ask the insurance company to fund the settlement before writing the check.
Honesty in the application
Sometimes, contractors are their own worst enemies by not being totally honest with their insurance brokers and disclosing fully the type of work they’ll be doing. Contractors might do this to secure a cheaper premium, but whatever the reason, it’s a bad idea.
If a contractor intentionally misrepresents the scope of its operations or anything else on its application for insurance, said Shane Riccio, a producer at broker Graham Co., the insurance company could declare the policy null and void.
This also means the contractor must come clean about prior claims, if the company has had a policy canceled because of failure to make a policy payment or anything else the insurance company asks before a policy is issued. Not being truthful or omitting important information could leave a contractor on its own in fighting a substantial claim.
Another tip for contractors, Riccio said, is to read their policies or hand them over to someone who is familiar with insurance to make sure the coverage meets their needs. “Trust your broker to an extent, but at the end of the day, it's your business, your assets, your livelihood,” he said.
At the very least, a review of the policy will prepare contractors to ask brokers more meaningful questions. “If they don't like the responses,” he said, "they’re armed with the ammunition to go out and find a new broker that could actually deliver a better product and a better result.”
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