Virtually every contractor or subcontractor is required by the person hiring it to provide insurance. In some cases, it is left up to the contractor to determine what types and limits it will provide, but in many situations the contractor is told exactly what it has to provide (at least as a minimum). Pity the contractor that doesn’t make sure it provides the insurance coverage it promised — the penalty is ugly indeed.
By not paying attention, all this money came out of Morrison’s own pocket.
A good, “real-world” example of what can happen is the case of Doherty v. Davy Songer, Inc. et al, 195 F.3d 919 (7th Cir. 1999). Davy Songer was a general contractor, which subcontracted with Morrison Inc. to do pipe-fitting work. The subcontract required Morrison to provide insurance coverage to protect both Morrison and Davy Songer in the event of a lawsuit alleging negligence “incident to” the subcontract. Morrison knew that it had business insurance but did not bother to check the details to make sure that Davy Songer would also be covered if a lawsuit were filed.
During construction, one of Morrison’s employees was injured by two of Davy Songer’s employees. Morrison’s employee sued Davy Songer (he’d already collected workers’ comp against Morrison, so he couldn’t sue his own employer), saying that Davy Songer’s employees were responsible. Davy Songer demanded that Morrison defend it in the lawsuit, but Morrison’s insurance company declined. To protect itself, Davy Songer settled the suit for $225,000 and sued Morrison Inc. for breach of contract for its failure to provide the insurance coverage.
The federal court of appeals decided that Morrison was liable to Davy Songer for the full loss, which Davy Songer paid, plus its attorney’s fees. Because Morrison promised to provide insurance coverage for Davy Songer but didn’t, and because the injury was “incident” to the subcontract, Morrison had to reimburse Davy Songer for everything Davy Songer paid out.
The sad part of the case is that, had Morrison read its contract and sent the insurance requirements to its agent to verify adequate coverage, it probably could have obtained all the insurance Davy Songer was demanding at very little, if any, additional cost. By not paying attention, all this money came out of Morrison’s own pocket — after its workers’ comp insurer had already paid out on the claim.
I see an amazing variety of insurance requirements in construction contracts these days. In the hvac or sprinkler areas, where it is typical for subcontractors to design/build their systems, it is not uncommon to see a requirement that the subcontractor provide “errors and omissions” insurance similar to what architects and engineers typically furnish. This insurance is not all that easy to obtain and the underwriting process is very different than what contractors normally experience with cgl policies.
Similarly, the contract could require a “waiver of subrogation” clause (preventing the insurer who pays a claim from going back against another guilty party) to which not all insurers will automatically agree. The contract may call for higher limits of coverage, coverage that is segregated from other claims, pollution coverage or any number of other items that a contractor might not have planned to purchase.
Given the enormous potential liability from uninsured claims, all contractors need to make sure that they can and do provide whatever coverage they have agreed to provide in contracts that they sign.
If your agent or direct writer tells you that you can’t obtain a coverage, or he quotes you an extra premium that is not covered by your contract price, you need to let your customer know right away and work it out before you sign the contract. If you don’t, what happened to Morrison could happen to you.