Contractors in the state of Florida will find themselves embroiled in a lawsuit at some point or another. Commercial General Liability (CGL) coverage is an invaluable tool when a contractor is subject to a claim for defective work, damage to property, or personal injury. Not only do these policies normally require that the insurance company indemnify the contractor, or resolve the claim on the contractor’s behalf, but it also compels the insurance company to provide a defense to the claim. The defense alone can cost hundreds of thousands of dollars in attorneys’ fees and expert costs alone. It is for these reasons, however, that the cost of Commercial General Liability policies has continued to rise in recent years. As a result, many contractors are working with their agents to find ways to reduce the costs of their insurance policies.
Often the cost of insurance can be reduced by adding endorsements to the policy that either limit the types of coverage being provided or impose requirements on the contractor to maintain coverage. For example, many contractors that work only on smaller projects will add an endorsement that restricts coverage only to structures less than three stories. As long as the contractor does not work on a larger structure, it remains fully covered for its work and can greatly reduce the cost of the policy.
Another common endorsement used to reduce the cost of insurance requires contractors to place certain contract requirements upon their subcontractors. This is sometimes called the Contractor’s Special Condition Endorsement (though, depending upon your insurance carrier it can carry different names). Under this endorsement, contractors that use subcontractors, or subcontractors that use sub-subcontractors, generally must do four things prior to starting work on a project:
- Enter into a written subcontract that contains an indemnity clause wherein the subcontractor (or sub-subcontractor) agrees to hold the contractor (or subcontractor) harmless for all liabilities, including the cost of defense, arising from the work of the subcontractor;
- Obtain a certificate of insurance from the subcontractor (or sub-subcontractor) naming the contractor (or subcontractor) as an additional insured – generally the subcontractor (or sub-subcontractor) must maintain a certain amount of coverage as well;
- Obtain proof from the subcontractor (or sub-subcontractor) of worker’s compensation coverage; and
- Obtain proof that the subcontractor (or sub-subcontractor) is licensed for the work, if required.
If the contractor fails to comply with the endorsement requirements with respect to all subcontractors on a project, the insurance carrier can sometimes reject coverage for all claims arising out of the project – and certainly all claims arising out of the subcontractor’s work. Depending upon your carrier and policy language, they may instead provide coverage as if that subcontractor was in compliance (meaning that limits would be reduced by those which should have been made available by the subcontractor), require large deductibles, or significantly reduce coverage limits. In the worst case scenario, not only will the insurance company not cover the associated liability and damages, but they can also deny the contractor a defense – essentially rendering the contractor’s insurance coverage useless.
It should not go unmentioned, however, that engaging subcontractors with a written agreement requiring indemnification and certain insurance requirements is essential in the successful transfer of risk away from the contractor. Many of the coverages necessary are only “triggered” by the subcontractor’s policy when required in a “written agreement” between the contractor and subcontractor. Evidence of this can be seen on certificates of insurance that provide for additional insured status, or waivers of subrogation “when required in a written agreement”.
When discussing your policy with your insurance agent it makes sense to attempt to add endorsements to your policy and reduce the total cost of the policy. However, make sure you fully understand what restrictions and requirements your agent is adding to the policy, and make sure you abide by all requirements that the policy places on you. If there is something in your policy or endorsement you do not understand, we recommend contacting an attorney before you start work to ensure compliance with all insurance requirements.
Don A. Lambert, Jr. and Donnie Lambert, III of CAL Risk Management (“CAL”), in Jupiter, Florida contributed to this newsletter. CAL provides risk management, bonding and insurance services to construction industry clients. Don can be reached at [email protected] and Donnie can be reached at [email protected], or call their office at 561-776-9001.
Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at [email protected] or [email protected] or 561-615-5701.