The Importance of Being Insured
Being insured is a critical element of doing business as a contractor. This CLE hosted by Levelset will be taught by construction and employment attorney JoLynn Scharrer, Shareholder with Hunt Ortmann.
Join this free live CLE webinar to earn one hour credit.
Register for this webinar to learn:
- Differences between types of insurance for contractors
- Common coverage issues to avoid
- The risks of not being insured
This webinar will be useful for construction businesses, in addition to attorneys.
Attorneys: This course will be accredited for one hour CLE credit by California State Bar (review pending). To obtain credit in your state, check with your local State Bar for reciprocity guidelines.
Speaker 1 (00:00:04):
So welcome. We’re glad you’re here and you get to learn from a very reputable construction attorney in Southern California, and she’s going to present on the importance of being insured and I will let Joann introduce herself and get started. Thanks everyone. And also before I go we will have time at the end for questions. So if you have a question, just type it into the Q and a panel or in the chat box and we’ll save time to address those at the end. Thanks. Go ahead, Joan.
Speaker 2 (00:00:41):
All right. Thank you. Good morning, everyone. I I will give you a little caveat to begin with. I have multiple screens in my office and my camera is situated on one of them. So it might appear that I’m not looking at you. I’m trying to sort of multitask between the, the slide deck and the camera itself. So I’ll do my best to make eye contact with you. We have a question already. I’m going to I’m gonna hold the questions for the end because we have a lot of material to get through and I’m, I’m hoping to do that quickly. This is gonna be basically an insurance 1 0 1 course for contractors.
Speaker 2 (00:01:21):
There we go. That’s me. I am a shareholder at hunt Ortman hunt. Ortman has been in existence for 32 years. I’ve been practicing for 34 years. I lead the firm’s insurance practice and the employment law group. In addition to being a legal guard attorney, the firm is, is happy to partner with level set, to represent the interests of contractors and other subscribing members. One of the things I’ve noticed in my practice is that many of my construction clients have very little background and do not understand the importance of being appropriately insured. So one of the things that I wanted to do was provide a presentation that gives some basic background information so that you at least know what to look for and what questions to be asking and why insurance is so important for, for the contractor.
Speaker 2 (00:02:21):
Start with a disclaimer. This is a CLE seminar, which means it’s educational in nature. I don’t have yet an, an attorney client relationship with you. This is intended to be legal advice and education solely. So these are the things that I’m going to, to cover today. Some in a little more detail and some I’m going to just sort of highlight what the issues are or what, the things that are important that you need to take away from this licensing requirements for contractors and how that sort of dovetails with insurance types of insurance for construction projects, core duties of an insurer with regard to what it should be doing for the benefit of its policy holder, which is you, the insured contractor, key policy provisions of general liability insurance policies. We’re gonna talk a little bit about how indemnity agreements might fall within the coverage of some general liability policies and what that means for contractors.
Speaker 2 (00:03:27):
We’re gonna talk about the importance of certificates of insurance and endorsements. We’re gonna talk about what to do if you have a claim, how you provide notice and tender and how do you get the insurer to do what you want them to do in the first instance we’re gonna talk about some common coverage issues and that’s a little more detailed. We can get into that, and that will be clearer and more easier to understand once we get through the policy provisions and what the policies look like. And then hopefully we’ll have enough time left that we can entertain all of your questions.
Speaker 2 (00:04:03):
So let’s start out with licensing requirements in California, and I know this varies state to state, but in California, the contractors state licensing bureau requires contractors to maintain workers comp compensation insurance, and they also have to have an active bond in the amount of $15,000. That amount is being increased to $25,000. I would venture to say probably within the next month or two for obvious reasons inflation. And the fact that I’m, I’m dealing with some claims where some charities have tendered their bond limits into court because there are multiple claimants and the bond limits are just never gonna be enough to, to satisfy the claims. So it’s understandable that that amount would go up. In addition, all California corporations have to comply with corporate formalities. They need to be properly formed. They need to have their regular meetings. They have to have appropriately designated officers and directors, and they need to remain in good standing, which means things like paying your taxes in order to prosecute or defend themselves in litigation. That’s very important because if you have a claim made against you and you are either not licensed that could have hugely detrimental consequences, and you also would be hampered from a being able to defend yourself in litigation in California.
Speaker 2 (00:05:30):
So let’s move on to the types of insurance. In general, there are two basic types of insurance, not just for construction projects, but, but overall there’s first party insurance and unrelated to construction projects. First party insurance is most commonly known as like your homeowner’s insurance. Homeowner’s insurance is insurance that you, you purchase to protect yourself against claims that you might suffer. Third party insurance is a little bit different. Third party insurance is insurance that you’ve purchased to protect yourself from claims made by other people against you as the insured. So with regard to a construction project, first party insurance is typically builders risk, which is course of construction insurance. This used to be an animal that owners would purchase or required to be purchased on their behalf. That is still typically the case. Builders risk is not always purchased for every project, although it is probably a good idea.
Speaker 2 (00:06:34):
And we’ll talk about why and property insurance, which doesn’t necessarily protect the project location itself, but it might protect a contractor’s work premises, locations, yards equipment yards, things like that for third party insurance commercial general liability insurance is, is a mainstay is a staple, is, is, I don’t imagine how any contractor or any other business could live without it. And we can, we’re gonna be talking about that the most. During this webinar, excess umbrella insurance, we can explain how that fits in with general liability insurance, professional liability insurance, typically for design professionals, architects, engineers OSIP and CIP, which is an owner controlled insurance program, or a contractor controlled insurance program. And those policies are typically a package type policy that includes general liability, excess liability, sometimes workers comp. And those are policies that are typically enrolled in by multiple parties that are part of a construction project. And we’ll talk about that further. And then there are other types of insurance pollution Marine workers’ comp, and we’ll go through that shortly. And then there are surety bonds. Surety bonds is a, is a different animal, but they are also technically insurance contracts and there are performance bonds and payment bonds. I’m not gonna talk in great deal today about them. I’m gonna mention them and we’ll, we’ll speak quickly about them, but they are an important component.
Speaker 2 (00:08:18):
Let me see if I can just move my bar here. There we go. First party insurance. So we, I, I mentioned a little bit about builders, risk insurance builders, risk insurance is a specialized policy. It’s a course of construction policy. That means if there is a loss to the property or a portion of the construction during construction, and, and some examples here on the slide are fire lightning, hail explosions, theft, and vandalism are the most common types of claims. Then that’s the type of coverage that would provide indemnity to the policy holder, which is typically the owner or the general contractor. Builder’s risk is typically only purchased in connection with the execution of hello, with the execution of a construction contract. And it typically only lasts for the duration of the project. The other type of first party insurance I mentioned above was property insurance. And that’s also first party insurance that specifically indemnifies the owner or the user of the property for its loss. Now this, if, if this is in place, it’s not always necessary that you have builders risk. These are complimentary coverages. And, and I think that is why many property owners probably don’t require builders risk, or it’s simply an option, but those are both types of first party coverage,
Speaker 2 (00:09:54):
Third party coverage. Oops, wait, we went, we skipped ahead. There we go. Okay. Now we’re gonna move on to third party coverage. The most important third party liability policy that a contractor can obtain is commercial general liability insurance, CGL policies, CGL policies provide comprehen comprehensive coverage to the contractor for bodily injury, property damage and personal injury. And this can be related to a construction site, but it also can relate to you your premises or all of your operations in general, really important though, that you have this because if there is a construction injury injury to a third party on a site, or if there is a property damage claim, and this is where construction defect litigation is a primary target and personal injury, personal injury claims, don’t usually arise in connection with construction projects. I’ve never seen one, although I’m, I’m sure that there, I could probably come up with some sort of strange hypothetical where someone is locked on a project.
Speaker 2 (00:11:08):
And, and I don’t know, they have some sort of medical or other consequences based upon being locked in a project. And maybe they would allege personal injury based upon some claim of of wrongful detention. But most importantly, our, our property damage claims commercial general liability ensures a contractor against property damage claims that may arise out of a construction project that is probably the most, most important component of that insurance. And there are two components to a definition of property damage in a policy. The first is there needs to be physical injury to two tangible property that can be part of a loss of use component. So if, if a portion of a site is non-op operable, because there was damage to tangible property, I I’ve had claims where there is a a pump that is damaged during the course of construction.
Speaker 2 (00:12:08):
And the pump goes, goes out of service. That would include physical injury to the tangible property itself, but also there’s a loss of use component. Property damage also means loss of use of tangible property. That’s not physically injured. So if something stops working, for example, maybe an HVAC system or something during the course of construction or simply right after construction, if that were to stop working and the unit not physically injured, but for some reason, maybe there is a problem with the electrical, with the side or something else that, that, that tangible property can’t be used that would also be arguably covered property damage under a general liability policy.
Speaker 2 (00:12:52):
Another component of third party insurance is excess insurance. There is excess insurance and umbrella insurance, excess insurance. If you think about insurance policies as building blocks, excess insurance is the building block that would sit on top of your CGL policy. So the CGL policy would be primary. It would be the first layer of coverage that would respond to a claim. And if you use up all of the limits of your CGL insurance, the excess insurance sits on top to jump in and handle a claim. When the primary CGL policy is gone an excess liability insurance policy offers higher limits. And it’s, I I’ve just explained the building blocks concept. There are two types of excess liability policies. There are some policies that are written explicitly to provide the same coverage as your primary CGL policy. Those policies are called follow form, excess policies.
Speaker 2 (00:13:54):
They’re typically very short. They might have some basic language, but basically what they say is, oh, we’re ensuring the same thing that the primary CGL policy insured specific excess insurance is a little bit different if a contractor or a, or an insured in general wants coverage for a specific type of loss, or doesn’t want excess to be as broad as the primary CGL policy, they can purchase specific excess insurance. And that insurance specifically lists out what is covered and what is not covered. And it may not necessarily match what the CGL policy covers. So if you’re thinking about building blocks, a primary policy might be a building block that is two by two in inches, let’s say the follow form excess insurance policy would also be two by two would be the same size designed to cover the same exact losses. A speci a specific excess insurance policy might be one by one above a two by two CGL primary policy. So it might be much narrower in the coverage, the scope of coverage, the limits what’s excluded and what’s included.
Speaker 2 (00:15:09):
There’s also umbrella insurance, which is an alternative to excess insurance umbrella. Insurance is also a block that sits above primary policies, but the difference between umbrella and excess is that if your primary policy is a two inch by two inch block, an umbrella policy could be a three or four inch square block that provides much broader coverage over the primary policy. So the umbrella policy typically provides excess limits when the underlying limits of the policies are exhausted through payment of claims. So in that sense, it acts just like an excess policy. It can also drop down and pick up where the CG PO CGL policy leaves off. If the CGL policy exhausted is exhausted by the payment of multiple claims. Now, in that instance, it may or may not provide the same coverage for the same types of risks as the CGL policy, but it’s typically broader and it will drop down where there is coverage within the policy form.
Speaker 2 (00:16:14):
And I’m gonna provide a little bit of a caveat here right now because all of these policies are technically contracts. So what is covered and what is not covered is explicitly stated in the contract. And it’s, you’re going to, you’re gonna need to review the policy language read the contract to find out what the specifics are, but in general, that’s how an umbrella policy functions. The third instance where an umbrella policy can provide coverage. That’s broader is if the primary policy, the CGL block doesn’t provide coverage for a particular loss, but the umbrella policy might provide coverage. That’s broader than the primary policy. Then the umbrella policy will drop down and provide coverage for that claim where the primary policy doesn’t typically it includes a self-insured retention, which says, Hey, for this claim, the primary insurance doesn’t cover. You we’ll cover you, but you have to make up the difference between what the primary policy would’ve paid. So a self-insured retention and we’ll talk about this is like a deductible, which means that the insured is gonna have to probably pay the retention before the umbrella policy drops down or kicks in.
Speaker 2 (00:17:33):
So we’re gonna continue with third party insurance, there’s professional liability insurance. This is coverage written to protect design professional, specifically on construction projects, architects, engineers other designers. And this is protecting against liability for errors and omissions in performing the professional services. Professional liability policies are written on a claims made basis, which means that if there’s a problem with a particular site or someone makes a complaint about, about plans or about, about some engineering work done on a site that claim has to be made within the one year, typically one year period of the policy when it’s effective. So if it’s not made within that one year, then it would be stale. It would likely not be covered under any other professional liability insurance. You can’t, you can’t track them year to year. So you have to make the claim within that year. If the, if the claim arises professional liability policies also have what’s called shrinking limits.
Speaker 2 (00:18:36):
And this is a little bit different than, than CGL policies, because shrinking limits mean that if are subject to a claim and the insurance company retains defense counsel and attorneys for you the cost of retaining those attorneys, the defense fees and costs that are paid are going to reduce the available policy limits to settle the claim or resolve the claim. So that’s really important because very often a lot of construction claims that I handle sometimes the tail wags the dog. And that means that the attorney’s fees are, are a significant component of the claim. Whether it’s for the named insured contractor or a general contractor or someone else who’s insured under the policy, but those attorneys’ fees could take up a significant portion of the limit. So you need to be wary about whether your policy has shrinking limits, or it indicates it has defense costs are paid within the limits OSIP and CIP policies.
Speaker 2 (00:19:43):
This is a centralized insurance program or a package policy that typically an owner or developer, or a general contractor sometimes will purchase to protect everyone involved in the work on a construction project. It’s also called a wrap up policy, and they’re usually used on single projects, but I actually had a claim where there was a rolling wrap up policy, which means an insurer had issued a policy to a developer and the developer would reup the policy by adding projects on, as the projects were contracted for. The issue was with that case was the the contractor had, was also purchasing excess insurance. And I had a claim where a contractor actually did not properly notify the excess insurer on a new project of the primary wrap. And so there were differences and disputes about who was supposed to pay things like deductibles and when the excess would kick in or not.
Speaker 2 (00:20:49):
And would the excess kick in if they didn’t know about the existence of the primary policy? There are lots of interesting issues with OIP and CIP policies. Typically these include general liability workers comp and excess or umbrella liability. It’s designed to be one policy where everyone on a construction project can enroll and you have to be enrolled if you’re not enrolled, you’re not gonna get the benefit of the insurance. If you’re enrolled, you get the benefit of the insurance. The great thing about owner controlled or contractor controlled insurance policies is that it reduces the number of claims, especially between and among the parties or the, the people involved in a construction project. It lowers overall insurance costs. You can spread the insurance costs more equitably among those who are enrolled. And it definitely can offer a broader scope of coverage for everyone who is enrolled other types of third party insurance for several construction projects.
Speaker 2 (00:21:54):
The contract might require pollution, liability insurance, typically in general liability policies. There are pretty broad pollution exclusions, which means it’s not covered under most general liability policies. That is why pollution liability insurance policies were initially designed because of the broad exclusions and general liability policies. And we’ll be talking a lot during the course of, of the webinar about the fact that most of these coverages are complimentary. So when you have professional liability insurance if you are a design professional or a design builder or, or an engineer if you also have general liability insurance, your general liability insurance is going to have an exclusion for professional services. That is because you are supposed to have separate insurance for errors and omissions for professional liability. The coverages are not supposed to overlap. And in fact, they’re supposed to all be mutually exclusive.
Speaker 2 (00:22:54):
And that’s one of the reasons why we’re gonna be talking about some of the exclusions later on. There’s also inland Marine that typically comes into play. If there are building materials being shipped and transported to a construction site, commercial auto truck is pretty self-explanatory. If there are work vehicles on site depending on who, who owns them and operates them, you’re gonna wanna make sure you have that type of coverage. Worker’s compensation not only required in California, but, but also a requirement to maintain your current license status. And then very it’s becoming more and more frequent that I see clients purchasing or asking me about cyber liability insurance. Why if you’re using software on a construction site, and I have also have lots of who use time reporting software the risks with being hacked or having to deal with fishing or ransomware is increasing every single day.
Speaker 2 (00:23:57):
So that is a a type of coverage that I’m discussing more and more with our construction clients, surety bonds very quickly performance bonds of performance bond is a contract issued by an insurance company a surety who guarantees satisfactory completion of performance on a project by a contractor or a subcontractor with a performance bond. There are three parties, and I’m, I’m sure most of you probably know this. The principal is the GC who will be performing the under the contract. The obligee is the party who receives the obligation, the owner of the developer and the surety is the insurer who basically guarantees the principal’s obligations to the obligee surety bonds also come in the hybrid of payment bonds. A payment bond is a contract that guarantees that employees, subcontractors, suppliers are all protected against non-payment on a project. If we’re talking about a public contracting situation, they’re very often referred to as Miller act bonds private construction bonds can be conditional or unconditional. If a bond is unconditional, that means the owner is fully protected from having a lien placed on their property. If it’s a conditional bond, it’s a pay when paid clause, it allows the owner limited protection and the lien can be placed on the property, but the owner then has a limited amount of time to transfer the lien from the property to the surety.
Speaker 2 (00:25:33):
So this is, we’re getting down to the where the rubber meets the road on, on insurance for general liability policies. And I’m going to make most of my comments relevant to general liability policies, because those are the most common when we’re talking about claims an obligation the insurer has two main obligations under a CGL policy. There’s an obligation to defend, and there’s an obligation to indemnify. And both of those obligations are found in the ensuring agreement to the policy, but the obligation to defend is every bit as important as the obligation to indemnify. CGL insurers are obligated to defend and insured when an insured tenders, a claim to them under their general liability policy for claims where there is only a potential for coverage. What does that mean? That means it’s in California. It’s a very broad standard. That means that if you get sued on a complaint and let’s say the complaint alleges property damage, and doesn’t go into much detail, and it’s really difficult to tell whether it would actually be subject to coverage or not.
Speaker 2 (00:26:39):
Because there are lots of terms in the insurance policy that are subject to interpretation and might be difficult to understand at times. But if that complaint says property damage, it raises the potential for coverage because the CGL policy covers property damage. That is a very simplistic example, but we’re gonna run with it. If there is a potential for coverage in California, the insurer is obligated to defend the insured, the contractor. What does that mean? That means that the insured needs to appoint defense counsel or agree to pay the contractor’s choice of council. That’s not always a given, but sometimes that can be arranged at commercially reasonable rates for that area. The duty to defend in California was originally established by a case called gray versus Zurich. It’s seminal law in California. It’s, it’s just like the bedrock. And the duty defend is interpreted very broadly.
Speaker 2 (00:27:48):
So if there is any type of potential for coverage, that insurer is on the hook to defend. That’s important for contractors because hiring an attorney to defend a claim as I said, is very often an equal component to what the alleged damages are for a claim. So, and sometimes if it’s a, if it’s a meritless claim it’s more important to have a lawyer defending you to get you out of the case, without spending any policy limits or worrying about whether there’s coverage or having any financial liability or financial risk to the company. Also, the insurer is, is obligated to continue defending, even if it becomes clear that there might not be coverage in the end, unless the insurer can show with no doubt that there is no coverage under the policy, the duty to defend continues and that in California, that’s the mantras case. And that is a very difficult burden for an insurance company to carry more often than not the insurance company will provide the defense throughout the life of the claim. And most claims will get settled. And some claims will be litigated, but the duty to defend is really important because that is a very expensive component to any claim for a contractor.
Speaker 2 (00:29:16):
The other duty is the duty to indemnify. And in a nutshell, what does that mean? That means that when a claim is tendered, if it’s covered under the policy, the insurer has an obligation to resolve it on behalf of the insured. What does that mean? That means that the insurer indemnifies the insured, or can pay directly a settlement or a judgment. If that’s the way the claim is resolved, this is a little less broad than the duty to defend because the claim itself has to be actually covered under the policy. And if there is a doubt as to coverage that is an instance where the insurer might deny coverage or might take a position that it’s not covered, it might affect the amount they would contribute to settle to a claim. They might try to have the contractor contribute to settle a claim because they are, they’re arguing that some or all of it’s not covered.
Speaker 2 (00:30:12):
And, and that’s their prerogative to the extent that a claim is not covered under the policy, but unlike the duty to defend the duty to indemnify takes into consideration, not just the allegations of the complaint, but facts and information that are produced through documents or that come in through deposition testimony and discovery, the insurer gets to consider all of those factors when they’re determining whether something is actually covered or not key policy provisions. Again, we’re sticking with the general liability policy today. This is a portion of an ensuring agreement. It’s an example of what that looks like in a general liability policy. So it says that the insurer is required to pay those sums that the insured becomes legally obligated to pay. What does that mean? Judgment or settlement as damages? What does that mean? That means injunctive relief or things like dis discouragement.
Speaker 2 (00:31:15):
Other equitable relief are not damages under the policy bodily injury and property or property damage. Those are both defined terms in the policy. We reviewed those a little bit earlier. Those are the types of claims that are going to be covered under a CGL policy. The insurer has the right and duty to defend the insured. It goes beyond the right. They actually have the duty and in California, that duty is very firm and they can’t, they can’t refuse that. Regardless of what the policy language says in a CGL policy, it’s pretty much established law that, that it’s not just a right, it’s an obligation. And it relates to a suit. What does that mean? That means a lawsuit filed against the insured. The insurer in California also has an obligation to defend SBA 800 formal request for for either mediation or arbitration or or request for early repairs. That is a search circumstance where the insurer can already retain counsel on your behalf so that you can start the process of defending yourself against those claims. If the claim is not covered, then they don’t have a duty to defend. But they have to be able to prove that there is no potential. They have an obligation to investigate claims and they may also settle a claim in order to settle a claim. They do need your consent.
Speaker 2 (00:33:00):
The payment of indemnity, pursuant to an insuring agreement is limited to judgements and settlements, and is also limited by what the policy limit is in the policy. And we’ll talk about that in a second, because there are different types of limits in the policies. The duty to defend ends with exhaustion or the payment of a settlement or judgment indemnity on a claim. So if an action is settled, there is no requirement nor any need for counsel to continue beyond the settlement who’s insured. This is typically a portion of a general liability policy. This section in the policy is much longer than the two slides that I have here. I have summarized who typically is insured under a policy, individuals and spouses. If you are a sole business owner, and this is where a DBA would come in partnerships are joint ventures and their members, partners, and spouses, but only with respect to the conduct of the business limited liability companies and members only with respect to the conduct of the business.
Speaker 2 (00:34:11):
And oops, I’m sorry about that. And managers with respect to their duties as managers for the LLC, with regard to the conduct of the business, other business organizations, corporations, officers, and directors, with respect to their duties as officers and directors stockholders are also insureds, but only re respect to their liability as stockholders. This definition, this portion of the definition doesn’t come into play very often. It sometimes can with smaller corporate entities but typically not with larger entities, because there is separate coverage that they can purchase for that trust and trustees with respect to those particular duties, volunteer workers and employees, but only for acts within the scope of their employment.
Speaker 2 (00:35:01):
So this is an interesting portion. This slide continues with who’s an insured and an organization you newly acquire or form. So if you’re a contractor and you you know, very often developers will develop individual LLCs for particular construction projects. If you are a contractor and you’re developing an offshoot business, maybe you’re developing a a design build arm, or you are taking over a subcontractor, some, you know, something like that, you’re swallowing up another company. They can be covered under your existing CGL insurance, but there’s a 90 day waiting period. And the coverage is afforded only until the 90th day. Why is that? Because they want you to get separate insurance or have that new entity endorsed onto the policy, why premium, they, they want the extra premium to cover the additional risks of having to ensure this new entity.
Speaker 2 (00:36:03):
So this is additional coverage, but it’s typically temporary deductible, self-insured retentions deductibles and self-insured retentions are amounts that you would have to pay. Most people are familiar with them in, in auto insurance. A deductible is an amount that you would have to pay, but it doesn’t stop the insurance company from doing what they’re supposed to do. So it wouldn’t stop the insurance company from defending you or indemnifying you. The deductible is something they might ask for at the conclusion of the claim, or they might take it in into consideration when they’re paying a loss, but it is not gonna stop them from performing their obligations. Under the policy. A self-insured retention is a little bit different. It acts like a deductible, but the main difference is that it is an amount that must be paid by the named insured before the insurer has an obligation to defend or indemnify for a claim.
Speaker 2 (00:37:04):
The tricky thing with self-insured retentions, they’re, they’re becoming more and more common deductibles and self-insured retentions can, can also affect what your premium charge is gonna be. So you can opt for a higher deductible or higher self-insured retention to control your premium a little bit, not, not a ton, but a little bit. And self-insured retentions typically cannot keep be paid by anyone else, but the named insured. And that is very important because there’s been a lot of litigation about claims that are made. And if you have if you’re a subcontractor and you have a general contractor, who’s an additional insured on your policy, and there is a claim made if the subcontractor or the main named insured cannot fund the self-insured retention. There’s been a lot of litigation about whether the general contractor or an additional insured can actually pay the S I R. And so if you’re a general contractor and you have this provision in your subcontracts with subs you need to be mindful of the fact that you wanna make sure that your sub is solvent, or if your sub’s policy has that language in it, that they’re gonna be able to pay the self-insured retention. There are lots of, of end runs that I’ve, I’ve heard people discuss, but this has been a huge issue in the, in the past decade with regard to contractors.
Speaker 2 (00:38:32):
And with that, we’ll move on to additional insured endorsements. There are two main types of additional insured endorsements. There are specific endorsements, and that is an endorsement that includes language such as on this slides is a sample from a CGL policy endorsement and the specific endorsement, expressly names a general contractor or an owner, or a, a, a public agency you know, a city or a water district, some, some other type of governmental agency as an insured under the policy specifically typically it’s required by contract and there’s that insured contract language here where your contract with the general contractor requires that they be named an additional insured it’s possible that you’ll have a specific endorsement added onto your policy for each project, for each entity that should be a named insured. There are also blanket, additional insured endorsements, and this is much more common.
Speaker 2 (00:39:39):
The newest versions of the blanket additional in endorsement I think were issued in 2019. And they’re the most common forms being used right now and required by construction contracts, additional insured endorsement, blanket forms, simply say that the coverage added by endorsement here will provide coverage as an additional insured to any person or organization who requires to be an insured. If the written work contract requires it. So it’s the same type of coverage, but you don’t have to add endorsement after endorsement, after endorsement, specifically naming the entities that are to be added to the policy limits and aggregates. So each CGL insurance policy has in general, three types of limits. There is an occurrence limit. An occurrence is the event that causes the bodily injury or the property damage. There is an occurrence limit. So if there is if there is a construction defect claim that arises out of a broken pipe, that is an occurrence, and that would be subject to the occurrence limit of the policy.
Speaker 2 (00:40:50):
If it’s, if it’s subject to other coverage, there is also the general aggregate limit under the policy. And that can be the same as an occurrence limit, not very common or it can be any number of occurrence limits. Typically you’ll see an occurrence limit maybe of a million dollars and a general aggregate of $2 million. What does that mean? That means typically that that policy for that year policy period will cover two claims. If the general aggregate limit is $2 million, when that ag general aggregate limit is gone, that that primary CGL policy is exhausted. Typically there are endorsements that can be added to CGL policies that include per project aggregates, which means that if you’re working on a construction project and you have more than one claim, the aggregate will apply to that project. And each project that is, that is endorsed like that. So that means if you had two claims on one project, you might blow the aggregate for that project, but that aggregate is gonna be renewed. If you have a different project that’s insured under the policy, and you might have, you know, a different aggregate applies.
Speaker 2 (00:42:05):
The third type of limit is the products completed operations, aggregate limit, and products completed operations coverage provides a different set of limits for claims that arise out of either products, liability claims, or completed operations claims, completed construction, project claims. And there are particular I would say very tedious policy provisions that relate to products completed operations coverage that we’re gonna talk about in a few minutes. So every CGL insurance policy, I, I, I remember 34 years ago learning about general liability insurance. And my mentor was telling me that a liability policy is like a piece of Swiss cheese. The cheese is the cheese itself is the insuring agreement and all of the holes, it, it, it Swiss cheese and all of the holes are all of the exclusions. So you’ve got the cheese, but you’ve gotta be mindful of, you know, what’s part of the wedge and what’s taken out through the holes.
Speaker 2 (00:43:16):
So there are a number of exclusions that are included in general liability policies. One of the most common that you’ll run into in dealing with construction defect claims are the J exclusions. There’s a whole series of exclusions called damage to your property and your work. The J exclusion is the damage to property exclusion. And it, it indicates that the CGL coverage does not apply to property damage for property. You own rent or occupy. Why is that? Because technically, if it’s your own property or you’re renting it, or you’re occupying it, you should have another type of insurance that provides coverage for that. And the CGL coverage is not gonna provide it. And that should be technically like first party coverage. It also doesn’t coverage premises, you sell giveaway or abandon if the property damage arises out of any part of those premises, the notion is the same.
Speaker 2 (00:44:14):
If you’re selling it, giving it away or abandoning it, there should be another type of insurance that provides coverage for that type of loss. Same thing with property loan to you, it likely is covered by someone else’s insurance, property, personal property, and the care custody and control of you. Same notion. The notion is that that should be subject to coverage by the person who owns it, or who is, is, is giving it to you or for your care custody and control the J exclusion. Also, these are the key provisions, the J exclusions also exclude coverage for that part of real property on which you or any contractors or subcontractors are working directly or indirectly on your behalf and their performing operations, if the property damage arises out of those operations, what this means is that if you cause property damage to basically to your work during the course of construction, they’re not gonna cover that.
Speaker 2 (00:45:16):
The other component to that is they’re not gonna provide coverage for that particular part of any property that must be restored, repaired, or replaced because of your work. What does that mean in California? That means that if you, you are a dry Waller, and let’s say you have, there’s, there’s some problem with just your work and not anyone else’s work. And that work needs to be restored, repaired, or replaced. They’re not gonna provide coverage for that alone, if you’re a dry Waller, and let’s say your work causes damage to another subs, work on a project or another portion of the project that is not considered your work. And then it would not be subject to this exclusion. There’s a lot of case law in California, and a lot of ongoing dispute. When you have a general contractor, who’s performing everything without subbing out any work is the whole project, your work.
Speaker 2 (00:46:14):
And does that mean that this exclusion applies to all of your work? There is there’s case law on that issue, and it is very often a fact question that is determined on a case by case basis. And it’s very, it’s, it’s not as common to find a project where some portion of the work wasn’t subbed out. It’s, it’s a constant subject of dispute, and there is a case, the Scottsdale case that addresses that issue specifically. Important thing about sub six of the J exclusion is that it doesn’t apply to property damage in the products completed operations hazard. So if you have if you have, if you’re a GC and you’ve completed the project sub six is not going to take all of your work out of coverage, additional exclusions, and I’m gonna go through these pretty quickly, cuz we’re, we’re quickly running out of time.
Speaker 2 (00:47:17):
Damage to your product damage to your work are also exclusions under the policy products, completed operations hazard. I said that’s a, that’s a tricky a tricky type of coverage. Most of the issues arise here when there are projects that are abandoned. And when is the project deemed abandoned or when is the project deemed completed? There’s a lot of case law out there on, on that issue. And you need to be careful about that work that needs service maintenance, repair correction, you get a notice of repairs or corrections that need to be made. That project will still be treated as completed. And very often you’ll look at certificates of occupancy or you’re lo you’ll look at final inspection. Signoffs things like that to determine when a project is completed or if you’re a sub you can look at when your work was completed exclusions, contractual liability, exclusion is very common in general liability policies.
Speaker 2 (00:48:23):
It usually does not apply because if there is a claim against a contractor and it includes a negligence claim that is liability that you could have in the absence of your contract. So it doesn’t really matter if you assume liability through an indemnity agreement in a contract this exclusion wouldn’t apply. If you could be sued under a tort theory or another theory and still have that same liability. Also, if the contract is one that is a general part of your business, a subcontract for a construction project, then that is not going to preclude coverage for bodily injury or property damage claims. So this exclusion is cited a lot, but it doesn’t come into play a lot.
Speaker 2 (00:49:09):
We already talked about the professional services exclusion that’s because if you have a CGL policy and you’re a design professional, you should have this separate type of coverage indemnity agreements. So it, I don’t think I’ve ever seen a construction contract that didn’t include an indemnity agreement. CGL policies can provide coverage for a contractor’s indemnity obligation to an owner or, or a general contractor or a developer. There are lots of conditions attached to it. As you can see, they’re all, they’re all listed here and I’ll I’ll, I know you’ll have the the slide deck, the material. So I’m not gonna go through them in detail now, but there are is very strict, limited scope of coverage for your obligation to provide indemnity, to provide a defense to an additional insured or an, an indemnity under your agreement. And it’s very specific a certificate of insurance.
Speaker 2 (00:50:12):
This is, this is really important because certificates of insurance is evidence of general liability coverage that was issued for the benefit of a project or a particular party, a contractor, or a general or an owner or additional insured. It’s not part of the policy itself and it is only secondary evidence of the policy. So the certificate of insurance is not the insurance, it’s just evidence of the insurance and it has some of the basic terms on it, but lots of litigation has been instituted based upon the fact that certificates with insurance may not have been appropriately provided by a broker. It needs to be signed at the bottom. You need to make sure that whenever I get certificates or I I’ve recommended in the past that clients confirm with the actual insurance company that the insurance policy was issued, because then you don’t have an issue with a broker exceeding their authority claim, notice and tender.
Speaker 2 (00:51:14):
So as we talked about, an insurer has no duty unless it receives notice of a claim. Once the claim is tendered, that the insurer has an obligation to investigate the claim. The time for an investigation, excuse me, varies from state to state in California, the claims handling regulations say that they’ve got 41 days to provide an ultimate response. There are some conditions with that in terms of requesting documents and things might trigger, might trigger an additional time for them to review the claim, but they need to either accept the claim without a reservation, which means that they are acknowledging that the claim is covered and that they’re going to defend you and indemnify you, that very rarely happens. They can accept the claim subject to a reservation of rights. And that means that they’re gonna say, okay, it looks like there’s a potential for coverage.
Speaker 2 (00:52:09):
We’re gonna provide a defense to you, but we’re also gonna reserve our rights because we think there, there are all these reasons why it might not ultimately be covered, but the reservation of rights still requires an acknowledgement of the defense and the retention of defense counsel on your behalf. Or they can outright deny the claim and say, this claim isn’t covered under the policy because it doesn’t, you know, it was a claim for you know, a straight up business dispute or, or something that’s not bodily injury or a property damage typically covered by a policy, or if they are saying that it didn’t fall within the policy period, there are a whole host of reasons, but outright denials should also be challenged. What I say to my clients is tender to everyone, potentially involved, tender early and tender often because insurer has no duty to pay attorney’s fees until after they receive tender of the claim.
Speaker 2 (00:53:04):
So if you’re spending money on an attorney and you haven’t tendered a claim to your insurance company, they don’t have to reimburse you for what you spent before. They got notice common coverage issues. I’m gonna switch through these slides pretty quickly, cuz I wanna get to questions. When was the claim made the claim needs to be made as soon as practical. So if you are aware of a claim, like I said, you need to tender it as quickly as you can. Insurer has a certain number of days to respond as we discussed. But the importance of when the claim was made was that’s gonna trigger the duties. What triggers coverage, CGL policies provide insurance for an occurrence. That’s the event that causes property damage or bodily injury during, during the policy period. So when did the property damage manifest? So when did it become apparent, observable and, and noticed when, when do you actually see that it tangibly happened?
Speaker 2 (00:54:07):
Did it continue from one policy period to the next, if we have a discrete you know, something explodes or something, something, you know is damaged maybe by a vehicle or something like that. It’s pretty clear that that property damage happened at that event on that specific time. And it did not continue and it would trigger one co one policy, property damage in the form of for example water intrusion and a construction project con continue. It continue, continue through one or more policy periods and each of those policy periods could arguably trigger be triggered. So if you get notice of the claim you wanna make sure that you’re tendering from the moment that you either started working on the project. If it’s, if it’s within a policy period all the way through the date of the claim you wanna tender to all of those insurance policy periods.
Speaker 2 (00:55:06):
Typically there is not coverage for breach of contract economic damages. So if you have a breach of contract dispute on a construction project or a failure to pay claim mechanics, land issues, those things are typically not covered under, under a CGL policy. Again, that’s where bonds come in. California’s a little interesting in that the court usually focused on the type of damages sought against the insured. The Vandenberg case came along a quite a while ago now, but decided there, and there was a breach of contract claim in alleged in the Vandenberg case. But what they were really seeking was damages for property damage caused by contamination. The court said we don’t care that it’s couched in the terms of a breach of contract cause of action. We are still going to look at the nature of the cause of action here, it’s for property damage and therefore it should have been subject to a duty defendant coverage under the GL policy.
Speaker 2 (00:56:09):
There are also subsidence earth movement, exclusions, mold, fungus exclusions are, are very prevalent. And that’s a huge issue because if you have water intrusion, there is a likelihood that you have mold mold and fun water intrusion that causes mold and fungus likely not covered heavily litigated issue in California allocation. So what happens when you have multiple parties who have lots of insurance policies, there are lots of insurance coverage for a loss for a, a duty to defend claim. The general, for example, if you’re a general contractor, you might be subject to coverage or getting a defense from lots of different policies that were issued to subcontractors, there are different methods to allocate. Usually you can leave that up to the insurers, your insurer, if they’re implicated, will obviously be seeking contribution from other insurance. There are many, many different allocation methods. And that’s something that’s usually left up to insurance, but you need to be aware that that all of the insurance should be tendered the claim and all of the insurance should be participating. Oh, okay. Well, I’m happy to, to stay a little bit longer in entertain questions. If there are questions, I’m gonna just look through the chat box and see
Speaker 1 (00:57:33):
Joann. I think the only questions are in the Q and a box that Q and a panel where there’s
Speaker 2 (00:57:40):
Okay. There’s a, there’s a question in the chat box as well. Okay. I’m looking at the questions now. Someone, what was the case you mentioned that addressed own work exclusions. If we’re talking about the J six exclusion, it’s the Scottsdale case in California dealt with the issue of the insurer, trying to claim that coverage for the entire project would be precluded because it was the general contractor who had done all of the work. And therefore there wasn’t work that was attributable to anyone else on the project. Someone else wrote wrap policy question mark. I’m not sure what that means. A wrap policy is the same as an owner controlled or a contractor controlled insurance package policy and, and general liability policies typically have an exclusion for that. So if you are a contractor and you’re enrolled in a wrap policy, an owner controlled policy on a project, your bone general liability insurance that you maintain as part of your business would not respond because it likely has a wrap exclusion because it understands there’s different coverage.
Speaker 2 (00:58:54):
That covers that. Let’s see, I vet the subcontractors that we hire for our business. Some subcontractors start out as sole proprietors, then become a corporation. They fail to put their contractors’ license into the corporation. When I receive the certificate of insurance is in the name of the corporation. Are they insured when the insurance is in the name of the corporation, but the license is in the name of the sole proprietorship. Yes, insurance itself does not depend upon whether the corporation is the in is licensed or whether the full proprietor is licensed. If the sole proprietor is wrapped into and becomes a principle of the corporation, then they’re separate issues, but the licenser license licensure issue and the issue of who is covered is completely separate. So if the corporation has insurance, the sole proprietor who now becomes part of the corporation should also be covered as a principal of the corporation under section two of the policy. I hope that answers the question.
Speaker 1 (01:00:04):
Then there’s one in the chat box from
Speaker 2 (01:00:08):
Right in California. If the insurance company declines to defend a contractor being sued by a property owner in part for defective work and a contractor. Yes. So, so you, you mentioned two separate remedies. The first thing is if the contractor feels strongly about the position that the claim is subject to coverage under the policy, the contractor can bring a bad faith claim against the insurance company for failure to defend. You can, there is a code section in California, seven 90.03. The insurance code that lists out UN unfair, unfair claims practices by an insurance company and among those are failure to properly investigate a claim failure to defend a claim and failure to indemnify a claim. So if you think that the denial was wrongful and the insurance company should be defending you it’s a broad standard and you can file a bad faith action against them.
Speaker 2 (01:01:07):
You can also Sue them for breach of contract and declaratory relief concurrently. You can also file a complaint with the department of insurance. I can tell you most of those do not go you’re not gonna get the same remedy and you’re not going to get a proactive response. It’s not like the department of insurance necessarily is going out every day punishing or or penalizing in any way insurance companies for that type of practice. So you can make complaints and they, they may be followed up with, there might be an investigation, but it’s much like employment claims, you know, the department of fair employment and housing in California will issue a right to Sue a letter and say, you know, go off on your Merry way and resolve this in a court. But it, it is helpful, but it’s, it’s not required. I think that’s it,
Speaker 1 (01:02:12):
There’s two that just popped up over in the Q and a panel, a J
Speaker 2 (01:02:20):
So UN here’s one UN Jed under an OSIP policy, do our primary policies provide coverage as secondary and or excess. Typically they wouldn’t because they would typically have a wrap exclusion, which means they wouldn’t provide coverage at all. If they unlikely do not have a rap exclusion, which I really doubt that that would be the case, then they could be secondary or excess coverage, depending on what the general liability in the OSIP says and what your general liability policy says. There are other insurance clauses in both policies that would need to be reconciled, but I would 99%. Tell you that your general liability policy has an OSIP a wrap exclusion
Speaker 2 (01:03:12):
Rich. If corporation is suspended by the FTB, where does that leave the contractor being able to defend in a claim by the insurer? So is the, are we talking about the corporation? The contractor is the same entity. If, if they’re the same entity, technically they’re not supposed to be able to defend themselves. The interesting twist on this is if a corporation can’t defend itself in litigation, let’s say the corporation who’s a contractor cannot defend itself in litigation. If that litigation proceeds and they get a default judgment against the contractor, and they are aware of the contractor’s insurance, there is an insurance code section that would allow them to take that default and proceed against the insurance company to try to collect that default judgment. Robert, what was the site for the California duty to defend it’s gray versus Zurich? And let me, I’ll give you the site in one second 65 Cal second, 2 63 Is the site.
Speaker 1 (01:04:33):
It looks like that is it for questions. Thank you so much for staying over with us and answering those questions problem. And thank you for a very informative presentation today. Reach out to me via email for anyone attorneys who need help with California accreditation, or if you’re aware of reciprocity in your state.
Speaker 2 (01:04:57):
Right. And I have the last slide up. That’s my contact information. If anyone has insurance follow up questions or any issues with insurance or, or construction projects even employment that’s where, that’s where I’m at. You can reach me anytime.
Speaker 1 (01:05:16):
All right. Thank you everyone for joining us. Thanks again. Jolin thank you, everyone have great.