Do you know your insurance requirements?

March 1, 2008
A contractor who promises in a contract to obtain insurance that he can't get (or chooses not to buy for cost reasons) can be in breach of contract, but this area is so complicated that who ends up being the loser can turn on some pretty technical points.

Contractors sign agreements every day that are prepared by their customers or the customer's designer or attorney. Although these contracts may cover dozens of subjects, nearly all of them require the contractor to purchase insurance and show evidence of that insurance before starting work. As I have discussed before in this column, the insurance marketplace has been volatile in the last few years, and the coverages required by a contract's insurance clause may be very expensive or even impossible to obtain. A contractor who promises in a contract to obtain insurance that he can't get (or chooses not to buy for cost reasons) can be in breach of contract, but this area is so complicated that who ends up being the loser can turn on some pretty technical points.

An example of how subtle the problem has become is illustrated in a recent court case out of the Colorado Court of Appeals. In Weitz Co., LLC v. Mid-Century Insurance Co., 2007 WL 2264634, Weitz, as general contractor, hired RK Mechanical Inc. to install plumbing, heating and air conditioning systems, including roof and perimeter drains, in a Colorado office building. The subcontract required RK to purchase commercial general liability insurance on an occurrence basis, covering completed operations and listing the general contractor as an additional insured “using ISO additional insured endorsement (CG 20 10) edition date 10/93 or its equivalent.” In addition, the contract required the subcontractor to continue this coverage “for at least two years following final payment to Contractor in connection with the Project.”

About a year after the project was completed, the owner noticed property damage indicative of water intrusion, including heaving of floor slabs and damage to drywall and finish floors. Eventually, the owner sued Weitz, who demanded that the subcontractor's insurer step in and take over the case. The sub's insurer would not do this without certain conditions that apparently were not acceptable to Weitz because Weitz's own insurer defended it and settled the case. After it was over, Weitz sued its subcontractor's insurer for bad faith, deceptive trade practice, breach of the insurance contract, etc. The subcontractor was let out of the suit (the court decision doesn't say why).

To make a long and fairly boring court decision short, Weitz lost its lawsuit. The court found that the ISO additional insured endorsement form that Weitz specified in its subcontract did not require the insurer to provide additional insured coverage for two more years after completion. The specific ISO form still provided for coverage of completed operations, but it had been changed to take out the requirement that the insurer also defend claims against the general contractor. How could Weitz complain that the insurer didn't defend it when Weitz had told the subcontractor exactly what endorsement form to use?

While in this case, the loss fell on Weitz (or its insurer) there is no guarantee that the next time it comes up, the result will be the same. What if Weitz had required the additional insured coverage for completed operations as part of its subcontract, but had not specified what forms to use? That would have put the entire burden on the subcontractor.

What if the subcontractor had not told its insurance advisor about the completed operations coverage requirement, so that it wasn't provided? The subcontractor would be in breach of contract.

What if the subcontractor had passed on Weitz's insurance requirements and ISO form designation to its insurance advisor, but the advisor didn't catch the inconsistency? Would the advisor be responsible?

What if the advisor told the subcontractor that it could not purchase the additional insured coverage because it was no longer available? Would this be a case of impossibility of performance, excusing the sub?

If this were public work, would the sub have the obligation to raise this before bid time or be found to have “assumed the risk” of impossibility?

Insurance certificates have a space to identify additional insureds, but they do not typically identify the form of additional insured endorsement being provided. The only way to know what coverage is being provided is to insist on seeing the actual additional endorsement form. How many owners, contractors or subcontractors actually obtain these forms and review them before allowing the contractor or sub to start work?

Insurance requirements are only one of many, many topics in contract forms that contain great risk elements that most contractors are just not trained to evaluate. Lien waiver forms are still allowed in many states that unconscionably strip away rights to lien — or even make a claim — for funds not yet received. Indemnity clauses still can be found that turn a sub into the general contractor's insurer for the general's own faults. Construction contracting is not for the meek. Keep attending those seminars (and reading this column), and above all else, read before you sign.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to [email protected].

Chubb joins green building groups

WARREN, N.J. — The Chubb Group of Insurance Companies has joined the American Council On Renewable Energy and the U.S. Green Building Council in an effort to better serve the needs of its commercial customers and support the development of the alternative energy marketplace.

Chubb recently formed a green energy team, made up of underwriters and loss control specialists, in response to the accelerating development of environmentally friendly energies, products and technologies. The team will further develop core commercial insurance products and services geared toward customers who operate within this sector. Chubb has insured renewable energy producers and distributors for 20 years.

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