Cook, Hall & Hyde, Inc.

"The Bottom Line:
Proof of Insurance Doesn't Prove You're Insured"
as seen in the December 2006 edition of New York Construction Magazine

Owners and contractors need to carefully review insurance documents for their primes and subcontractors because simple clauses and forms can invalidate entire categories of coverage.
By Louis Santelli.

Only 10 to 15 years ago, it was common to come across general contractors, owners, or developers that did not secure insurance safeguards from their subcontractors. In that era, the construction industry had far fewer lawsuits based upon state and local labor laws and most insurance contracts were far more comprehensive than today's General Liability policies.

But today, certificates of insurance that name an owner-developer or general contractor as an additional insured have become a prerequisite for participation in most projects in our region. Virtually all owners and developers require them of the general or prime contractors, and most contractors in turn require them from subcontractors.

Seldom are contractors even allowed to begin work without having a signed contract with the familiar hold harmless, indemnification, and waiver of subrogation wordings.

Furthermore, simply requiring such insurance documentation is no longer proof of adequate protection. The increasingly complex arena now requires careful review of insurance documents to make sure that the coverage an owner or contractor thinks is in force actually exists.

I recently represented an owner who was hiring a contracting firm to rip off and replace the entire roof of a commercial building in Manhattan in a $240,000 job. After securing the declaration pages from the contractor, we discovered that there was a conditional "Exclusion for Roofing Operations" on the policy that would have left no coverage for property damage if certain job conditions were not met.

Had we merely requested a certificate of insurance from this subcontractor, we would not have been aware that this exclusion was on his policy until a loss had occurred. Needless to say, the owners chose another contractor for the project.

These types of unexpected exclusions or conditions of coverage are not uncommon. Over the last four years, insurance companies that continued to write General Liability coverage for construction companies have not only increased policy rates four-fold, but have also imposed endorsements and exclusions that seriously limit coverage that most contractors expect to have for themselves and from their subcontractors.

We have found that general contractors and developers are rarely advised about restrictions on subcontractor coverage, in part because they typically only ask for a Certificate of Insurance, which contains insurance limits and additional insured wording. Unfortunately, these certificates do not show endorsement forms or exclusions in the corresponding policy.

Furthermore, we are starting to see endorsements and exclusions on general liability policies for developers and general contractors that restrict their coverage if any contractor performing work on their behalf lacks the required types of coverage and contracts.

Such endorsements can take on several forms. Some of these endorsements reduce the limits for the developer or general contractor to $100,000 including defense costs. Another totally excludes coverage when policy recordkeeping conditions are not met prior to a loss.

Now, combine this scenario with unknown exclusions on the subcontractor's policy. An owner or general contractor could be facing a situation where there is virtually no coverage for anyone.

There are ways for an owner or contractor to prevent these dangerous scenarios and ensure coverage for all project participants. The best is for an owner or general contractor to sponsor an owner- or contractor-controlled insurance program, often called a "wrap-up" policy. Unfortunately, the option requires an owner or general contractor to be working on one very sizable project or several midsize projects, as well as to have a very strong financial base - requirements that shut out 90 percent of the market.

The next best option is simply additional leg work on the part of the owner or contractor to supplement the typical requirement of a Certificate of Insurance. The owner or contractor would need to request a full copy of the declaration pages from the contractor's or subcontractor's policy, which will include a full listing of all forms and endorsements.

There are key items that owners and general contractors should scout for on these policy declaration pages. Firstly, all forms that have the word "Exclusion" in the title are of great importance, including one typically entitled "Designated Work Exclusion," which could exclude any defined type of task such as residential work, roofing, or framing.

Others to watch for are the "Prior Work Exclusion" form, which excludes coverage for bodily injury or property damage claims if that work was completed before the start of the current policy, and the "Contractors-Condition of Coverage" endorsement, which lists conditions a subcontractor must meet in order to ensure coverage, such as obtaining proper insurance documents and making required notifications of other insurers. And in New York, the "Exclusion-Independent Contractors Employees" form excludes coverage for employees of subcontractors that are suing the general contractor under state labor law.

These examples show the risk that owners and general contractors assume if they are not completely informed about the coverage held by those performing work on their projects. While factors such as cost, quality of workmanship, responsiveness, and service are paramount in selecting contractors and subcontractors, so too is understanding how insurance coverage can make or break a project's overall profitability.