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Mind the gaps in general liability coverage for construction companies operating in multiple states


Construction companies operating in multiple jurisdictions are finding that standardized language used in typical liability policies is subject to considerably different interpretations from one state to another.

Although jurisdictions may have different approaches to interpreting coverage for construction defects, the same questions often arise. It is critical for risk managers to address these questions and take steps to bring certainty to the insurance relationships.

Core coverage questions in most construction defect cases include whether:

• Defective construction, and damage caused by it, constitute an “occurrence” or “property damage.”

• Business risks exclusions (care, custody, and control exclusions, “your work” and “your product” exclusions, the contractual liability exclusion, expected and intended injury exclusions, the impaired property exclusion and the sistership exclusion) apply to the claim.

• Exclusionary endorsements (wrap-up, exterior insulation finishing systems, and mold exclusions, and designated project endorsements, among others) apply to the claim.

Many courts that apply these policy provisions, terms and endorsements, agree that they are intended to exclude defective construction itself, while providing coverage for unintended consequences. The consensus, however, appears to end there.

Courts have been divided over whether the natural and probable consequences of defective construction are covered. Furthermore, they disagree as to whether incorporating defective work or products into a structure can give rise to covered damages. They also typically disagree over whether damages caused to other property while making necessary repairs to defective construction are covered.

Frequent coverage questions concerning retentions and deductibles, additional insured status, and other insurance and excess insurance are common.

The threshold question regarding deductibles and retentions deals with the number of deductibles or retentions that may be owed. For example, they may be owed on a per-occurrence, per-claim, per-project, or other basis. Moreover, other issues include what type of costs (i.e. defense costs) erode the deductible or retention, whether they can only be satisfied through payments made by the named insured, and whether actual payment of the deductible or retentions are a prerequisite to coverage. The resolution of these questions is impacted by which state's law applies.

With respect to additional insurance, other insurance and excess insurance, issues also arise as to whether the additional-insured coverage provided by a subcontractor is adequate. This can pivot not only on what the construction contracts require, but also on which state's law applies to the subcontractor's insurance policies.

Exhaustion of primary and excess insurance policies also can be a concern. Excess carriers often require exhaustion of all applicable underlying insurance before their policies respond. Thus, disputes can arise as to whether all applicable underlying insurance has been exhausted, which again, is a question that often is resolved differently between jurisdictions.

In sum, the court decisions on these issues are inconsistent, making it difficult for construction companies operating across state lines to ensure adequate coverage.

So, what are construction companies and their risk managers to do?

Unfortunately, there is no simple solution to guarantee adequate coverage across multiple jurisdictions. However, there are a number of considerations in evaluating the company's insurance needs:

• Identify where the construction company has done business for the past several years (for completed operations) and will be doing business during the upcoming policy year. Then learn the basic court decisions or legislation addressing coverage for construction defects to determine if the company can cost-effectively shift the anticipated risk to the insurer.

• Determine where the company's subcontractors do business and learn the basic court decisions and legislation in those states. Find out if the states have issued decisions or if there is legislation in place addressing the scope of coverage under additional insured endorsements. Do not assume the project address determines the applicable state law.

• Consider whether the company can negotiate a choice of law provision in insurance policies so they know how their policy will be interpreted. This is not, however, always cost effective or feasible, and it does not resolve the fact that additional-insured coverage secured by subcontractors would be unaffected by a choice of law provision inserted into the general contractor's policies.

• Insist that the company's risk management department be involved in approving all subcontractors' insurance and additional-insured endorsements. If possible, insist on completed operations coverage under these endorsements.

• Thoroughly evaluate the company's individual insurance program even if the company will be an enrollee in an owner-controlled insurance program, a contractor-controlled insurance program or a wrap policy. The main issue is whether the company will have insurance if the OCIP/CCIP/wrap limits are inadequate or otherwise unavailable. Adjust the company's individual insurance program to ensure it is realizing an appropriate level of savings on premium when some of the annual risk is moved to the OCIP/CCIP/wrap.

Construction companies can take proactive steps to protect themselves by identifying the applicable states' laws, determining whether insurance is adequate under those laws, and then taking steps to resolve any gaps in their coverage.

William F. Knowles and Brendan Winslow-Nason are based in Seattle and practice in the global insurance group at law firm Cozen O'Connor P.C. They can be reached at wknowles@cozen.com and bwinslow-nason@cozen.com.