Are There More Limitations On Your Insurance Coverage Than You Thought?
William C. Last, Jr.
It is becoming increasingly common for insurance carriers to include special conditions in general liability insurance policies for general contractors that require the insured general contractor to have his or her subcontractors include specific insurance related language in their subcontracts and require the subcontractors to provide certain defined insurance coverage.
Examples of special condition insurance policy provisions include: (1) restrictions on contractors performing work on condominium or multiple single family buildings, (2) excluding of coverage for business entities that are not listed in the declaration page; (3) conditioning coverage on the inclusion of indemnity clauses in subcontracts; and (4) conditioning coverage on the general contractor requiring its subcontractors to have specific policy limits and naming the general contractor as an additional insured.
Insurance policies have the following components: (1) a declaration page that includes the name of the insured; the policy period; the designation of coverage; policy limits; deductibles, and a list of accompanying forms and endorsements; (2) an insuring clause that includes the basic agreement to provide insurance coverage; (3) a number of coverage exclusions and exceptions that limit the coverage provided under the insuring clause; and (4) conditions on coverage that place specific duties on the insured as a condition to providing coverage.
Special conditions can be found in the conditions portions of the policy, or they may be included in the definitions or exclusions portion of the policy. Such clauses may bar coverage for a contractor who unknowingly is involved in the construction of restricted buildings such as condominiums and multiple single family buildings.
The Appellate Court Enforces Insurance Policy Special Conditions
A recent California Appellate Court decision emphasizes the importance of proof of compliance with special conditions when seeking to obtain coverage. In Scottsdale Insurance Co. v. Essex Insurance Co. (2002) 98 Cal. App. 4th 86, the California Court of Appeals, 4th District, upheld certain special conditions as a prerequisite to obtaining coverage. In Scottsdale, Essex Insurance provided the Developer-Contractor with comprehensive general liability insurance from February 15, 1991 through March 21, 1993, while Scottsdale Insurance Co. provided coverage from March 21, 1993 through April 20, 1994.
The underlying dispute concerned the construction of a new single-family home. Shortly after the house was purchased, the new owners had ongoing problems with water infiltration. As a consequence of the water infiltration, a mold problem developed in the house. The house was built by an architect-contractor (“Developer-Contractor”) who had a financial partner for the property development. The title to the property was in the financial partner’s name.
The Scottsdale policy excluded injury or damage arising from any joint venture not designated in the policy as a named insured. The two carriers argued over the application of the joint venture exclusion to the relationship between the Developer-Contractor and the financial partner. However, the Appellate Court refused to enforce the joint venture exclusion; reasoning that the Developer-Contractor’s involvement in a joint venture did not materially alter the insurance carrier's risk and therefore provided no basis for rejection coverage.
As the Appellate Court noted, the purpose of the joint venture exclusion was to protect the insurer from hidden risks that it did not consider in calculating an appropriate premium. In Scottsdale, the insurer agreed to insure the Developer-Contractor’s contracting business. The homeowner’s claim arose from defects in the construction of the house. Only the Developer-Contractor built the house and the financial partner was not involved in the design or construction aspects of the venture. Therefore, under these facts, the Developer-Contractor’s involvement in a joint venture did not materially alter carrier's risk, since only the Developer-Contractor still would be individually liable for damages arising from the claimed defects.
The Developer-Contractor’s insurance policy also stated: “It is hereby understood and agreed that conditions for coverage under this policy are: 1) Certificates of insurance with limits of liability equal to or greater than those provided by this policy will be obtained from all subcontractors prior to commencement of any work performed for the insured. 2) Insured will obtain hold harmless agreements from subcontractors indemnifying against all losses from the work performed for the insured by any and all subcontractors. 3) Insured will be named as additional insured on all subcontractors general liability policies. Nothing herein contained shall be held to vary, alter, waive or extend any of the terms of the conditions, provisions, agreements or limitations of the above mentioned Policy, other than as above stated."
An insurance policy fundamentally is a contract between the insured and the insurer. Insurance policies typically are issued on standard forms containing terms and conditions prepared by the insurance carrier. This standardized policy language has been created by insurance trade associations. The standard language can be modified by endorsements. Policies that include nonstandard provisions are occasionally referred to as manuscripted policies. While the Scottsdale policy language was specially manuscripted, an increasing number of insurance carriers are adding similar language to their insurance polices as standard language. Other carriers are adding language that excludes the construction of condominiums and multi-family units from coverage due to the large number of defect suits associated with such construction.
In Scottsdale, the Developer-Contractor also did not comply with the policy’s special conditions that its subcontractors were insured and named the Developer-Contractor as an additional insured. The Appellate Court found that the insurance carrier was prejudiced by the Developer-Contractor's “failure to comply with the policy special condition that he require his subcontractors to be insured and that he be named an additional insured in their polices. Had he done so [the Developer-Contractor’s] vicarious liability for negligence by the subcontractors would be covered both by the Essex policy and the subcontractor's policy.”
First, carefully review your coverage with your insurance professional. The language included in insurance policies is complex and often unintelligible to the lay person. The courts have rendered numerous decisions interpreting insurance policy language. Thus, it is important to review your policy with a person who understands the language and is familiar with the myriad of cases that interpret such language.
Second, if you have special conditions in your policy and you are constructing residential structures notify the other contracting party of the restrictions and obtain written representations that the completed structures will not be used in any manner that falls within the restrictions.
Third, review your subcontract agreements to determine if they satisfy any special provisions in your insurance policy.
Fourth, if you are a subcontractor whose insurance policy includes such special conditions obtain written assurances from the general contractor and developer that project does not fall within the special conditions.
This article, ©2002, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.