As a construction lawyer, I deal with insurance issues for my clients regularly. While I recognize that insurance policies are dry, boring, and difficult to read for most people, they are critical to protecting assets and the business as a whole. Obtaining adequate coverage and properly understanding your policy can be the difference between survival and losing it all over a claim. Contractors should take more time and care to evaluate the company’s insurance needs and current coverages than they often allocate to the task.
Many of the mistakes that can lead to surprises and significant problems result from simple misunderstandings. Here are some common examples that can cause you to “snatch defeat from the jaws of victory” in a coverage sense.
- I have an insurance certificate from my subcontractor, so I am covered right? Not necessarily. An insurance certificate has no legally binding effect. If there is not an endorsement to that subcontractor’s policy – which you should get a copy of when possible – then the coverage has not been bound and the insurance company will deny the claim. Even with the endorsement, it must be the right kind of insurance to cover the loss. Make sure you are an additional insured on the correct coverage.
- I have my own Commercial General Liability policy, so I am still covered under that right? Again, not necessarily. One of the common misunderstandings of contractors is that policies cover every aspect of their work. Many CGL policies, however, contain the “your work” exclusion that excuses the insurance company from coverage if the allegations made against the contractor are that the contractor’s work was performed improperly. If your policy has this type of language, look for other ways to protect yourself contractually.
- I am required to indemnify the owner, my insurance policy covers that loss right? This issue is among the most misunderstood in this area of the law. An indemnity obligation is a contractual obligation undertaken to pay another party for a loss it sustains. Considered a contractual liability, it is different from naming that owner as an additional insured. The coverage works different in each and different policy language applies. Because the duty to indemnify can exceed insurance coverage, care should be taken in looking at these contract clauses to avoid exposing assets. Read your contract language carefully and compare it to what is covered by your insurance.
- I had workers’ compensation insurance and paid benefits to my injured employee, so I am immune from further suit right? The answer to this question often depends on what state’s laws apply. In Pennsylvania, for instance, a contractor can agree to waive the immunity provided by the Workers’ Compensation Act in its contract. The practical effect is the possibility that a contractor could end up paying twice for the same accident. This is a significant risk that implicates both your insurance and indemnity obligations. Careful consideration should be undertaken before agreeing to such terms.
These are but a few of the misperceptions and mistakes contractors make with insurance issues. Insurance is not the most exciting part of the construction world, but a failure to understand it can be financially devastating to a company. It only takes one major claim for which the company does not have insurance to end a small business. Time should be given to this important issue in proportion to what can result if not done correctly.