General contractors buy insurance and enter into indemnity agreements with subcontractors to control the risk associated with their projects. Based on our experience fighting for policyholders, we’ve identified five reasons an insurer might deny your claim, along with steps you can take to help make sure you get the full benefit of your risk-shifting agreements.
Untimely Notice: Why Give the Insurer an Excuse to Deny Your Claim?
It hurts to be invited late to the party. The same is true when you’re inviting your insurer to the litigation “party” by giving notice of the claims made against you. While “timely notice” may not be specifically defined in an insurance contract, notice is often required “as soon as practicable” Uncertainty is NOT the friend of a risk manager. The type of insurance coverage may impact the timing of notice. For example, an excess insurance policy may not require notice until the policy is likely to be implicated. In short, what constitutes “timely notice” will vary based on the language of the policy, the law of the jurisdiction that controls coverage, and the nature of the coverage.
But just as you can count on the sun rising in the east regardless of where you find yourself in the world, you can count on insurers asserting untimely notice as a first line of defense. This is a risk that you can control by giving notice of a claim the moment you become aware of it. Because “claim” may mean different things in different insurance policies, a general contractor – and its coverage counsel – should review the insurance contract BEFORE claims arise to (1) understand how “claim” is defined and (2) identify the notice requirements. And if you are a general contractor, hopefully, your contract will require your subcontractors to give THEIR insurers (and you) timely notice for claims arising at least in part from their work. You need to give those subcontractors and their insurers timely notice as well so that you can look to them for defense and ultimately indemnification.
The bottom line? It’s important to give notice to ALL insurers and other parties that MAY owe a duty to defend or indemnify the general contractor.
A Certificate of Insurance Is NOT an Insurance Policy!
Surprises can be fun – for your birthday. But they are almost never a good thing when it comes to risk management on a construction project. General contractors (and owners) generally require parties that are contractually obligated to defend or indemnify them to provide insurance coverage at predetermined limits to backstop those obligations.
All too frequently, general contractors (and owners) ask their subcontractors to provide nothing more than certificates of insurance to back up the risk transfer provisions. But certificates of insurance are not insurance policies and do not disclose exclusions that may render the coverage nonexistent or limit it in a way that effectively avoids the risk transfer obligation that the general contractor sought to shift to its subcontractor.
To avoid surprises, a general contractor should require subcontractors to provide complete copies of the insurance contracts, including ALL endorsements, in addition to certificates of insurance. Of equal importance, the general counsel – and this is an area where coverage counsel can help – MUST review those insurance contracts to ensure that there is coverage for the risks presented by the project.
Does the Construction Contract Properly Identify the Parties?
As a general contractor, you may face claims arising from a subcontractor’s work. Your contract with the subcontractor will (hopefully) require the subcontractor to defend and indemnify you for claims relating to its work. But sometimes, businesses conduct their operations through related but legally distinct entities.
Hopefully, the answer is “yes” to the following questions:
- Is the party seeking a defense or indemnity from the subcontractor the same party named in the contract with the party asserting the liability claim?
- Is the party seeking a defense or indemnity from the subcontractor the same party named in the subcontract?
It may surprise you to learn that the answer to these two questions is not always “yes.” It probably won’t surprise you that in such cases, the insurers generally do not volunteer a defense and there will be more hurdles to clear to secure coverage. Hurdles are fun if you’re watching the Olympics, but they’re not entertaining in the context of risk transfer. There may be endorsements that resolve this problem, and experience teaches that there is likely a path to develop and present the evidence required to establish a right to coverage. However, this issue can be avoided by careful contract review up front. Finally, pay close attention to the parties identified as insureds in your own policies (and applications) so that you can avoid this same problem when you make claims under your own insurance policies.
Is the Risk Transfer Provision Triggered by a Claim or by a Finding of Liability?
When you play Monopoly, do you get $200 or $400 for landing on “Go”? The answer depends on the rules to which you agree when you begin the game. Does your subcontractor’s duty to defend you begin when a claim is made against you relating to its work or are you required to prove the subcontractor’s liability to trigger its duty? As in a game of Monopoly, the answer depends on the rules that are set by the terms of your contract.
Too frequently, parties ASSUME that a subcontractor’s duty to defend is triggered by a claim alleged to arise from its work. But unlike an insurer’s duty to defend, the trigger for a subcontractor’s defense obligation depends on the indemnity language used in the subcontract. And since the consequences are NOT measured in Monopoly money, it is imperative to draft a contract that ensures the protection you need.
Is the contractor’s liability insurance primary or excess of the subcontractor’s insurance? And why should you care? This difference is significant because it may impact the amount of coverage available to you, and it may even impact the cost of your insurance in the future. “Primary” in this context means that the claim is funded first by your own insurance, and then the subcontractor’s insurer kicks in. On the other hand, if your insurance is “excess” of your subcontractor’s insurance, the defense and indemnification are funded in the first instance by the subcontractor’s insurance. Once again, the answer depends on the “rules” established by the subcontract. Consequently, the Monopoly comparison remains relevant: Just as certain rules can change from game to game, the terms of your subcontracts can vary, so you should never make assumptions at the inception of a project.
Are You Confident that Your Application for Insurance Is Accurate?
Policyholders should not assume coverage even when they give timely notice of a claim that is plainly within the coverage of an insurance policy. Insurers are ever vigilant in searching for ways to avoid the obligations purchased through an insured’s premium dollars. And errors — whether material (meaning they are likely to have affected an insurer’s acceptance of the risk) or knowing (meaning that the applicant knew or should have known about the inaccuracies) — in an insurance application may offer an insurer an avenue of escape from a costly claim. “Fudging” is okay if it involves chocolate and best avoided in your insurance application because it can cost you your coverage when you need it or force you to initiate litigation to obtain the coverage that you purchased.
It is not uncommon to see insurers seek recission (opting out of the contract after a claim has been made) at the first sign of potentially expensive litigation exposure, even after collecting premium dollars from a policyholder for years. Consequently, to get the benefit of the insurance you purchased, it is important to carefully review your applications (including renewals) to ensure that the information supplied to the insurer is accurate.
If You’re Denied, All Is Not Lost
When it comes to insurance coverage — especially in the context of complex construction projects — an ounce of prevention is worth a pound of cure. That’s why general contractors should always engage counsel to review the indemnity language in their contracts before signing on the dotted line because that may determine the extent of third-party insurance coverage available to them. However, if you already have coverage in place and a claim is denied for any of these five reasons, all is not lost. The team at Goodman Law Group | Chicago can draw on our decades of experience to help you get the benefit of the insurance coverage to which you are entitled.
