At the recent Construction Conference held by Ward and Smith, two attorneys from the firm provided an overview of insurance in the construction industry.
The presentation featured essential guidance for construction industry professionals related to insurance claims, policy exclusions, professional liability, subcontractor exceptions, and risk mitigation.
The Business of Insurance
Allen Trask, an insurance counseling and recovery attorney, initiated the discussion by stating that, “The insurance industry is not evil, however, it operates as a for-profit business and insurance carriers are not your fiduciaries.”
The obligations of insurance providers are governed by contracts, and their fiduciary duties are to the shareholders of the company. “To optimize this aspect of your business, find a good agent, read the contract carefully and understand the exclusions before you sign,” added Trask.
Jeff Stoddard, a construction litigator, joined the discussion by mentioning that, “The big five insurance companies refuse to pay claims upwards of 40 percent of the time. They aren’t here to help you despite what their commercials say.”
Documentation is essential when dealing with a claim. “Document everything and do it early, even though it’s a pain,” advised Trask. “The adjuster is like a friendly adversary. Their job is to adjust the claim to the terms that are most favorable to the carrier.”
The various types of insurance products include:
- Property and Casualty
- Commercial General Liability
- Auto
- Worker’s Comp
- Builders Risk
- Professional Liability
- Environmental
- Umbrella/Excess Coverage
“Property and casualty protects you and the things you own, as well as from what you may do to somebody else, or the impact you may have on somebody else,” said Trask.
There are various policy forms that apply to specific areas. “Some are named peril such as fire, theft, vandalism, or flood. If that’s your policy, it’s limited to that named peril,” noted Trask.
As the name implies, open peril functions as an all-risk policy. Builders risk is a form of property and casualty insurance that provides temporary coverage during construction, between one and four percent of the project price.
“Builders Risk is tailored to a specific project under construction,” added Trask, “and it’s often passed through to the owner and the developer.”
Commercial General Liability
“This is the one that applies the most to the construction industry, because if you get sued, it is the one that is the most likely to protect you,” explained Stoddard.
Typically, commercial general liability insurance covers damage to someone else’s property, bodily injury, personal injury, and advertising injury. “Insurance companies make a lot of money from the exclusions, so you really have to watch out for that,” advised Stoddard.
A policy with 200 pages may have 20 pages at the end that exclude many of the stated coverages from the first part of the policy, for example. Insurance policies do not cover damages from mold or pay disputes between an owner or a subcontractor.
Intentional misconduct, fraud and misrepresentation can be a basis for excluding coverage, and every policy contains a duty to cooperate with the carrier. “If an adjuster asks a question and you tell them something because you think it will be more favorable to your side, and it ultimately constitutes a misrepresentation, they will disclaim coverage based on that, so you want to be honest and cooperative,” noted Stoddard.
Licensing board complaints are also generally not covered for general contractors or subcontractors.
Commercial general liability insurance is not a warranty. “If it functioned as a warranty, there would be no incentive to do good work and insurance costs would skyrocket,” added Stoddard.
Contractors should take note that these policies are usually explicit in spelling out that, “This insurance shall not apply to the cost of repairing or replacing any of your work defectively or incorrectly done by you or by others on your behalf.”
Repairs to work not performed in accordance with the contract, design documents, industry standards, or building code are not covered. Also, work to complete any work that was required by the contract is not covered. It is important to carefully evaluate whether the repair work is covered by your policy or not. As most contractors may know, it is not uncommon for clients to get emotional, continuously find problems with the work, and ask for repairs. “Lots of contractors have had to make a challenging business decision about when to cut that off,” explained Stoddard. Navigating a lawsuit with a homeowner can be expensive, and Stoddard noted there is not a one-size-fits-all approach to handling this type of problem. “You just have to take it on a case by case basis, but I can tell you that you should not expect an insurance carrier to take care of it,” Stoddard said.
Contractors who believe an insurance company will cover a claim from a difficult client asking for repairs may be extremely disappointed. “It’s not unusual for people to get frustrated and say, ‘I have given this person 15 punch list opportunities, if they ask for anything else, I will let insurance cover it,’” Stoddard explained.
In terms of a net expenditure, it is more financially advantageous to do the punch list, perform the warranty work, and keep the customer happy. “Don’t rely on your insurance policy, because it may not offer as much coverage as you thought it would,” added Stoddard.
Subcontractor Exception
The subcontractor exception is an important aspect of an insurance policy for a general contractor.
However, it is not uncommon for an insurance company to exclude the subcontractor exception. “As a GC you may think you’re not liable for a subcontractor’s work because of the exception,” mentioned Stoddard, “but the exclusion to the subcontractor exception could be there, allowing them a way out.”
Stoddard’s advice is to reach out to the insurance agent and carefully review the details of the policy. “Just to reiterate, the first part of a policy may make it sound like there is extensive coverage. Then, the last part of the policy will carve out all of that coverage,” commented Trask.
Older policies that are being renewed may even have exclusions reinserted by endorsement after they are excluded. “Put simply, it can be a bear to read through these policies,” laughed Trask.
Resulting Damages
Commercial general liability insurance mainly covers damage that results from work performed by the general contractor. A roofing contractor, for example, would be covered for water damage to the interior of a home.
Named Insured
Naming the appropriate person/entity on the policy is a critical aspect of risk management. “This is in the beginning of the agreement and it will state the name of the company, officers, employees, etc. It can always be different and if you have interwoven businesses, your insurance agent needs to know that, so they are all named in the policy,” commented Stoddard.
“If the developer is named and not the contractor, for example, you can have a big issue,” Trask said.
One of the most widely misunderstood components of insurance policies in relation to construction concerns the certificate of insurance. “Many operate under the notion that obtaining a certificate of insurance from a subcontractor is sufficient, but it’s not,” mentioned Stoddard.
General contractors should ensure that the subcontractor names them as an additional insured on their policy. “Attaching a blanket additional insured form to the subcontractor’s policy will provide coverage for you as a general contractor if you get sued,” noted Stoddard. “That way, claims against you are paid for by the subcontractor’s insurers, which keeps you from having a claim on your policy.”
General contractors should have a contractual provision with all subcontractors requiring them to be a named insured. “You want the subcontractor to defend and indemnify you from claims arising from their work, meaning they will pay the judgment if water gets into the building, for example, or pay for your legal defense,” added Stoddard.
“This is how insurance policies work,” Trask explained. “When you buy a policy, you’re buying defense of a lawsuit, and you’re also hopefully buying away your liability from having to pay someone.”
Finding the Right Coverage
Having the right coverage to match a specific situation is critical. “In terms of tactics, we often stack coverage, whether it’s putting it on subcontractors or buying supplemental policies,” mentioned Trask.
Professional liability insurance may be advisable as commercial general liability insurance does not cover professional services. “This comes up a lot with design-build contracts. If you have an architect on staff or use one on a contract basis, for example, and there is a problem, CGL wouldn’t cover it,” noted Trask.
Most CGL policies have broad exclusions for anything related to environmental issues or pollution. To minimize risk, contractors should consider environmental liability insurance, as it is a specialized commercial policy that protects businesses from financial losses tied to pollution and contamination.These types of policies can provide coverage for bodily injury or property damage from pollutant releases, clean-up costs, and government ordered testing, monitoring, or remediation.
“The policies are very technical. Essentially, you just want to ensure that what you have is adequate to cover what’s not in the CGL policy,” said Trask.
Though umbrella coverage is expensive and difficult to obtain, Trask believes that looking into it is advisable.
Insurance remains an essential tool for risk mitigation. “It is increasingly harder to utilize, so you really want to be diligent about getting the most value out of the contracts you’re signing,” added Trask.
“Having a dedicated person on staff to ensure you and your subs have the right policies, your contract has the right provisions, and you have what you need to protect your company is very important. An ounce of prevention is truly worth a pound of cure,” Stoddard concluded.
