The Known Unknowns Can Be Managed – It’s the Unknown Unknowns That Cannot
The largest General Contractors generally have broad General Liability insurance coverage, likely because their size and risk management capabilities created the leverage with insurers needed for successful coverage negotiation. These contractors also tend to use larger national or global insurance brokers having personnel specializing in construction industry insurance and some “clout” with underwriters.
But what about the smaller General Contractors and Trade Contractors? They tend to purchase their insurance through local and regional insurance brokers, many of whom lack specialized construction industry training and expertise and have only a limited number of insurance carriers with which they deal directly. These brokers use the services of wholesalers, or intermediary brokers, to access the broader insurance marketplace. As a result, it is common to find that midsize and smaller contractors and subcontractors are insured with non-admitted, surplus lines insurance carriers. Although these insurers may have acceptable ratings from A.M. Best and other insurance rating organizations, they commonly use “non-standard” policy forms containing restrictive, if not onerous, coverage terms, exclusions, and conditions.
Consider that insurance requirements are specified in various forms of contractual agreements, including construction contracts, premises leases, and maintenance agreements. These requirements usually specify that contractors are to maintain specified types of insurance, including Commercial General Liability (CGL) insurance with Products and Completed Operations coverage insuring the contractor and the owner (as an Additional Insured) against claims for bodily injury and damage to property resulting from the contractor’s operations, both while the work is being performed and following its completion. The existence of the required insurance is to be confirmed by the provision of a Certificate of Insurance or, only if specifically requested, a copy of the insurance policy.
It is common practice for owners, when they receive a Certificate of Insurance, to assume that the policies listed in the Certificate fully protect the contractor and the owner for claims arising out of the work. This is a bad assumption. When I examine the Commercial General Liability policies of mid-size and smaller contractors and subcontractors, more often than not, I find that the insurance carrier has included a Contractor’s Endorsement (or various forms with harmless-sounding titles) excluding coverage that was needed and expected by the insured. When this comes to light after a claim has been denied, it can be devastating to the contractor whose business and livelihood are now at risk.
I commonly find that contractors’ CGL policies have been endorsed with:
A Subcontractor’s Warranty provision denying coverage under the policy if a loss is caused by a subcontractor that does not carry general liability insurance with limits at least equal to those in the contractor’s policy;
A Definition of Insured Contract that deletes contractual liability coverage except for liability assumed in lease agreements, sidetrack agreements, certain easement or license agreements, elevator maintenance agreements, and municipal indemnification agreements required by ordinance;
An exclusion of coverage for damage to work performed by subcontractors on behalf of the insured;An exclusion of any claim for injury to employees, including employees of subcontractors of any tier; and,
A total pollution exclusion eliminating the exceptions found in the standard Insurance Services Office (ISO) CGL policy form.
You may ask: Why didn’t the insurance broker inform the contractor of these five major policy exclusions when the insurance was proposed or, if not, then when the policy was transmitted to the contractor? Unfortunately, insurance brokers often do not themselves read policy forms and endorsements before proposing coverage. And, when policies are received from insurance carriers, many do not read them and determine if the policy provides the coverage that was expected and/or proposed. Even if the insurance broker has read and understood the terms, conditions, and exclusions of the policies, many fail to describe the coverage provided and inform their client of major exclusions in writing when they transmit the policy.
A case in which I was engaged as an expert witness involved a suit against a General Contractor (GC) by an employee of a roofing subcontractor who was seriously injured in a fall from the roof of a home that was being renovated. The GC carried a CGL policy with sufficient limits of liability, sold by an insurance broker who knew that virtually all of the GC’s work was performed by trade subcontractors. Like most policyholders, upon receipt of the policy, the GC reviewed the policy’s Declarations to ensure that its name and address were correct, the limits were as expected, and the policy term was right. It did not read the entire policy, instead relying on the insurance broker to have procured the coverage needed for its operations. Some months after the accident occurred, the GC was sued by the injured worker who alleged that the GC did not perform adequate safety inspections at the site, did not ensure that fall-protection devices were in place, and otherwise permitted the work to take place in an unsafe workplace. The claim was reported to the CGL insurer who responded with a denial of coverage based mainly on the policy’s “Contractor Endorsement” which read in relevant part as follows:
“This insurance does not apply to:
‘Bodily Injury’ to:
• Any independent contractor or the ‘employee’ of any independent contractor while such independent contractor or their ‘employee’ is working on behalf of any insured; or
• The spouse, child, parent, brother or sister of such independent contractor or ‘employee’ of the independent contractor as a consequence of (1) above.
This exclusion applies:
• Whether the insured may be liable as an employer or in any other capacity; and
• To any obligation to share damages with or repay someone else who must pay damages because of the injury.”
The insurance broker had transmitted the policy to the GC with a short letter that contained no description of the policy’s coverage and no mention of major exclusionary endorsements such as the quoted Contractor Endorsement. In my opinion, this insurance broker did not satisfy its responsibility to procure the insurance requested and expected by the GC or to inform the GC of its inability to do so, thereby leaving itself exposed to the GC’s broker-malpractice lawsuit.
The described case is, unfortunately, not an unusual situation. It is strongly advised that those risk managers, insurance advisers, independent agents or brokers who provide counsel or insurance services to construction contractors, developers, managers, and project owners take the extra steps necessary to ensure that liability insurance carried by General Contractors and Subcontractors provides coverage at least equal to that provided by the ISO standard Commercial General Liability policy.