Contractor Pitfalls Unrelated to COVID-19
While most are focused on COVID-19 impacts right now, there remains a need to educate on insurance pitfalls unrelated to the current situation.
While I’ve previously addressed issues facing property owners, insurance for contractors is another area with great variability in coverage options.
Except for very large companies, few contractors have an internal risk management department that is tasked with evaluating and purchasing insurance. A more typical scenario is that a contractor is required to get insurance based on a specific job he/she wants to get. In contracting, margins are already slim and every penny matters to the bottom line. Most contractors are not “insurance experts” able to understand every element of their policy nor should they be; they are contracting experts.
The challenge is that there are so many variants of coverage for contractors that comparing apples-to-apples hard. While “cheapest price” might be top of mind when purchasing coverage, if there turns out to be a claim, the presence of an exclusion could be the difference between the contractor going bankrupt and the ability to keep the business open.
I want to outline a few main pitfalls that I often review with my insureds:
EIFS or External Insulation and Finish System is a group of building cladding systems that provides a finished surface. Sometimes referred to as stucco (though not technically the same thing), EIFS is often used in the desert Southwest on the outside of both residential and commercial buildings. Many policies have a blanket EIFS exclusion because of historical water damage and mold issues. There was a spate of liability claims in the 1980s and carriers quickly and uniformly started excluding this coverage. This can be a significant liability exclusion for contractors that is easily missed. Again, it can be remedied with endorsements or alternate policies, but unless a contractor and his/her agent keep an eye out for it, this is something often overlooked.
Contractors – Injury to Subcontractors
An exclusion included in many general liability (GL) policies for contractors is an absolute exclusion to injuries of subcontractors. The underlying theory is that workers compensation is the policy of choice for injured workers. In return, carriers can offer a reduced premium for allowing that exclusion. However, this leaves contractors, especially those that hire subcontractors, incredibly vulnerable. Depending on the circumstances of injury, the laws of a given state, and the relationship of a general contractor (or even owner) to the subcontractors, there are ways that workers compensation might not apply. Recall that worker injuries are the single biggest liability threat at a job site. Recall also that many injured individuals have savvy attorneys that work to get “out of” the workers compensation system. If these actions are successful, the backstop is a good GL policy.
Contractors – Additional Insured Wording
Nothing makes GL insurance more confusing than when someone asks for “additional insured” to be provided by a subcontractor. Between standard ISO-filed forms and carrier-specific forms, there are over 200 variants of additional insured wording and that doesn’t include manually crafted one-off wordings. The mere existence of 200 variants implies that there are nuances in coverage and how one applies versus another. To make matters worse, a typical certificate of insurance (COI) simply “checks a box” that additional insured wording exists, but who knows what it says. This is an incredibly important issue not just for an insured, but for anyone who hires that insured. They usually have no idea if the additional insured wording applies or not.
Designated Operations and/or Specific Operations Exclusions
I represented a general contractor that hired a subcontractor to do steelwork. The GC did the appropriate due diligence of requesting a COI and the subcontractor was hired to provide and erect some steel. Something just seemed “off” about the certificate when I reviewed it, so I asked the GC to request a copy of the subcontractor’s policy. Lo and behold, there was absolute exclusion of coverage for “any construction operations” that applied to both ongoing operations and products-completed operations. My jaw completely dropped. I’m unclear where the breakdown happened between the sub, the sub’s agent, and the carrier, but this sub literally had zero coverage and all it took was a cursory look at the declarations pages to realize it. Unfortunately, these issues crop up all the time and are a significant pitfall for contractors “just” price shopping.
The list of endorsements that create issues for contractors goes on and on: Pollution coverage, designated locations coverage, and specific contractor condition requirements are just a few others. The key message for contractors who are purchasing coverage is that all options are not equal. More importantly, a key message for those hiring contractors or subcontractors is that a COI actually provides very little information about what coverage is in place. Demand to spend time with your agent going through what is being purchased including the exclusions and modifications.
The benefit of so much emphasis right now on what exists for COVID-19 coverage, is that it is bringing to light the underlying exclusions that insurance policies contain. Don’t be fooled into a false sense of security, know what you are buying.