Kansas Contractor s Insurance Guide

Transcription

1 Kansas Contractor s Insurance Guide Daniel C. Estes, J.D. A Legal Reference Guide to Insurance in the Construction Industry 2013

2 About the Author I am a construction attorney in Kansas City serving contractors in Kansas and Missouri who face various legal matters. Construction is a risky business and I introduce new technology and systems to the practice of law to better serve contractors. Many of these are inspired by my clients businesses. Like my clients, I use systems that save my clients money and improve their bottom line. That defines my belief of what a lawyer should do for clients enhance their success. Only by doing that can a lawyer be successful. This guide is intended to provide a primer for contractors on many of the issues faced on a regular basis with insurance policies, coverage and claims. Contrary to what you may believe the need to properly address insurance issues begins well before the work begins. Often before you even submit a bid. Working with knowledgeable insurance brokers and attorneys can help you insure that your business and future is protected. I am a partner with the firm of Fisher, Patterson, Sayler & Smith, LLP, in Overland Park, Kansas. If you have construction insurance issues or other legal issues facing your construction business, we can help. - Daniel C. Estes Copyright 2013 Daniel C. Estes. All Rights Reserved. No portion of this may be reprinted or reproduced without prior written consent of the author. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 1

3 Introduction Insurance policies are confusing and when designed for contractors are nearly indecipherable. Contractors facing an insurance claim are often uncertain about what is covered and what is not. When they find out what is covered they wonder - out-loud to their lawyer - why they bothered to buy it. The answer is usually of no consolation. Insurance companies think that they provide protection for you from accidents, but not for the normal risks associated with the building trade. Normal business operations risks are insured under a CGL (Commercial General Liability) policy. Insurance products and policies have evolved over time to exclude insurance coverage for risks normally associated with contracting to provide a service. It isn t insurance to protect the contractor from doing a bad job. This limitation is usually expressed as the distinction between an insurance policy and performance or payment bonds. If you operate an excavation company and your front loader operator backs his equipment into a parked Mercedes while loading rock for a foundation; that is an accident. These are the kinds of accidents that CGL insurance is designed to cover. Your insurer will pay to have the Mercedes fixed and hopefully the owner will learn not to park so close to a construction site. On the other hand, if the front loader operator drives over the stubbed below-slab plumbing for the building and it has to be fixed, it probably won t be covered by the insurance policy. At least not in a typical CGL policy. Things are almost never this simple. What happens when the damaged plumbing is not discovered until after project completion when the sewer backs up into the building? Or, when the building slab heaves a few inches causing displacement of columns and walls because the excavator failed to place fill material in the proper sized lifts? Or, the wrong type of material was used? Sure, these are risks associated with the contract to perform the work. Contractors are expected to perform the work properly when they sign the contract. On the other hand, the damage was to the concrete, the walls, the doors, drywall, and columns. None of that was constructed by the excavator. It was an accident that such significant damage was done to the building. Surely, those are covered by your CGL policy. Unfortunately, these are the types of situations when coverage is not easily determined. These are the situations that result in litigation over construction defects and insurance coverage. An entire book could be written on the nuances of insurance coverage for contractors. And they have been. The goal of this guide is to provide you with a basic understanding of the types of available insurance coverage and the most common issues faced when a claim occurs. It is also a reference to help you determine when and how to protect your business when you are facing a possible claim or need to call on your insurance company to assist you. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 2

4 What you must know: Understand the types of insurance: CGL, OCIP/Wrap-up, Builder s Risk, All Risk, Property. Insurance is Not a bond. It does not guarantee performance or payment. Different roles require different insurance: Design Build (E&O); Engineering (Professional liability); CMa/CMc/Testing & Observation; Architecture; Engineering Procurement; Developer. Compliance with notice of claim terms is critical. Reservation of Rights is almost guaranteed; hire your own lawyer to advise you on getting the most out of the insurance company. Insure to the contract obligations and insure the indemnity owed. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 3

5 Types of Insurance for Contractors Numerous insurance products exist that that can provide contractors with protection on projects, as well as, insure owners, engineers and architects against construction project risks. An understanding of the basic nature of each type of policy can help you purchase the coverage when talking to your broker. Commercial General Liability (CGL): This is a general policy for businesses. Any business should carry a CGL policy to protect itself from the accidents that can happen in day-to-day operation. This typically covers things like car accidents, slips and falls in stores, scaffolding that falls on a passing pedestrian. When contractors purchase CGL coverage they often do not appreciate that it provides only very limited coverage for construction project risks. In general terms, the CGL policy is not intended to cover you if you perform defective work and flood the building under construction, or fail to hire a licensed electrician who causes a fire. When you sign the contract, you agree to build the house or building according to the plans, the code and in a good and workmanlike manner, which rarely allow for bad work that damages the building. It is also not intended to cover you for money you may have to pay the owner for failing to keep on schedule or complete on time (liquidated damages or delay damages) or for the lost profits you suffer if the owner terminates you. Those are all considered risks of doing business and why some people refer to CGL insurance as business risk policies. Often a CGL policy issued to a contractor will include additional policy language called endorsements that further limit what coverage may be available. These include exclusions for water damage; mold, mildew and biological growth; pollution i ; hazardous waste or materials; contract liability limitation; designated premises limitation; additional insured limitations. Only very few endorsements that expand coverage are common, usually involving the completed operations hazard, or a lower policy limit (i.e. $100,000 instead of $1 million) for certain risks like water damage or mold. Similar insurance policies that may be related and are required for nearly every contractor include worker s compensation coverage, property insurance for buildings, vehicles and equipment and automobile liability policies. Owner Controlled Insurance Program (OCIP and also known as wrap-up ): This is a policy held by a project owner during the work that is intended to cover virtually all liability arising from the construction. It is actually a package of coverage usually provided in separate policies, i.e., CGL, worker s compensation, employee liability. One benefit to the owner of using an OCIP is the savings in insurance premiums paid by the contractors and subcontractors that typically are passed on to the owner in bids. With the OCIP the owner pays a single premium for the entire project. Contractors can see benefits in the use of OCIP by obtaining higher limits than they may be able to procure otherwise, and allowing the contractor to work on a project that previously was out {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 4

6 of reach. Risks of using an OCIP include possible gaps in coverage requiring supplemental insurance be purchased that cannot be passed along as a cost on the project and reductions in contract value greater than the contractor s actual cost of directly procuring insurance coverage. Generally, owners proving an OCIP policy for a project are more vigilant about project safety and often engage in better oversight in areas that disputes and defects occur. Additionally, owner created or contributed delays that require extending general conditions insurance cost are directly paid by the owner creating greater incentive to complete on schedule. Where an owner has a tendency to self-perform work or contract directly with certain trades, this can provide protection to other contractors for any errors made by the owner or its contractors. Finally, an OCIP is a common version of these insurance programs, but they do not have to owner controlled, they can be contractor controlled. While they usually are obtained for a single project, they can be purchased as a rolling policy to apply on a continuous basis for multiple projects. Builder s Risk: A special insurance policy for risks to the property, materials and equipment used on a construction project that might be damaged or destroyed during the course of construction. This is truly property insurance. Defined types of risks are usually identified in the policy. It terminates when the project is completed as the insurance against loss could then transfer to the owner s traditional property insurance. Many standard construction contracts indicate that the owner will purchase Builder s Risk insurance or provide notice of its intention not to purchase it, so the contractor can select its insurance coverage properly. Quite often this is not done. Likewise, those terms also include important waivers of subrogation and setoff provisions that can significantly affect the value of a subsequent claim. Whether or not Builder s Risk insurance is purchased for the project, a contractor needs to be aware of it and document it. Contractor s All-Risk Insurance: All-Risk insurance typically refers to a type of policy that automatically covers anything not expressly excluded from coverage. Traditional insurance policies specifically define what is covered then exclude things from it with exclusions, exceptions and limiting endorsements. Another use is Contractor s All-Risk insurance specially designed for overseas projects. This is the equivalent of Builder s Risk, but covers many of the risks associated with shipping and transit of materials to an overseas project. Property Insurance: Property insurance policy are simply the standard coverage for possible risks to the structure, typically when complete. However, certain risks to an ongoing construction project can also be covered by traditional property insurance. Coverage is limited by policy language. Some contracts will include waiver of subrogation language - stating that amounts paid for a loss by property insurance is not recoverable from the contractor - where property insurance is required. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 5

7 Making a Claim Notice Requirements Perhaps the most important terms of any insurance policy are the one setting out how the insurer must be notified of a potential claim. Every policy will include a section on How to Make a Claim or Notifying Us of a Claim. Most policies require that you notify the carrier as soon as you have any reason to believe that a claim may exist. While this sounds easy enough, it is still a common source of disputes. Who Must be Notified Insurance policies state who is to be notified of the claim. Usually an address is provided where the notice of claim must be mailed. Notifying your insurance agent is not good enough. An insurance agent or broker works for you, not the insurance company. While you should notify your agent, it does not satisfy the notice requirement under the policy. Often the agent will assist you with providing proper notice to the insurance company, but you cannot assume the agent will do so just because you give the agent a call. What is a Claim Requiring Notice? Service of a lawsuit or a major accident causing damage or an injury are pretty clearly the subject of a potential claim. Notifying the insurance company immediately is a logical first step. Contractors face events that are often less clearly claims requiring notice. When a property owner asks for warranty work or repairs from water damage or simply a leak. A leak that develops in a roof after completion may prompt a call to the contractor immediately, but it may not mature into a claim needing notification of the insurance carrier for years. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 6

8 Understanding Policy Exclusions When claims arise from a construction project and the contractor s insurance carrier is placed on notice, depending on the nature of the specific claim, the insurance company will often disclaim coverage under one or more exclusions. They will spell these out in a reservation of rights letter. It is intended to notify you that coverage may not exist and the insurer can reserve its right under the policy to deny the claim, if not immediately, later. The typical exclusions to be wary of include: Work Product Exclusion A common exclusion used in older insurance policies ii, but which still appears in many insurance policies with modification or additional exclusions and exceptions that can change its application. Typical language is: This policy does not apply:... to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. Inside the Courtroom In Owings v. Gifford, 237 Kan. 89, 697 P.2d 865 (1985), a case involving faulty work by a contractor/ builder of residential construction, the Court discusses these types of insurance policy exclusions. The policy at issue in Owings excluded coverage for property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. 237 Kan. at 91, 697 P.2d 865. That policy excluded coverage for property damage to the residence caused by the contractor's negligence in faulty construction. 237 Kan. at 93, 697 P.2d 865. The Owings Court explained that the purpose of a general liability policy is to provide coverage where the insured's work or product actively malfunctions, causing injury to a person or damage to another's property. 237 Kan. at 94, 697 P.2d 865. Since a contractor can control the quality of its work performed, it is likewise liable when that work is faulty. This is seen as why warranties are implied in law and a normal part of doing business. However, the policy excludes coverage for property damage due to the insured's own faulty work. For coverage of that risk, the builder may obtain a performance bond or purchase a guarantee of contractual performance. 237 Kan. at 93, 697 P.2d 865. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 7

9 The entire building may be the general contractor s work product even though portions of it were built by subcontractors and the entirety of the building s defects can fall outside of the policy coverage. Work of a general contractor carried out by subcontractors, however, has very different treatment in other policy language, including the your work exclusion. iii Inside the Courtroom Kansas law is substantially shaped by the rules set out in the Lee Builders case. In Lee Builders, the typical policy language of the your product exclusion stated: [This insurance does not apply to:] [p]roperty damage to your product arising out of it or any part of it.... Your product means: a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: (1) You;... b. Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products. Your product includes: a. Warranties or representatives made at any time with respect to the fitness, quality, durability, or use of 'your product; and b. The providing of or failure to provide warnings or instructions. Farm Bureau (the insurer) first argued that the product provided by the builder was principally the leaky windows themselves. Indeed, Lee Builders provided the windows, but the amount sought by Lee Builders did not include the cost of (or any property damage to) the windows. Accordingly, no aspect of Lee Builders claim included property damage to windows, and the your product exclusion had no application for this reason. Farm Bureau also argued that the product provided by Lee Builders was the entire custom home. The Court ruled that if this were the case, then their product was real property and expressly outside of the your product exclusion. As a result, the exclusion would not apply and damage to you work of building real estate was covered. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 8

10 Your Work Exclusion A more frequently applied exclusion to a claim for damage from defectively performed construction work is the your work exclusion. Simply, this policy language disclaims any coverage for those claims that arise out of your work in building the house or building. Although this language is extensively relied upon by insurers to deny coverage, there are numerous cases interpreting and construing this exclusion. Often the application is dictated by the nature of the construction project. Kansas law now supports the conclusion that language referring to your product or your work need not necessarily include the entire project into which your work is integrated. Rather, the property damage must be directly occurring to your contractual scope of work in order to fall under the exclusion. Differing insurance policy language can certainly lead to different results. The language shown above includes damage to your actual work, where the damage is also caused by your work if it is also included in the products-completed operations hazard. (See below.) Currently used in as the your work exclusion language in ISO policies, this language attempts to eliminate all coverage for damage to your work from your work if you also performed the work. This distinction can be critical for a general contractor where the entire project might be defined as your work after all you contracted to build the entire building however, the actual construction work was performed by subcontractors. Frequently, whether the damage arises out of your work or any part of it can be a critical issue. Most construction defects resulting in property damage are caused by multiple potential components and the failure of interconnected work performed by multiple contractors or subcontractors. Insurance carriers will rely on this exclusion until a cause can reliably be identified and sufficient evidence exists to decide if coverage exists. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 9

11 Inside the Courtroom Somewhat similar exclusions were considered in the Advantage Homebuilding LLC v. Maryland Casualty Co., 470 F.3d 1003 (10th Cir. 2006), case where certain property damage was excluded as follows: This insurance does not apply to: Property damage to: (5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations; or (6) That particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it. Paragraph (6) of this exclusion does not apply to property damage included in the products-completed operations hazard. Here the Court focused on the use of the term damage as determinative because damage that occurred during the course of the insured s work was excluded from coverage, but that damage occurring after completion was not. This language is ultimately very similar to the effect of the products-completed operations hazard. Occurrence Defined Insurance policies work by providing coverage, then limiting that coverage with defined coverages and exclusions. A condition to coverage that is particularly difficult to understand and apply is the policy language stating that it provides coverage only when there is an occurrence. The term is then usually defined by the policy. One common element of these definitions and courts interpretation is a consideration of whether an accident or accidental damage took place. This is perfectly reasonable if a scaffold collapses on a project site damaging a neighboring property. Everyone understands that a discrete set of events occurred at a particular time. Faulty construction work, however, often occurs during the work, doesn t start to cause any damage for months, slowly and progressively results in damage such as water leaks over months or years until it is finally discovered. These scenarios present a challenge to determining if an occurrence as defined by the policy took place and courts around the country are by no means uniform. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 10

12 This is a critical issue for contractors facing a claim or lawsuit for defective construction work because while any of several exclusions may apply to preclude insurance coverage for the damages, if the damage constitutes an occurrence, the insurance carrier will be required to provide an attorney to defend the claims. Attorney s hired by your insurance carrier work for you and will not only fight against those claims, but advocate for you with the insurance carrier to reach a resolution to control your risks. Inside the Courtroom The critical case on this issue is Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997 (2005). The Court concluded that most any construction defect resulting in property damage constitutes an occurrence. We conclude that property damage to surrounding structural components caused by moisture seepage resulting from faulty work constitutes an occurrence under this general contractor's CGL policy because: (i) the policy definition specifically includes within the term accident the continuous or repeated exposure to substantially the same general harmful conditions ; (ii) our Supreme Court has indicated that an occurrence is avoided only when an act results in an intentional injury. See, e.g., Spruill Motors, Inc. v. Universal Underwriters Ins. Co., 212 Kan. 681, 687, 512 P.2d 403 (1973); (iii) to construe occurrence more narrowly would render other policy provisions and exclusions meaningless; (iv) to the extent that this policy definition or the precise phrase construed is ambiguous, we construe the policy against the insurer. See Lightner v. Centennial Life Ins. Co., 242 Kan. 29, 36, 744 P.2d 840 (1987). A Sunset Clause Other Exclusions and Endorsements That Limit Coverage Any clause that precludes bringing a claim against the insurance policy after a period of time. You construct a new home in During the project you carried a $1,000,000 general liability policy and continue to renew the coverage. In 2015, you are sued for a construction defect on the 2012 house. When you file a claim, the carrier denies coverage and refuses to provide any defense because there is a sunset clause. A sunset clause limits the amount of time after a policy expires that a claim can be filed, usually two to five years. This is typically seen in policies written for construction related risks. Considering the fact that most construction defect losses arise years after a project is completed, this endorsement is dangerous. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 11

13 The Prior Work Exclusion Prior work exclusions disallow making a claim for a project on a policy that was only purchased after the project was completed. Contractors rarely request coverage for prior work because the work was insured at the time. Whether this leaves you without available coverage depends largely on what triggers coverage. Most general liability policies for contractors are written on an occurrence form, meaning that coverage is based upon when the loss occurs. A loss is usually considered to have occurred when a project is completed. It depends on the type of loss and the coverage trigger wording in your general liability insurance policy. Most construction defects claims arise years after a project is completed. Because of this, if you have a Prior Work Exclusion you may think the claim is covered, but most likely is not. Work Performed By Subcontractors The endorsement limiting coverage for work performed by subcontractors (CG 22 94) is one of the most complicated endorsements in contractors liability insurance. To understand this endorsement, you must first understand the standard Your Work exclusion. A standard general liability policy states that damage resulting from your work is covered, but damage to your work is excluded. For example, a general contractor builds a fence. During the work, the contractor digs a hole for posts and breaks a buried water line. The damage to the water line is covered because the water line is not the contractor s work. Water damage to the fence from the resulting flooding is not covered - it is the contractor s work. The exclusion reads as follows: As you can see, the exclusion is not absolute. It has an exception that applies to the exclusion - meaning there is coverage - when work is performed on your behalf by a subcontractor. (In legal terms this is an important distinction between exclusions and exceptions. ) Work completed by a subcontractor is not considered your work. As a result, where you would not have coverage if you performed it, the exception does provide you coverage for that same work if performed by a subcontractor. (Often the subcontractor will have the same exclusion of coverage but no subsubcontractor for the exception to apply.) {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 12

14 The endorsement eliminating this exception (CG 22 94) as an endorsement to the policy can be a terrible surprise. So, if your policy has a CG endorsement, you can have absolutely no coverage for damage to the work that is the subject of the contract. Often, this will trigger a dispute over what the work consists of and what is damage to other work. In these disputes the indemnification terms of the contract can become the primary source of the dispute. Contractual Liability Limitation One of the most important considerations a contractor must make is the amount of liability he assumes in a contract and whether or not his insurance covers contractual liability. In most construction contracts, liability is transferred through an indemnification agreement. A general contractor is automatically liable for the work of his subcontractor. Through the indemnity agreement, the GC transfers that liability back to the subcontractor. The subcontractor is now obligated to indemnify the GC in the event of a loss, often including the GC s attorney s fees and costs. When an indemnification claim arises, as a subcontractor you will want to know if your liability policy covers the obligation to indemnify the general contractor. It depends principally on the insurance policy exclusions. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 13

15 First, looking at the standard language regarding contractual liability in a typical occurrence policy you can find the exclusion language. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 14

16 Standard language excludes coverage unless the contract is an insured contract. To find out what an insured contract is, you must refer to the policy definitions. As defined, a contractual indemnification agreement would be considered an insured contract. It is worth noting that the contractual liability is principally covered because tort liability would also exist in the absence of the contract. Some claims on a project may trigger an indemnification obligation, like perhaps delay damages where liquidated damages don t exist, but generally speaking tort liability would not apply to such a claim. Applicability of the coverage can be arguable in those claims. Under a contractual liability limitations endorsement (CG 21 39), the definition simply deletes that language referring to assumed liability (section 9.f. above) from insured contract. As a result, the subcontractor can now be on the hook to pay for the legal expenses and liability of the general contractor in the event of a loss with no help from insurance. Additionally, a general contractor may not have coverage for that subcontractor s work. If the subcontractor is not financially able to pay the losses, the general contractor can be left paying the damages and {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 15

17 the subcontractor can be left seeking bankruptcy or facing dissolution. Pollution Exclusions Most general liability policies excludes bodily injury or property damage losses arising out of the release of pollutants. There are, however, several exceptions to this exclusion. Standard language provides that the coverage will exist: On your premises: Building Heating Equipment - Coverage will still be provided for bodily injury resulting from the release of smoke or toxins caused by equipment used to heat your building. Owner as Additional Insured Provides coverage for bodily injury and property damage resulting from the release of pollutants if you are a contractor working at your client s premises. But, only if the client is named as an additional insured on the contractor s policy. Hostile Fire There is still coverage for bodily or property damage from smoke or fumes arising out of a hostile fire. Away From Your Premises: Mobile Equipment Provides coverage for the discharge of chemicals from your mobile equipment such as fuel and motor oil. Operations Within Building If a contractor brings materials into a building that release toxins or fumes that cause bodily injury or property damage, there is coverage as long as the damage or injury happened inside the building. Hostile Fire - There is still coverage for bodily or property damage from smoke or fumes arising out of a hostile fire. In addition, the pollution exclusion does cover costs related to cleanup arising out of property damage, but not cleanup at the request of a government agency. So, the standard pollution exclusion actually provides a lot of coverage for pollution. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 16

18 In contrast, the Total Pollution Exclusion is really simple. All those exceptions are deleted. It replaces the original pollution exclusion with the following: Nothing is covered. This exclusion is critical because pollution losses can be extremely expensive. Not only are the damages significant, but the clean-up usually requires exhaustive expert abatement processes. A major pollution loss could put you out of business if you don't have the right coverage. Products-Completed Operations Hazard The complexity of the policy language is not only difficult to understand what coverage exists, but this often makes it difficult for even the seasoned lawyers to interpret its application. These terms are typically defined as follows: 13. products-completed operations hazard: a. includes all bodily injury and property damage arising out of your product or your work except products still in your physical possession or work that has not yet been completed or abandoned. The bodily injury or property damage must occur away from premises you own or rent unless your business includes the selling, handling or distribution of your product for consumption on remises you own or rent. Your work will be deemed completed at the earliest of the following times: (1) when all of the work called for in your contract has been completed; {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 17

19 (2) when all of the work to be done at the site has been completed if your contract calls for work at more than one site; or (3) when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed; b. does not include bodily injury or property damage arising out of: (1) the transportation of property unless the injury or damage arises out of a condition in or on a vehicle created by the loading or unloading of it; or (2) the existence of tools, uninstalled equipment or abandoned or unused materials. When an injury or damage occurs is often the determinative factor in the application of the coverage and exclusions defined by the products-completed operations hazard. In a construction defect claim resulting in ongoing or progressive property damage, the date of occurrence of damage is often subject to argument. If the defective work was put in place during construction, while you retain possession of the job site, the damage could begin during construction but persist and not be discovered until well after you relinquish possession to the owner. The complexity of these factors make exclusions that depend on application of the products-completed operations hazard especially challenging to evaluate without legal advice. Errors and Omissions Errors and omissions claims or coverage typically refers to activities of a professional nature, of those owned a fiduciary responsibility or those involving other agency representation. Contractors typically don t need E&O insurance coverage unless they are engaged in design-build projects, are performing architecture or engineering work or otherwise performing work that results in a fiduciary relationship. Generally the coverage for professional errors and omissions coverage is triggered by claims with the potential for triggering coverage under the terms of the policy with the court interpreting the coverage in favor of the claimant. Miller v. Westport Ins. Corp., 288 Kan. 27, 200 P.3d 419 (2009). Insurer s Duty to Defend An insurance company s duty to defend - hire an attorney to represent your company when a claim or suit is made - is determined by a different set of factors than is the duty to actually pay {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 18

20 any damages assessed against you. While the written terms (coverages, definitions, exclusions, exceptions, endorsements, policy limits) will determine if the insurance company must pay any damages, the duty to provide a defense by hiring counsel is governed more by case law. When a claim is first made, it may not be readily apparent whether insurance coverage will exist if the claimant prevails. Generally speaking, insurance companies owe their insureds duty to act in good faith and to err on the side of protecting the insureds before a specific determination on coverage can be made. If any claim made could possibly result in damages that would be covered by the insurance policy, then the insurance carrier will most often have a duty to provide a defense. Trigger of Duty to Defend An insurer is contractually obligated by the policy to defend even meritless suits that fall within the insurance coverage. As such, the duty to defend is much broader than the duty to pay indemnity. On the merits of a claim, the insurer may have no obligation to pay, but before the merits are decided, the insurer must pay for the defense of the insured. In effect, the insured receives coverage for the defense itself, even though no duty to indemnify will ever exist in that situation. In other words, the duty to defend is broader in the sense that it is triggered in more situations than the duty to indemnify. Miller v. Westport Ins. Corp., 288 Kan. 27, 200 P.3d 419 (2009). There is no duty to defend claims outside the coverage, although insurers often end up defending non-covered claims because the statement of the claim or the petition in the lawsuit states a theoretically or potentially covered claim, albeit of dubious merit or only remote prospect of success. Under Kansas law, lawsuit pleadings are merely a starting point for the duty to defend analysis. They are not dispositive. An insurer must additionally consider actual facts of which it is or should be aware when evaluating its duty to defend. In other words, even where a petition states a lawsuit that does not trigger the duty to defend, knowledge of other facts and information that gives the insurer reason to know that coverage could exist still triggers the duty to defend. The contents of the lawsuit are often sufficient to trigger a defense, but it may not be sufficient to relieve the duty to defend. The law in this regard favors insureds and favors protecting insureds over insurers. When a claim or lawsuit arises, it is best to submit it to all insurance carriers for a determination of the duty to defend. Likewise, any denial of a defense should be met with a fair measure of skepticism and legal counsel should review the claim and policy to evaluate the denial and pursue the insurance carrier. Miller v. Westport Ins. Corp., 288 Kan. 27, 200 P.3d 419 (2009). Effect of Failure to Defend When an insurance carrier fails to live up to its duty to defend a claim or suit, whether or not {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 19

21 the claim had any merit, the insurer breaches its insurance contract with the insured. However, as explained in Aselco, Inc. v. Hartford Ins. Group, 28 Kan.App.2d 839, 21 P.3d 1011 (2001), a breach of the duty to defend does not deprive the insurer of coverage defenses. Inside the Courtroom The Aselco Court s reasons for not punishing insurers that breach the duty to defend were summarized as follows: [W]e believe the cases decided to this point mean our Kansas Supreme Court would not adopt a bright line rule that insurers who fail to provide a defense and reserve their rights are inevitably equitably stopped from raising their coverage defenses. We are persuaded that an insured in [Plaintiff's] position should not automatically reap coverage without limits. Additional Insured Endorsements Each policy defines who an insured is and includes within that definition, who, other than the person paying the premiums, is considered an additional insured under the policy. In most any construction contract, it is standard for owners and general contractors to require they be listed as additional insureds on any downstream party s insurance policy. Often, additional insured terms are fairly straightforward - compared some other provisions - although the scope of coverage provided may not be the same as the named insured s coverage. Contractors need to insure they are insuring the contract including identifying the additional insured s as required by the construction contract. Since additional premiums can be incurred for this coverage, it is essential to price the additional insured coverage before bidding and be sure that those premiums are included in your financial margin for the project. {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 20

22 Summary of Key Insurance Issues for Contractors Contracts require the insurance coverage needed. Price the insurance premiums before you bid the job. Buy coverage for the contract - don t take an off-the-shelf insurance policy. Insure the indemnity obligation in your contract. Hold owners and GC s to their insurance obligations. Keep a copy of the policy with the project files. Track you policy exclusions and avoid excluded work. Contact Information Daniel C. Estes Fisher, Patterson, Sayler & Smith, LLP 9393 W. 110th St., Suite 300 Overland Park, Kansas destes@fisherpatterson.com Also contact me at: Connect at: Blog: {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 21

23 Endnotes i Total Pollution Exclusion (CG 21 49); Contractual Liability Limitation (CG 21 39); Limitation of Coverage to Designated Premises or Project (CG 21 44) ii Insurance policies are most commonly form documents issued by Insurance Services Office, Inc., called ISO forms, which are periodically updated. Alternative form of policies exist, but the ISO forms are the most commonly used and most commonly interpreted by the courts. As the courts interpret various clauses of the policy forms, they are changed in attempts to more consistently limit coverage to the risks that carriers intend to cover. iii The Kansas Court Appeals when considering the case cited numerous other support for this interpretation. See, e.g., Prisco Serena Sturm Architects v. Liberty Mutual, 126 F.3d 886, 892 (7th Cir.1997); Scottsdale Ins. Co. v. Tri- State Ins. Co. of Mn. 302 F.Supp.2d 1100 (D.N.D.2004); American States Ins. Co., 262 F.Supp.2d 1245; Brosnahan Builders v. Harleysville Mut. Ins. Co., 137 F.Supp.2d 517 (D.Del.2001); Wanzek Const. v. Employers Ins., 679 N.W.2d 322 (Minn.2004); see also Grotee, Understanding the Basics of Commercial General Liability Policies, 652 Pract. L. Inst. 63, 77, (Lit. and Adm. Practice Course Handbook Series 2001) (where the CGL policy definition of "your product" expressly excludes real property, the "your product" exclusion will not apply to the named insured who is erecting a building); Cunningham and Fischer, **1005 Insurance Coverage in Construction-The Unanswered Question, 33 Tort & Ins. L.J. 1063, (Summer 1998) ("real property" was deleted from the definition of "product" in the 1986 form CGL policy, "clarifying that work on homes, buildings, or other structures is not considered to be the insured's product.") {Kansas_Contractors_Insurance_Guide_FINAL}Daniel C. Estes Page 22