Insurance Coverage Issues for Contractors


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Insurance Coverage Issues for Contractors

  1. 1. Leonard R. Ruzicka, Jr.<br />Ellen C. Nangle<br />April 13, 2011<br />Insurance Coverage Issues for Contractors<br />
  2. 2. Overview<br />General Observations<br />Builders Risk Insurance<br />Comprehensive General Liability Insurance<br />Professional Liability Insurance: Errors and Omissions<br />Missouri’s Anti-Indemnity Statute and Exceptions<br />Waiver of Subrogation and Effect on Lower Tier Subcontractors<br />
  3. 3. General Observations<br />There is no standard form commercial policy<br />Policies sold as “all risks” may seem like “no risks” when you make a claim<br />Make sure you read and understand:<br />Coverage<br />Exclusions<br />Exceptions<br />
  4. 4. Builder’s Risk Insurance<br />A form of property insurance that covers physical loss or damage during construction of those materials, fixtures or equipment used in the construction process<br />
  5. 5. Coverage Specifically<br />Builder’s risk is typically written on an “all risks” basis, i.e., coverage extends to all losses that occur during construction except losses arising out of misconduct or fraud. <br />Exclusions: Almost all builder’s risk policies have form of defective workmanship exclusion. To determine the extent of your coverage – focus on this clause<br />
  6. 6. Good/Bad Exclusion<br />Good exclusion: Cost of making good faulty or defective workmanship, material, construction or design, but this exclusion does not apply to damage resulting from such faulty or defective workmanship, material construction or design<br />Bad exclusion: No exception for “resulting” damage (highlighted language)<br />
  7. 7. Term<br />Starts with construction and ends when construction is complete. It is an “occurrence” based policy (versus “claims made”), i.e., the physical loss or damage must occur during construction and before occupancy<br />
  8. 8. Practical Tips<br />Make sure contract is very clear about who is to procure the Builder’s Risk Insurance and what coverage levels to procure<br />Make sure contract is clear about who is covered – owner, general contractor, sub-contractor, lender, etc.<br />
  9. 9. Practical Tips<br />Make sure permanent coverage is in place once project is complete. Builder’s risk expires once the project is accepted by the owner or when the named insured interest in the property ends or abandons construction<br />
  10. 10. What Do Comprehensive General Liability Policies Cover?<br />Property Damage<br />Bodily Injury<br />Caused by an “Occurrence”<br />What does “Occurrence” mean”?<br />Generally construed to be an accidental event<br />
  11. 11. What Do Comprehensive General Liability Policies Cover?<br />Coverage for the insured against 3rd party claims for person injury and property damage<br />Examples<br />
  12. 12. Comprehensive General Liability Insurance<br />Defective work is generally not covered under CGL Insurance, but the resultant damage is<br />Examples<br />
  13. 13. Does A Contractor Have Coverage For Losses Due To Defective Work?<br />Missouri courts will not likely conclude that failure to properly perform work is an occurrence. Most standard Comprehensive General Liability policies have a “faulty workmanship exclusion” which excludes coverage for property damages resulting from a contractor’s operations<br />For example, a Missouri court concluded that pouring a concrete subfloor in a negligent manner did not constitute an accident or an “occurrence” and therefore the insurer had no duty to defend or indemnify.<br />
  14. 14. What should you do when you have an event that may be covered by Comprehensive General Liability?<br />Give your insurer immediate notice<br />If sued, tender the suit to the carrier ASAP. If some of the allegations may not be within coverage but others might be, tender anyway<br />The duty to defend is much broader than the duty to indemnity. If the complaint states one claim that falls within coverage, the insurer has a duty to defend against the entire lawsuit<br />
  15. 15. Cooperate with the insurer providing all information requested or necessary to:<br />Properly defend the claim<br />Evaluate liability<br />Evaluate settlement opportunities<br />Do not take any actions that may prejudice the insurer’s position in the claim, e.g., do not admit liability / do not settle without the consent of the insurer<br />
  16. 16. What If Insurer Declines Coverage?<br />No longer have a duty to cooperate<br />Insurer in peril if wrongfully declines<br />Hire an experienced coverage attorney<br />Make sure you communicate issues respecting your business / facts of claim<br />Expect insurers to be slow and bureaucratic / demand irrelevant information<br />
  17. 17. Professional Liability Insurance<br />As discussed, commercial general liability insurance typically does not cover professional errors or omissions<br />Professional liability insurance addresses this risk<br />
  18. 18. Professional Liability Coverage<br />Covers claims arising from errors and omissions in performing professional services<br />Typically purchased by architects, engineers, surveyors, design builders and construction managers<br />
  19. 19. Professional Liability Coverage<br />Differences between CGL coverage and professional liability<br /><ul><li>Professional liability policies require tail coverage
  20. 20. Professional liability typically covers the cost of the defense for the insured, and amount required to repair the damage
  21. 21. Typically, professional liability insurance does not cover the redesign costs
  22. 22. Owner cannot be an additional insured because it does not have an insurable interest</li></li></ul><li>Missouri’s Anti-Indemnity Statute (R.S. Mo. §434.100)<br />“In any contract or agreement for public or private construction work, a party’s covenant, promise, or agreement to indemnify, or hold harmless another person from that person’s own negligence or wrongdoing is void against public policy and wholly unenforceable.”<br />
  23. 23. Exceptions to Missouri’s Anti-Indemnity Statute<br />9 exceptions<br />Additional Insured Exception<br />Construction Bonds or Insurance Bonds<br />If there is insurance to cover the Indemnity obligation<br />
  24. 24. Waiver of Subrogation and its Contractual Effect on Lower Tier Subcontractors<br />Waiver is the intentional or voluntary relinquishment of a known right<br />Subrogation is the right of one who has paid the obligation of another to be indemnified or made whole by the other<br />Waiver of subrogation is the relinquishment of a right to be made whole by another<br />
  25. 25. Waiver of Subrogation and its Contractual Effect on Lower Tier Subcontractors<br />Typical scenario<br /><ul><li>Owner requires a general contractor to indemnify it
  26. 26. General contractor requires a subcontractor to indemnify the general contractor and the owner
  27. 27. Both contracts have a waiver of subrogation clause</li></li></ul><li>Waiver of Subrogation and its Contractual Effect on Lower Tier Subcontractors<br />End result is that the subcontractor’s insurer pays and is unable to recoup any payments from the other parties<br />Limit the indemnity to just the negligence of the party indemnifying<br />Limit the insurance obligation to the indemnification<br />
  28. 28. Questions?<br />