Many contractors contentedly accept the insurance policies presented to them by their insurance carriers. However, it is a much better practice to be an active participant in choosing the most appropriate coverage for your business and the specific jobs that you are performing. Use the following tips to be sure your company has the best and most comprehensive coverage.
- Never purchase a Commercial General Liability (“CGL”) policy with a “sunset” provision limiting coverage under Products & Completed Operations liability (P&CO) to a 2, 3 or 4-year term. Why? Because the California statute of limitations for construction defect claims is generally 10 years.
- Never consider a “Claims-made” or “Modified Occurrence” coverage form which also have a built-in limitation as to the length or term of P&CO coverage. Example: If you purchase a claims-made policy and decide to “switch” your insurance to the preferred “occurrence” coverage form, unless a special provision is made prior to the new purchase, the claims-made coverage would become worthless after the sixty (60) day claims-reporting period.
- Beware of “action-over” exclusions in your CGL policy. Contractors and subcontractors are typically required, by contract, to indemnify and defend the owner and general contractor from third-party claims that relate to the contractor’s work. A common scenario involves injury to a subcontractor employee. In addition to a worker’s compensation claim, the injured employee may be able to bring a lawsuit against the general contractor and owner, claiming negligence in maintaining a safe site. Under the indemnification provision in the subcontract, the general contractor and owner tender the injured employee’s claim back to the employee’s employer, exposing the employer to a second round of liability. CGL policies typically include coverage for employer liability that the policyholder assumes under a contract. However, an increasing number of insurance companies are excluding coverage for this scenario, by adding an “Absolute Employers Liability Exclusion” to the policy.” As a result, a subcontractor would not have coverage for the action-over claim. (More on this topic in a future bulletin.)
- Review the insurer’s current rating and status with AM Best. Also check with the Department of Insurance to confirm the carrier is admitted in California and with the Secretary of State, to confirm that the carrier is authorized to conduct business within the state.
- Check OCIP/CCIP insurance provisions, prior to signing their enrollment documents. Review the deductible amount that you will be held responsible for as it will often be significantly higher than your own policy. Pay particular attention to the additional insured endorsements and scope of coverage that they require. The OCIP was purchased for the project, yet often an OCIP will ask for additional insured endorsements extending P&CO coverage to the work being performed. The OCIP would be the provider of P&CO coverage for the work.
- Ensure that you maintain a diary system to check that all engaged subcontractors’ insurance policies are current and in force, and that all appropriate additional insured endorsements are attached.
Patrick McNamara has practiced construction and real estate law for 18 years. His practice includes advising contractors and owners, as to contract, dispute resolution, and insurance matters. For more information, please email him at: email@example.com or call (916) 381-7868.