Point-Counterpoint

May/June 2008

The Risks of Going Naked: How Can You Best Keep Covered?

Do contractors really need comprehensive general liability insurance?

Albert B. Wolf Attorney-At-Law Albert B. Wolf has practiced law in Colorado and occasionally in other jurisdictions for nearly 47 years. His practice primarily involves litigation in construction cases, where he has represented nearly every facet of the industry—contractors, subs, suppliers, architects, engineers and owners. Web site: www.wolfslatkin.com

These days, many contractors are thinking about “going naked,” doing without liability insurance. So a client recently asked me: should we?

Perhaps. Premiums for comprehensive general liability insurance (CGL) are astronomical. For those big premiums, insureds get policies that are neither “comprehensive” nor “general.” Instead, they are difficult to understand without careful study, are rarely read by their insureds and provide less than expected.

While policies provide that insurers agree to pay all sums their insureds must pay for personal injury or property damage, that user-friendly language is typically followed by a laundry list of exclusions in the policies themselves, along with another stapled mass of exclusions titled “endorsements.” The complete package virtually swallows up the carrier’s obligation to pay any claim against the insured except those arising out of direct physical injuries to people or property (a passerby struck by a falling brick).

Among the exclusions being added as endorsements to contractors’ CGL policies are claims arising from mold, bacteria, lead, war, terrorism, pollution, construction management errors and omissions, asbestos, silica, subsidence (land or earth movement) and EIFS.

Although insurance companies would also like to exclude damages from defective construction, CGL policy drafters have mysteriously been unable to insert that simple exclusionary language, probably afraid that if they do, people might not buy the policy.

So what’s left? Defense costs. In most states, if there is even a remote chance of coverage, insurers must provide defenses for their insureds. This “duty-to-defend” obligates carriers to provide defense attorneys, fees and other costs (expert witnesses, depositions, investigations), probably the best benefit of a CGL policy.

When claims are submitted, the insurers typically send letters quoting verbatim the exclusions that suggest there’s no coverage for the claims. The company will then follow that dismal response by agreeing to defend the insured, but only “under reservation of rights,” which means that by providing the defense, the carrier still reserves its right to deny coverage later or that it may otherwise have an out.

Insurers often claim that defense costs are recoverable from insureds if the carrier can convince a court the claims are not covered. However, courts in several states have denied the recovery of defense costs by insurers.

Instead of defending claims against their insureds, some carriers just insist there’s no coverage and simply enjoy their premiums. Insureds are left with the options of defending at their own expense, settling claims or suffering judgments against them. However, if the insureds can prove later that the carrier did have a duty to defend or there was coverage, the carrier could be stuck for substantial damages, including for its bad-faith refusal to defend or pay claims.

But this all begs the question: what can the construction industry do to get better insurance protection? First, some insurance products do insure against construction defects and related problems without the usual bevy of exclusions. Obviously, they are more costly.

Second, the industry might consider attacking some insurance industry practices such as the use of the Insurance Services Office, which drafts the policy forms used by most insurance carriers, suggests premium rates for various coverages and otherwise does what we naïve lawyers think are actions that should, but seemingly do not, violate price fixing, restraint of trade and other anti-trust laws. Insurance companies appear to be exempt from federal anti-trust laws but are subject to state laws. Think “lobby.”

Third, meaningful dialogue between construction and insurance industry organizations might bring about mutually beneficial changes in policy terms and premiums.

The nicest thing to be said about CGL insurance is that it will probably protect policyholders against some claims for direct personal injuries or property damage (head wounds from falling bricks) and it may pay defense costs for other claims. Is that worth the cost?

Think “self-insurance.”