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Why you could need contractors’ E&O insurance

SIL6504 — Fri, 22 Jun 2018 15:46:58 +0000

Why you could need contractors’ E&O insurance SIL6504 Fri, 06/22/2018 - 11:46

The construction industry is growing and becoming more complex at the same time. For a contractor, this means keeping up with marketing, hiring and design-build trends. Oh, and making sure all aspects of your work are covered by insurance.

According to The Associated General Contractors of America, there are 7 million contractors employed in the construction industry in the United States. That's a lot of jobs to be filled by a workforce that has continued to dwindle since the economic downturn. More work to go around, with fewer skilled laborers available, can cause headaches for any contractor employer.

Adding to the complexity for contractors and sub-contractors is the trend toward design-build processes in construction projects. With more collaboration among designers and builders, contractors may take on more - or different - work than before. For contractors, this opens up a lot of opportunity and naturally some added potential.

Unfortunately, the risk of a client lawsuit may increase with changes in your contracting business. The good news is that insurance products are available that may cover you if faced with some of the common reasons that lead to a client lawsuit:

Making a mistake that costs the client money, time or their reputation. Your mistake now means additional materials or time is needed, and maybe you miss a deadline. Maybe the client was critically dependent on that deadline being met and now their reputation has suffered.
Failing to deliver promised services … you're hiring fast and things can go wrong. And the lawsuit doesn't have to be warranted in your opinion - you'll still need to defend yourself.

Other common situations that could lead to a lawsuit may involve giving poor advice or recommendations and failing to protect the client's best interest. Again, you may not agree, but the lawsuit may still need to be faced, and you need insurance to cover the defense and possible penalties.

This is where contractors' errors and omissions (E&O) insurance is critical. E&O insurance is a form of liability coverage designed to protect contractors from potential claims that result from errors and/or omissions in their work. Simply put, it covers your professional errors and oversights. You might think your existing insurance covers this, but there's a real possibility that it doesn't, so make sure you check. Your general liability policy likely doesn't cover you for professional mistakes that cause damage. Contractors are so important to the construction industry and our economy. A lot of great work gets done thanks to you! But sometimes, even the smallest customer complaints can quickly escalate to a lawsuit. Make sure you're protected properly.

State Auto Insurance makes no representations or guarantee as to the correctness or sufficiency of any information contained herein, nor guarantees results based upon use of this information. State Auto does not warrant that reliance upon this document will prevent accident and losses or satisfy federal, state and local codes, ordinances and regulations. The reader assumes entire risk as to use of this information.

5 commonly requested endorsements for contractors

SIL6504 — Fri, 22 Jun 2018 15:42:53 +0000

5 commonly requested endorsements for contractors SIL6504 Fri, 06/22/2018 - 11:42

Lawsuits concerning construction defect often give contractors cause to rethink their insurance and consider adding endorsements to enhance their policy. Building owners, lessees and general contractors are now adding requirements to their contracts. When a contractor is entering into a contract for a construction project, the insurance agent can help with coverage and help identify potential issues.

Here are the 5 most common situations where an endorsement is needed on a contractor's general liability policy:

Situation: Adding general contractors as insureds on your policy.
Common Endorsements: Additional Insured (CG 20 10) and Blanket Additional Insured (CG 20 33)

This is the most common request that contractors get from owners, lessees or general contractors. When a general contractor hires an electrical subcontractor on a new home build, the general contractor wants to be listed on the electrician's general liability insurance policy in case they get sued for the electrician's work. The Additional Insured endorsement is important in this scenario because it proves to the general contractor that the subcontractor has insurance, and, based on the additional insured form used, the coverage that is available.

If a subcontractor is entering into a number of contracts where this endorsement is requested, it may be more cost effective to have a Blanket Additional Insured Endorsement on the general liability policy instead of adding it each time. This gives automatic status when required in a construction agreement with you, as long as a contract between the two parties is in place.

Situation: When a subcontractor is liable, this provides that their policy pays first.
Common Endorsement: Primary/Non-Contributory (CG 20 01)

If there's a request for the Additional Insured endorsement, there's typically one for the Primary/Non-Contributory endorsement, too. If you're a subcontractor adding this endorsement to your insurance policy, you're accepting that your insurance policy will respond on a primary (pays out first) basis to any applicable potential claim. The use of this endorsement is widely debated because of the potential ambiguity and lack of clarity surrounding the terms "primary" and "noncontributory". The International Risk Management Institute attempts to explain the questions around this endorsement and actually recommends that risk managers not include this requirement in contracts.

Situation: Ensuring the subcontractor's insurance company won't go after the general contractor.
Common Endorsement: Waiver of Subrogation (CG 24 04)

The A/C installation contractor drops an A/C unit on the electrician at the job site, causing injury and damage to the electrical work. If the Waiver of Subrogation endorsement is in place, the electrician's insurance company should not look to the general contractor for payment or participation in the loss.

Situation: The general contractor is sued for the subcontractor's work after it's completed.
Common Endorsement: Completed Operations (CG 20 37)

Most Additional Insured endorsements only apply while work is ongoing. Once work is completed, there can be gap in coverage if the subcontractor's work causes a loss and the general contractor gets sued. The Completed Operations endorsement, used along with the Additional Insured endorsement, helps to eliminate this potential gap. This endorsement is carefully underwritten on a per project basis. If the electrical subcontractor's work causes a fire weeks after the project is completed, and the homeowner sues the general contractor, this endorsement can provide coverage.

Situation: Providing enough limits for multiple projects at the same time.
Common Endorsement: Designated Construction Project(s) General Aggregate Limits (CG 25 03)

This endorsement was designed to make a separate general aggregate limit available for each construction project/site that the insured was involved in and listed in the endorsement. This option applies for "ongoing" operations, and the insurer will pay the same aggregate limit for all claims which occur from any listed project. The project might even require you to have a specific amount of coverage designated for that project alone.

Say a general contractor has a general liability policy with $1M/$2M limits. At the same time, they have three projects: a housing development, a strip mall and a commercial warehouse being built. If the per project liability limits endorsement is included, each project is listed, and each one of those projects has the same $2M limit available. So, if all 3 projects have a $2M loss, the insurance company could potentially pay out $6M. If this endorsement is not on the policy, and all three projects have $2M losses, the most the insurance company will pay out is $2M. The general contractor is left with $4M in losses that are not covered by insurance.

It's not as simple as always agreeing to whatever requests for endorsements are made when entering into a contract. Always, always, always talk with your insurance agent. You need to make sure you can afford the extra cost of the endorsement required. And, the agent can assist in identifying potential policy limitations.

Subcontractors’ work: If they build it, are you covered?

SIL6504 — Fri, 22 Jun 2018 15:40:00 +0000

Subcontractors’ work: If they build it, are you covered? SIL6504 Fri, 06/22/2018 - 11:40

Pop quiz: Is the work of subcontractors covered by your liability insurance?

If you answered yes, you may be correct. If you said no, you may also be correct.

You likely already know that the typical commercial general liability (CGL) insurance policy doesn't cover "your work." (Why is "your work" in quotation marks? Because it's like that in the actual policy … indicating it's a specifically defined word in the policy.) For example, one of the more commonly used forms in the insurance industry, CG 00 01 04 13, excludes coverage to redo or fix "your work." Why? Because providing sloppy, faulty or bad workmanship is a risk you may assume as a business. It's not what insurance is meant to cover. The idea is that you have control over the quality of work you perform. You owe the customer a good work product and results that would make you happy if you were the customer.

But when it comes to subcontractors, you have less control and more risk when it comes to the work being done. That's why the typical CGL makes an exception for the work of subcontractors. If they do a bad job, there could be coverage if this exception is in your policy. In the exclusion for "your work", the ISO CG 00 01 04 13 form mentioned earlier states that "this exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

This is good news! But here's the kicker - it's becoming more common for insurance companies to add an endorsement that removes the exception to the exclusion for "your work". This means that the work of a subcontractor is now also excluded from coverage. Why would an insurance company do this? The purpose is to put the onus of responsibility on the party that can control the losses - just as you control the quality of work your business provides, the subcontractor controls their work product. They should be responsible if the work is faulty.

Let's say you're a general contractor and recently completed a beautiful new office complex. You put in a lot of work and so did a number of subcontractors. You had double and triple checked every detail to make sure everything was completed as planned. But late one night, you get a phone call to come to the project site. You find that the newly installed roof is leaking and causing damage to the sheetrock, insulation and wood flooring.

Is the installed roof covered, or not? Well, if a subcontractor did the work and the work is defective, your CGL policy may still cover it. You might have a policy that gives an exception for subcontractors in the "your work" exclusion. Great!

But, you could also have a policy that removes this exception - and then the subcontractor's work isn't covered. The damage resulting from it may be covered still, but you're not going to find coverage for that roof in your CGL policy.

This can create a significant coverage gap for a general contractor when it comes to subcontractor work. If the subcontractor is unable to pay to fix the faulty work, it's likely to leave the contractor in a bind. That's why it's critical that you talk through the details of your insurance coverage with your independent agent. You need to know what will happen if a subcontractor's work is bad. Will you be left with the bill to redo or fix the work?

Most general contractors are added as an additional insured to their subcontractor's policy with primary noncontributory wording. The subcontractor's policy (in our example, the roofer's policy) should provide coverage for the general contractor for all damage to the building except for the roofing damage (which would be excluded as "your work" under the roofer's policy).

Because of these potential gaps, one of the most common questions I get asked when looking to write a contractor policy is a variation of, "does the policy have an exclusion for subcontracted work?" This is a great question for agents and contractors to consider as they review their insurance policies. Other great questions include; "how much work is being subcontracted out to others," "what are the additional insured requirements, and how strictly are they enforced?"

Is your head spinning trying to digest all of this? Those of us in the insurance industry understand that this is a complicated topic. But, that's only because our products are designed to address so many different types of situations. Just another reason why working with your independent insurance agent is the best way to make sure your operation is properly covered.

Help avoid the basic types of construction defect claims

SIL6504 — Fri, 22 Jun 2018 15:37:02 +0000

Help avoid the basic types of construction defect claims SIL6504 Fri, 06/22/2018 - 11:37

Every contractor knows that things can change quickly on a job site. Have you ever been part of a construction project when something went terribly wrong, like a sudden water pipe burst? The silver lining is, this type of construction defect can be immediately known and addressed, while on the other hand, some projects may take years for the defect to be noticed.

Whether construction defects are known today or appear years later, they're a concern for any contractor. And where the work is performed may add an additional layer of complexity as state laws vary greatly. If a contractor is working on a local project, they're likely familiar with the local laws and requirements. But, if an out-of-state contractor is brought in, they may not be.

There are four types of construction defects:

Design deficiencies: Here the problem lies in the design. In these defects, the buildings or systems designed by architects and engineers don't work as intended, or as expected.
Product or Material Insufficiencies: Despite proper design and installation, the issues happen because the product or materials used were defective or damaged. This could also be materials that are inferior in quality or standard and may not function or last as long as expected.
Construction Process Failures: Poor quality workmanship can result in a range of damages from plumbing leaks, electrical or mechanical problems or cracks in foundations or walls.
Operation and Maintenance: Once construction is complete, it's critical that the construction is maintained effectively. Exterior sealants may only last 4-5 years depending on the environment. Without proper maintenance failed sealants can cause water intrusion, most commonly around windows and doors.

With today's evolving technology, improvements in building materials emerge faster than building codes can be updated. For instance, increasing uses of solar panel systems aren't addressed in many commercial roof specifications. Things like wind-loads or weight capacities are leading designers to follow codes that may no longer be relevant. These innovations satisfy consumer's demands for more eco-friendly products, but on the flip side, they expose contractors to liability for unintended results.

Here are a few thoughts for contractors to consider regarding construction defect claims:

Stay on top of current building codes and standards
Understand and follow MFG guidelines to ensure proper installation and limitations.
Pre-qualify employees that are hired to ensure they have the skills to deliver the kind of work expected by you and your clients.
Hire experienced sub-contractors that you are familiar with and have proven their skills.
Document processes and materials that may be needed, even years after the projects are completed and keep your records.
Develop a quality assurance / quality control program.
Take advantage of risk transfer opportunities through contracts vetted through legal counsel.

By staying on top of evolving standards, monitoring your on-going projects and engaging the right insurer, you can help avoid construction defect pitfalls and better position your business for success.

Are your subcontract agreements helping or hurting your business?

SIL6504 — Fri, 22 Jun 2018 15:28:16 +0000

Are your subcontract agreements helping or hurting your business? SIL6504 Fri, 06/22/2018 - 11:28

A strong, well-written subcontract agreement is a must for any good contractor to remain profitable while maintaining good business relationships with their subcontractors. Too often this issue is not thoroughly discussed and reviewed up front. Instead, it's dealt with only when there's a claim and a question of liability at hand. Well-written contracts, with clearly defined responsibilities and appropriate insurance, can save a business relationship. When the unfortunate claim happens, it becomes a matter for two insurance companies to handle. Nevertheless, contractors can maintain good strong relationships with their subs and call on these partners during a time of need … which we all know can happen quite frequently in the contracting world.

How can you make sure your contracts are good for your business relationships and your profitability?

When reviewing a contract, look at these four things:

The name on the contract should match the Named Insured(s) listed on the insurance policy.
The Scope of Work and a Clear Definition of Responsibilities among the parties.
Insurance requirements address adequate limits, appropriate endorsements and other specifics I included below.
The Indemnification Section is clear and in favor of "ABC Company" (our insured or prospective insured).

Once these are in order, look for these insurance provisions:

Additional Insured Endorsements, which extend coverage by allowing direct access to insurance policies. These should be written to cover both ongoing and completed operations. Completed operations coverage is essential, as the damage often occurs after the work is done and put to its intended use.
Primary and Noncontributory language to address which insurance policy responds to the claim. Without this language, a subcontractors' insurer may only pay a portion of the claim, either on a pro-rata basis or excess basis.
Waiver of Subrogation provision affirming that rights of subrogation against the insured are waived.
Defense costs in addition to (or outside of) policy limits should be stated in the contract. While most CGL policies are written to meet this requirement, it should be affirmed in the contract because it's not usually reflected on the certificate of insurance. And if defense costs erode the limits, there may not be any money left to fund the actual damages as it was all spent to defend the claim.
Financial stability of the insurer is critical because insurance is a "funding" mechanism to pay claims. The carrier should be admitted to do business in the state(s) where the work is performed and have an A.M. Best rating of A- or better. Non-admitted carriers with appropriate financial ratings may be acceptable; however, state insolvency funds may not provide a recovery source if the carrier becomes bankrupt.
Evidence of insurance, or Certificates of Insurance, should be obtained and renewed for the duration of the agreement and the applicable statute of limitations for injuries/damages arising out of the work.
Insurance requirements of contracted work, noting if any portion of the work is not self-performed and subcontractors are used, there should be identical insurance requirements for all parties hired by the subcontractor. Otherwise, your business may have vicarious liability for the actions of and work performed by others, even if you don't have a direct contractual relationship with them.

A well-written subcontract accompanied with the right insurance protection. Talk to your insurance agent to make sure your contracts fit your business needs.