Most people don’t read their entire insurance policies unless necessary—and sometimes, not even then. Worse yet, some people cannot even locate their policies when they need them. However, not knowing what your policy says can have devastating financial effects for you and your business in the unfortunate event you are sued for defects in your work.
Liability policies (most often referred to as Commercial General Liability or “CGL” policies ) generally protect an insured faced with a lawsuit. In the construction context, CGL policies are designed to afford protection to contractors when claims are made against them for property damage caused by that contractor’s work (and oftentimes also that of its subcontractors). If you are sued for faulty workmanship or work of a subcontractor, a good CGL policy should cover the costs of attorneys to defend you, and provide coverage either to settle the lawsuit or pay a resulting judgment. However, a bad CGL policy could leave you with little or no coverage whatsoever.
The insurance industry is very good at calculating acceptable risks, and determining the value (or cost) of those risks. This is generally how premiums are calculated. If you are asking your insurance broker for a “cheap” liability policy, you are probably going to get what you pay for.
It is no secret that it rains in the Pacific Northwest. And many construction defect claims include damage caused by rain penetrating a building’s envelope. Despite this, some insurance policies include an endorsement limiting coverage to $25,000 for damage caused by water (including rain). In most situations, $25,000 doesn’t come close to the damages alleged in the lawsuit. Although you’ve paid premiums probably exceeding $25,000, the most you may get from your insurer is $25,000. This is not really worth the premiums you’ve paid.
There is more than one example of an EIFS contractor (EIFS is short for exterior insulation and finish system, commonly known as synthetic stucco) obtaining a CGL policy thatexcludes coverage for any property damage caused by EIFS. So, what insurance did this EIFS contractor obtain for the premiums paid for this policy? Maybe nothing.
There are additional examples where a contractor of a condominium building obtains a CGL policy that excludes coverage for property damage resulting from the contractor’s work on condominiums. What did this contractor obtain for the premiums paid over the years? Again, maybe nothing. These examples are only a sample of many. In many situations, reading the policy in the beginning would have avoided the problem.
It is worth the investment of time to review your policy and to sit down with your insurance broker to understand what your CGL policy covers—and more importantly, what it doesn’t cover. When you need insurance, you should make sure that the insurance adequately protects you and your business. You also may be shocked that the cost of good CGL policies, that provide the coverage you need, are not as much as you may think.
Kyle Sturm is an attorney in Ball Janik LLP’s Portland office. He focuses on complex insurance disputes on behalf of corporate and individual policyholders arising out of disputes with their insurance companies across the country. He is a regular contributor to Ball Janik’s The Policyholder Report and Construction Law Watch blogs, and is a frequent speaker and author of insurance-related topics.
Contact Kyle Sturm at 503-944-6034, ksturm@balljanik.com.
