FINDING INSURANCE COVERAGE IN UNLIKELY PLACES

SITUATION 1

You are a general contractor that recently completed construction of a radio station. You receive a claim letter (with an engineering report attached) saying that custom fabricated steel rods in the radio tower that were supplied by your subcontractor have begun to fail. You might think that there is no insurance claim to be made here, and that you are facing the prospect of pursuing only your subcontractor for this claim. Conventional wisdom would agree with you, but it (and you) would not necessarily be correct.

RESULT

A Federal Court found that, in these circumstances, a contractor had coverage under its general liability policy. In doing so, the court relied upon a snippet of language that insurance companies had added to an industry form general liability policy in recent years – the so-called “Subcontractor Exception to the ‘Your Work’ Exclusion.” The court held that this little noted or understood language created coverage for the contractor and required its insurer, not the contractor, to pay for repairs and to recover the money the insurer had paid for the repairs from the subcontractor. See National Union Fire Ins. Co. v. Structural Systems Technology, Inc., 756 F. Supp. 1232 (E.D. Mo. 1991), 964 F. 2d 759 (8th Cir. 1992).

SITUATION 2

You are a general contractor getting ready to install a new junction box and sewer line. While installing sheet piles as the first step towards creating the work area in which you will construct the junction box and eventually tie into the existing line, you accidentally drive your sheet pile through the existing concrete reinforced sewer line. It turns out that the line was shown in an incorrect location on existing plans and that a “jog” in the line was not revealed by the exploratory holes you dug to verify the location of the line “upstream” and “downstream” from the work site. You incur hundreds of thousands of dollars in emergency bypass pumping costs and in other expenses as a result of this accident. When you call your insurance agent, he says that you do not have an errors or omissions policy that might cover this claim, and that your general liability carrier will not pay the claim because the CGL policy excludes coverage for damage to property caused by “Your Work” having been incorrectly performed on the property. This is also the position taken by the carrier when it responds to your claim.

RESULT

The contractor consults his attorney, who makes a different argument to the insurance carrier. The attorney points out that the exclusion relied upon by the carrier only excludes coverage for damage to “[t]hat particular part of real property on which you… are performing operations.” Counsel also points out that the contractor was never supposed to work on the sewer line at the location where or time in which the damage occurred. He also points out that under the literal language of the exclusions drafted by the insurer, coverage is provided for the costs that resulted from the accidental damage to the sewer line. Ultimately, the contractor recovers hundreds of thousands of dollars from the insurer.

THE MORAL OF THESE STORIES

It is important that, whenever you suffer a loss or substantial unanticipated expense in connection with a project, you consult with an experienced insurance professional, preferably an attorney, to consider whether you may have coverage under the ever-changing language of your insurance policies, or policies that have been purchased by your subcontractors, vendors, project owners, architects or engineers.

WHAT TO DO IN THE EVENT OF AN INSURANCE CLAIM

When an accident occurs, it is critical for contractors to present claims to insurance carriers in a manner that minimizes potential defenses as much as possible. Companies should be careful to avoid the following potential pitfalls when making a claim.

PROVIDE THE INSURERS WITH PROMPT NOTICE OF A CLAIM

Because the consequences of not promptly notifying your providers can be significant, it is typically better to “over-notify” carriers than to “under notify” them. Therefore, in the event of an accident, a company should notify its builder’s risk and general liability carriers, the owners’ carriers, the owner’s subcontractors’ carriers, and the design providers’ errors and ommissions carriers. While some carriers may say that their policies do not cover the incident, it is better to “over-notify” than to fail to notify a carrier whose policy may end up covering the accident or occurrence.

It is often necessary to take emergency action to respond to claims and to repair contract work in order to progress a job. Whenever possible, risk managers, agents, or contractors’ attorneys should notify carriers that such emergency actions are required or have taken place. Even if the notice is short, and the insurer only has a small window of opportunity to inspect the damage before emergency actions or repairs are undertaken, short notice is preferable to no notice at all.

DESIGNATE A SPOKESPERSON OR CONTACT PERSON

It is important to immediately involve counsel or to designate particular individuals within the company who will interact with insurance carriers and their adjusters regarding claims. Unless an agreement explicitly says otherwise, everything that an insured says or sends to an insurance company is “on the record.” Because insurance companies often determine whether coverage applies to a given incident by applying facts to particular words used in the policy, choosing one’s words carefully when dealing with insurers is important. It is possible that one may encounter difficulties in recovering an insured claim because field personnel used particular words in describing activities in their ordinary course of work, while insurance companies use different language to describe the events covered by an insurance policy. For example, the distinction between a cessation of work under a builder’s risk insurance policy and a “delay” claim against an owner pursuant to a construction contract is subtle. Yet the choice of words used in correspondence with an insurer can have an effect upon a claim made under a builder’s risk insurance policy.

DO NOT SPECULATE

Another problem that insureds encounter is “speculation.” Insureds should cooperate with insurers and all requests by insurers for information, job records, photographs, and the like should be fairly and promptly responded to, preferably with the assistance of counsel. Speculation should, however, be avoided. In this regard, one is best advised – in the words of the old Dragnet TV show – to confine communications with insurers to “just the facts.”

CONTEMPORANEOUSLY TRACK YOUR COSTS AND EXPENSES

Whenever an insured makes a claim against an insurance company there will come a time (in the course of negotiation or litigation) when the insured will be required to prove the costs or expenses it has incurred in connection with its loss on the insured claim. The better the records of costs and expenses incurred, the more likely it is for the insured to recover on the claim and the greater the amount of the likely recovery. When possible, new tracking numbers should be established in an insured’s accounting system in order to segregate the costs arising out of an occurrence or accident. Man hours, equipment and materials, as well as subcontractor expenses, used or incurred to repair damages or to mitigate the effects of a loss or accident should be tracked on an on-going basis. If work, or portions of it, is stopped as a result of the accident or occurrence, such event should also be tracked on an on-going basis. When one receives a “cessation of work” or “business interruption” claim, both field and home office costs should be captured using costs codes, job reports and, in connection with home office expenses, an “Eichlaey calculation” supported by contemporaneously gathered data.

SUBMIT TIMELY PROOFS OF LOSS

Proofs of loss should be submitted to insurers as soon as possible after an accident or occurrence. Many policies have time frames during which submissions of proofs of loss are required and one should adhere to such deadlines. Even if there is no time frame specified in a policy, or if a policy indicates that proof of loss should be submitted “as soon as practicable” or words to that effect, timely proofs of loss are generally advisable. Partial or preliminary proofs of loss can, if necessary, be submitted. An insured should attempt to generate a “final” proof of loss as quickly as possible, and if necessary, it should submit supplementary or amended proofs of loss to capture additional costs or expenses incurred.

FILE A LAWSUIT/ARBITRATION DEMAND BEFORE ANY STATUTE OF LIMITATIONS EXPIRES

Many insurance policies contain contractual limitations of actions periods under which a civil action or arbitration claim must be filed against an insurer within a specified period of time. Because some of these limitations of actions periods can expire in one or two years, it is important to keep these time frames in mind and to consult with counsel well in advance of such a deadline if a claim is not promptly adjusted by an insurer. The fact that an insurer continues to discuss a claim as the filing deadline approaches does not mean that the limitation period has been extended or that the carrier has waived the deadline. Instead, the insurer may wait for the deadline to pass and then argue that your claim is foreclosed.

PRESERVE DAMAGED PROPERTY UNTIL INSTRUCTED BY THE INSURER TO DO OTHERWISE

Many construction insurance policies contain a provision obligating the insured contractor, regardless of liability, to “preserve property” from further damage after a loss or damage to the contract work has occurred. The insured contractor’s obligation is mirrored by the insurer’s liability to repay the contractor for costs incurred in the course of mitigating further damage to the contract work. Thus, the contractor may recover its reasonable and verifiable costs incurred to preserve damaged property. The contract clause creating these obligations is generally known as a “sue and labor” clause.

PRESERVE EVIDENCE

An insured contractor must take reasonable steps to preserve evidence and to give insurers an opportunity to examine the evidence and physical conditions before they are disturbed. If an insured contractor fails to do so, the insurer may use the alteration or destruction of evidence as a defense to paying the contractor’s claim.

MAKE NO VOLUNTARY PAYMENTS

Under almost all policies, insureds are prohibited from voluntarily making payments on account of a claim. Therefore, when faced with a claim by an owner or a third party, it is prudent for a contractor to consult with counsel and to give its insurers an opportunity to handle the claim on its behalf before making any arrangement or accomodation with the claimant.

THE BOTTOM LINE

In order to minimize your company’s losses from unanticipated accidents and events, and to maximize your company’s insurance recoveries, you should obtain expert advice and pay careful attention to detail. Involving experienced counsel as soon as a loss or accident occurs is likely the single most important thing that you can do to ensure that your company receives all of the financial protection to which it is entitled.