Category Archives: Insurance

WORKERS COMPENSATION (PART TWO) — STATUTORY EMPLOYER AND CONTRACTORS

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To follow-up on the article Workers Compensation—Tidbits on Construction Projects, the recent opinion in Roof Painting By Hartzell, Inc./Summit Holdings-Claims Center v. Hernandez, 2015 WL 641199 (Fla. 1st DCA 2015) touches upon the application of a statutory employer in the construction context.

 

Here, a contractor was hired to provide pressure cleaning and related services.  The contractor, in turn, subcontracted the labor to perform the services through another company (e.g., subcontractor).   Both the contractor and subcontractor that provided the labor had workers compensation insurance.  A laborer (retained by the subcontractor) was injured in performing the pressure cleaning services.   The issue was which workers compensation carrier should be responsible: the subcontractor’s carrier or the contractor’s carrier.

 

Florida Statute s. 440.10(1)(b) provides:

 

In case a contractor sublets any part or parts of his or her contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment, and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

Since the injured laborer was hired by the subcontractor, the subcontractor’s workers compensation carrier should cover the injured laborer’s claim.

 

Section 440.10 forms what is referred to as the “statutory employer” concept.  For instance, if the subcontractor does not obtain applicable workers compensation insurance, then under this section, the general contractor is liable (as the general contractor is the statutory employer). It is this reason that contractors that subcontract a portion of their services to others need workers compensation coverage!

 

Importantly, contractors that comply with the requirements of section 440.10 are protected by the exclusiveness of liability provisions in Florida Statute s. 440.11. This means the contractor is immune from lawsuits (such as tort-related lawsuits) from injured workers with workers compensation being the exclusive form of liability absent any intentional tort committed by the contractor.  See Fla.Stat. s. 440.11.  “Because section 440.11(1) of the Florida Statutes makes the liability to secure [workers] compensation imposed by section 440.10(1) the exclusive form of liability imposed by Chapter 440 on an employer, once an employer acquires and maintains workers’ compensation insurance for the benefit of its employees, it becomes immune from suit.” VMS, Inc. v. Alfonso, 147 So.3d 1071, 1073 (Fla. 3d DCA 2014).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

WORKERS COMPENSATION — TIDBITS ON CONSTRUCTION PROJECTS

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Workers compensation is a “must have” insurance in the construction industry. 

 

Certain officers are entitled to be statutorily exempt from workers compensation (pursuant to Florida Statutes Chapter 440).  See Fla.Stat. s. 440.02(15).  But, if exempt, these officers are not entitled to receive workers compensation benefits.  The reason to obtain an exemption is to avoid paying premium for these officers.

 

For an applicant to receive a statutory exemption for a corporation:

-The corporation must be registered as an active Florida company (with Florida’s Division of Corporations).

-The applicant must be identified as an officer (with Florida’s Division of Corporations).

-The officer must own at least 10% of the corporation.

-No more than three officers can be exempt.

-The exemption is valid for 2 years.

 

For an applicant to receive a statutory exemption for a limited liability company, the above requirements pertaining to a corporation are applicable except for the applicant being required to be identified as an officer.

 

An applicant that satisfies the exemption requirements will receive a Certificate of Election to be Exempt that will identify the dates the exemption is in effect.

 

Notably, sole proprietors, independent contractors, and partners may also receive a Certificate of Election to be Exempt and not recover workers compensation benefits. See Fla.Stat. s. 440.05.

 

While there is a statutory exemption for the officer/owner-employee, there is not one for the nonofficer/nonowner-employee.  Thus, if the construction company relies on full time or part time nonofficer-employees, workers compensation is required for these employees.

 

Additionally, general contractors need to ensure that every subcontractor it hires has workers compensation or a valid Certificate of Election to be Exempt.

 

Florida Statute s. 440.10(1)(b) states:

 

In case a contractor sublets any part or parts of his contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment; and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

As also explained in Barrs v. LMF Construction, OJCC Case No. 10-002222KAS, 2010 WL 4270050 (Fl.Off.Judge Comp.Cl. 2010):

 

Under a statutory employer analysis a contractor is protected from workers’ compensation liability for the employees of a subcontractor, an independent contractor, or sole proprietor if an officer of a corporation or the subcontractor validly elects exemption from coverage by filing a written notice pursuant to Section 440.05 Fla. Statutes, 2009; or has otherwise secured the payment of compensation coverage as a subcontractor for the work performed by the subcontractor. This is a vertical analysis starting with the general contractor on top. The general is responsible unless those in the vertical chain below have either secured workers’ compensation coverage or are under a valid exemption.

  

For instance, in Smith v. Larry Rice Construction, 730 So.2d 336 (Fla. 1st DCA 1999), a general contractor was building a Taco Bell.  The general contractor subcontracted the framing to a subcontractor.  The subcontractor did not independently secure workers compensation benefits; rather, it leased employees from a labor leasing company that secured workers compensation for these laborers.  The subcontractor then engaged a sub-subcontractor –really, a sole proprietor and his crew as additional labor–to perform a portion of its framing scope of work. The sole proprietor / sub-subcontractor was injured on the project. While the sole proprietor / sub-subcontractor had a Certificate of Election to be Exempt, the exemption had expired at the time he was hurt. The sole proprietor sought workers compensation benefits but these benefits were denied. He argued that the general contractor constituted his statutory employer (per Fla.Stat. s. 440.10) and is liable for his workers compensation benefits.  The First District Court of Appeal agreed and found that the injured sole proprietor was a statutory employee of the general contractor and entitled to receive workers compensation benefits.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

GENERAL UNDERSTANDING OF THIRD-PARTY AND FIRST-PARTY BAD FAITH INSURANCE ACTIONS

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Insurance is a large part of the construction industry.  Whether you are a contractor, subcontractor, design professional, supplier, or owner, you (should) have insurance to cover risks inherent in the industry and the particulars of a project. 

 

There are instances in a dispute involving insurance coverage that either an insured or third-party claimant will become frustrated with an insurer.  The frustration may stem from the insurer not considering or initiating settlement opportunities to resolve the dispute.  When this occurs, the insured and/or third-party claimant consider preserving rights to what is known as a bad faith action largely based on the insurer “[n]ot attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and  honestly toward its insured and with due regard for her or his interests.”  See Fla. Stat. s. 624.155(1)(b)(1).

There are two types of bad faith actions: (1) third-party bad faith actions and (2) first-party bad faith actions.

 Third-Party Bad Faith Actions

A third-party bad faith action arises when a third-party asserts a claim against the insured and the insured is exposed to damage exceeding the coverage / policy limits of its insurance policy.  Naturally, the insured would be responsible for any judgment that exceeds the policy limits of its insurance policy.  

But, what if the insurer had the opportunity to settle the claim for the policy limits or under the policy limits but did not and exposed the insured to a monetary judgment exceeding the policy limits?  It is this opportunity to settle a covered claim within coverage limits but refusing to do so that triggers the bad faith action.  To this point, the Florida Supreme Court stated that “the essence of a third party bad faith cause of action is to remedy a situation in which an insured is exposed to an excess judgment because of the insurer’s failure to properly or promptly defend the claim.”  Macola v. Government Employees Ins. Co., 953 So.2d 451, 458 (Fla. 2006) (internal citations omitted).

On the other hand, if the insurer effectuates a resolution with the third-party that includes a release of the insured, there is no third-party bad faith action considering the insured would not be exposed to a judgment in excess of the policy limits. See Fidelity and Cas. Co. of New York v. Cope, 462 So.2d 459 (Fla. 1985).

 

A third-party can bring a third-party bad faith action directly against the insured’s insurer only if it obtains a judgment against the insured in excess of the policy limits. State Farm Fire & Cas. Co. v. Zebrowski, 706 So.2d 275 (Fla. 1997).

 

A third-party bad faith action can be based on Florida Statute s. 624.155 or the common law.  A difference is that a statutory bad faith action under s. 624.155 requires what is known as a civil remedy notice identifying the insurer’s violation to be submitted to the Florida Department of Financial Services as a condition precedent to initiating the bad faith action.  See Fla.Stat. s. 624.155(3)(a).  The insurer is given 60 days to cure the violation before the bad faith action can be initiated.

 

A common law third-party bad faith action does not require the civil remedy notice.  See Macola 953 So.2d 451 (insurer tendering policy limits to insured in response to civil remedy notice and in accordance with Florida Statute s. 624.155 which did not eliminate underlying third-party action would not eliminate a common law third-party bad faith action.) 

 

However, it is important to understand that a party (whether the insured or third party) initiating a third-party bad faith action will not be able to obtain a judgment for both the common law and statutory bad faith causes of action and will ultimately have to choose the cause of action it wants to pursue.  Fla. Stat. s. 624.155(8). The statutory third-party bad faith action is probably more commonly pursued and parties should serve the civil remedy notice before initiating the bad faith action.

 

 First-Party Bad Faith Actions

A first-party bad faith action is not based on a third-party action but based on the insured’s own claim against its insurer (such as with a first-party property insurance policy or for uninsured motorist coverage). This may occur when the insured submits a claim against its own insurance policy and the insurer denies the claim or otherwise refuses or delays in paying the full covered amount of the claim. Unlike the third-party bad faith action, a first-party bad faith action has nothing to do with an insurer exposing an insured to a judgment in a third-party claim in excess of the policy limits.

 

A first-party bad faith claim is a statutory action under s. 624.155 that requires the civil remedy notice as a condition precedent to initiating the bad faith action.  However, unlike a third-party bad faith action, there is no common law first-party bad faith action.   QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541, 545 (Fla. 2012).

Before a bad faith action can be initiated in a first-party action, there needs to be a determination that there is coverage, i.e., that the insurer is liable to the insured under the insurance contract, and what the covered damages are. See Liberty Mut. Ins. Co. v. Farm, Inc., 754 So.2d 865 (Fla. 3d DCA 2000) (first-party bad faith action was premature prior to coverage dispute); see also State Farm Florida Ins. Co. v. Seville Place Condominium Ass’n, Inc., 74 So.3d 105 (Fla. 3d DCA 2011) (first-party bad faith action was premature until both coverage and extent of insured’s loss has been adjudicated).

(Notably, there is no statutory bad faith action against a surety issuing a payment or performance bond in Florida.  Fla.Stat. s. 624.155(9).)

Bad faith actions are complicated actions and involve a host of issues (such as discovery-related issues, burdens of proof, and damages) that are not discussed in this article.   The point of this article is for parties to understand the difference between third-party bad faith actions and first-party bad faith actions and to ensure their rights are protected if there is an insurance coverage dispute, whether it is a dispute involving an insured’s first-party insurance policy or a third-party claim that triggers an insured’s liability policy.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

WRAP-UP INSURANCE ON LARGE CONSTRUCTION PROJECTS: OCIP OR CCIP

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Wrap-up insurance is commonplace on large, complex construction projects.  There are two types of wrap-up insurance programs routinely utilized: (1) Owner’s Controlled Insurance Program (“OCIP”) or (2) Contractor’s Controlled Insurance Program (“CCIP”).  Under either wrap-up program, the objective is that most (if not all) of the construction participants (such as the contractor and subcontractors) are wrapped-up or covered under one insurance coverage program.   

When a construction project has wrap-up insurance, whether OCIP or CCIP, there will be an insurance manual that will explain certain aspects to the construction participants such as (a) what type of insurance is included in the wrap-up program, (b) how premiums are to be determined for the wrap-up program including the required close-out audit, (c) who is responsible for any deductibles for claims, (d) the type of insurance the participant still needs to procure and/or the type of insurance not covered under the program (and, if not in the manual, it should be outlined in the contract), and (e) how to submit and handle claims under the wrap-up program.  The manual will also identify the administrator of the wrap-up program. 

In my experience, wrap-up coverage includes builder’s risk coverage, worker’s compensation coverage, commercial general liability (CGL) coverage, and umbrella coverage.  Insurance not routinely included in a wrap-up program is pollution liability, errors & omissions / professional liability, automobile liability, equipment coverage such as boiler and machinery insurance, and coverage for a contractor’s off-site operations.   This will be applicable insurance the contractor and subcontractors will still need to procure as may be required by the wrap-up program or underlying contracts.

 

The advantage of a wrap-up program is ideally to streamline risk management issues including additional insured status, (higher) limits of liability and excess (umbrella) liability coverage, products completed operations (applicable to CGL coverage so that products completed operations ideally runs through the applicable statute of repose for construction defects), waiver of subrogation concerns, and the claims process since major construction participants will be covered under the same global insurance policies (as opposed to many different carriers).  Another advantage is that there ideally is a cost benefit since the program should reduce overall insurance costs by all of the enrolled participants which corresponds to a reduction in overall construction costs.

 

There are, however, perceived disadvantages to wrap-up programs too.  There is an administrative burden in having to deal with these programs which is why there is often a third party administrator engaged to handle the administrative process associated with ensuring that major construction participants are properly enrolled in the program, insurance costs that are routinely included in bids / proposals are backed-out to avoid duplication in insurance costs, claims are properly and timely handled, and enrolled participants are audited during the close-out of their contracts to determine their final, allocated premium.  Also, as mentioned above, the wrap-up program does not relieve the enrolled participant from obtaining other required insurance coverage not included in the program but required of the participant through the wrap-up program’s manual or contract. And, there is the concern that even if there is an insurable construction defect claim, the claim is still going to flow downstream irrespective of the fact that there is a wrap-up program designed to cover that type of claim. (For example, with OCIP, there is concern that such a claim will be formally asserted against the contractor and then subcontractors instead of perhaps tendering the claim to the OCIP administrator so that the carrier can make a determination as to the claim since the contractor and subcontractors would have the same insurance through OCIP. Thus, any duty to defend obligation would be owed to all from the same OCIP carrier which will hopefully reduce protracted litigation.)  See, e.g., Southeast Wisconsin Professional Baseball Park District v. Mitsubishi Heavy Industries America, Inc., 304 Wis.2d 637 (Wis. Ct. App. 2007) (finding that in a multi-party litigation regarding deficiencies with a retractable roof, the OCIP carrier owed duty to defend obligation to all of the parties).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

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Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured.  Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

 

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government?  In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor?  The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

 

In this case, the government hired a prime contractor to abate asbestos at a post office.  The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

 

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project.  The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused.  The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim.  After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

 

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee.  The thrust of the claim was that the government breached the indemnification provision.  The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government.  The Court of Federal Claims agreed and dismissed the lawsuit.  Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

 

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

 

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

 

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

 

 

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government.  While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

 

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor.  I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE “PRIMARY AND NONCONTRIBUTORY” INSURANCE REQUIREMENT

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If you were ever involved in a construction defect claim or lawsuit, you may have heard the phrase “primary and noncontributory” when referring to YOUR insurance coverage.  Or, you may have come across this phrase when discussing with your insurance broker the additional insured insurance coverage requirements you need to provide pursuant to your contract.

 

But, what does this mean when referring to YOUR insurance coverage? This phrase refers to the priority of YOUR insurance coverage.

 

For instance, a general contractor will require that that its subcontractors obtain CGL insurance coverage that not only names the general contractor as an additional insured (for both ongoing and completed operations), but also includes an endorsement reflecting that the subcontractor’s policy is “primary and noncontributory.”  (See above picture for example of endorsement)   The subcontract may provide, by way of example, that, “Insurance coverage provided by you [subcontractor] to the additional insured [general contractor] shall be primary and noncontributory with respect to any insurance coverage otherwise available to the additional insured.”  This means that if the general contractor is sued associated with the negligence of its subcontractor, it will tender the claim to the subcontractor’s insurer to defend and indemnify it since it will (hopefully) be an additional insured under the policy.  The subcontractor’s policy is the “primary” policy without contribution from the general contractor’s policy (as the general contractor’s policy will really come into play as excess insurance).

 


The general contractor, to be safe and circumspect, may want the subcontractor to obtain a “primary and noncontributory” endorsement that says that the subcontractor’s insurance will be primary and noncontributory when required by written contract.  The reason this is safe is because most CGL policies already contain a section called “Other Insurance.” In this section (as depicted in part in the adjacent picture), the policy will state that it is primary except when other insurance (specified in the policy) is available in which case it will serve as excess insurance.  One of the other insurance conditions that will deem your policy as excess is when you are identified as an additional insured under another’s policy (e.g., the subcontractor’s policy that identifies the general contractor as an additional insured is the primary policy and the general contractor’s policy will serve as excess insurance). The primary and noncontributory endorsement modifies this “Other Insurance” language.

 

 

Understanding the application of insurance and the interrelationship of potential policies is never easy.  But, this understanding is of the utmost importance for construction risk assessment purposes where risk is inherent in the very nature of construction.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

DO NOT LET LACK OF NOTICE VOID YOUR INSURANCE COVERAGE

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The Southern District of Florida’s opinion in Pharm. D v. Founders Insurance Co., 2014 WL 32557844 (S.D.Fla. 2014) illustrates that absolute importance of notifying a liability insurer of a claim and a lawsuit; otherwise, coverage that would be afforded to an insured could be voided.  This should never occur!

 

In this matter, a water pipe ruptured and a fire occurred at the insured’s premises.  This resulted in damage to a pharmacy located below the insured’s premises.  Due to this damage, the pharmacy filed a lawsuit against the insured.  The insured failed to take any action in the lawsuit and a default judgment was entered against the insured for in excess of $500,000.

 

Years later, the (third party) pharmacy sued the insured’s CGL (commercial general liability) insurer to recover the amount of its default judgment against the insurer.  The insurer argued that coverage should be voided because its insured violated the terms of the policy.  Specifically, the insured had the obligation to notify the insurer of any claim or suit as soon as practicable and to send copies of any lawsuit to its insurer.  Apparently, the insured never did this and the insurer had no notice of the lawsuit.  The Southern District agreed with the insurer that the lack of notice voided coverage:

 

“The insurance policy in question had a continuing notice obligation for a reason: the insured had the best information on legal action brought against it and, therefore, the insured was required to keep its insurer informed of developments. Accordingly, the insured had two distinct duties: (1) to notify Defendant [insurer] of any claims and (2) to notify Defendant of any lawsuits filed which may implicate the insurance policy.

***

The record shows there is no genuine dispute of material fact that the insured failed to notify Defendant of the state lawsuit and, thus, materially breached the insurance policy. As a matter of law, this breach absolved Defendant of its contractual requirement to defend in the state lawsuit and renders Defendant not liable on the default judgment entered in state court.”

Pharm. D, supra, at *3, *5.

 

The lesson learned from this matter is that if suing a party in which liability insurance is applicable (such as any case involving property damage or personal injury), take affirmative steps to ensure that the party’s liability insurer (CGL insurer) is notified of a claim and of the lawsuit.  Even if the party does not respond to the lawsuit, send a copy of the lawsuit to the party’s insurer.  Take steps to locate the insurer or the party’s insurance broker to ensure that proper notice is served and so that you are not relying on a potentially silent party to notify its insurer of a lawsuit (especially, when you are relying on insurance to cover your damages).  Clearly, in this matter, the insured-party did nothing despite having CGL coverage that perhaps would have covered some of the pharmacy’s damages.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

HMM–WAIVER OF SUBROGATION–SHOULD IT STAY OR SHOULD IT GO?!?

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Parties involved in construction are familiar with the phrase “waiver of subrogation” because there is commonly, and virtually always, a waiver of subrogation provision in the construction contract.  For instance, the AIA Document A201 (General Conditions) contains a waiver of subrogation provision for damages or loss covered by builder’s risk property insurance.  A waiver of subrogation provision prevents an insurance company from paying a claim and then stepping in the shoes of the insured (through subrogation) to sue a waived third party responsible for the claim.  To ensure the waiver of subrogation provision does not conflict with any other rights in the contract, the A201’s waiver of subrogation provision provides: “A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

 

For example, let’s assume a fire during construction caused substantial damage to an owner’s property.  The owner submitted a builder’s risk claim and it was determined that the damage caused by the fire (peril) was covered.  Let’s assume the fire was attributed to the negligence of the contractor and its electrical subcontractor.  With waiver of subrogation language, the carrier cannot pay the claim to the owner and then subrogate to the interests of the owner to pursue claims directly against the contractor and/or electrical subcontractor to recoup the proceeds it paid to the owner.  This waiver would apply even though the owner’s contract with its contractor required the contractor to indemnify the owner for damage caused by the contractor or the contractor’s subcontractor’s negligence.  Without the waiver of subrogation language, the carrier would not be deprived of this subrogation right.

 

 


In addition to the waiver of subrogation relating to builder’s risk property insurance, parties are requesting waivers of subrogation endorsements for CGL policies and other liability policies.  With CGL policies, the waiver of subrogation endorsement is referred to as the “Waiver of Transfer of Rights of Recovery Against Others to Us” endorsement.  Sometimes parties want a blanket waiver or at least they want to know they are specifically identified in the endorsement to ensure the CGL carrier waives a subrogation claim against it if the carrier pays out insurance proceeds.   This endorsement is important because without it a party could be breaching its insurance policy and voiding applicable coverage by contractually agreeing to waive subrogation that is in conflict with the policy’s subrogation language.  If a carrier is willing to issue this endorsement (and there are times it may not), it will usually come at a cost through a higher premium, etc., since the waiver of subrogation impacts an insurer’s risk assessment.

 

I like contractual waiver of subrogation language relating to builder’s risk property insurance claims.  As long as the insurance broker and carrier are aware of the contractual waiver so that there is not any issue that the waiver impacts policy language / coverage (and, the broker and carrier should inquire since it’s become boilerplate language in construction contracts), the waiver of subrogation allows a covered claim to be paid without an otherwise waived party worried about whether the carrier is going to try to later recoup losses against it.

 

From an owner or contractor’s perspective, I also usually like the idea of the party being hired to provide the waiver of subrogation endorsement / waiver of transfer of rights endorsement in its CGL policy irrespective of the requirement to identify the hiring (or paying) party as an additional insured.  The primary reason is that in the event there is any issue whatsoever with the additional insured status under the hired party’s policy such that it does not apply  to the hiring party (e.g., additional insured status of a general contractor under its hired subcontractor’s policy), with the waiver of subrogation, if the hired party’s policy pays it has at least waived its right to recoup that money against the hiring party through subrogation.

I know there are some parties that do not like waiver of subrogation language, especially with CGL policies, due to underwriting issues that it poses and/or potential increased premium costs associated with the endorsement.  Sure, this is true.  But, a waiver of subrogation does enable a dispute to be streamlined by allocating risk to a party that is in a position to control the risk and has insurance to cover that risk and by reducing continued litigation associated with a claim.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

A BUILDER’S RISK INSURANCE TIDBIT

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Builder’s risk insurance is a form of all-risk property insurance that protects an owner’s property / project from perils during the course of construction subject to the exclusions identified in the policy. Sometimes there is the question when negotiating a contract between an owner and general contractor whether to name the contractor as an additional named insured (along with the owner) and/or a loss payee under the builder’s risk insurance policy procured by the owner.  A contractor prefers, and should prefer, to be included as a named insured and/or loss payee to ensure it is protected and paid for a covered loss during construction. In reality, it is much better for the contractor to be identified as a named insured; being identified as a loss payee simply means the contractor can be paid insurance proceeds (it can be named on the check), but it is not an insured under the policy.

 

 

Each of the standard form construction agreements contain slightly different language regarding a contractor’s interest under a builder’s risk policy procured by the owner.  For example, the AIA would require the builder’s risk insurance to include the interests of the owner, the general contractor, subcontractors, and sub-subcontractors.  Ok; this makes sense but it does not specifically require the owner to name these entities as named insureds under the policy and/or loss payees. Rather, the AIA contains language that allows the owner to adjust the claim as a fiduciary with the payment made to the owner as a fiduciary.  The ConsensusDOCS provide better language for the contractor that would require the owner to name the contractor as a named insured.  Again, being identified as a named insured is preferable as it allows the contractor to assert a builder’s risk claim directly against the policy as an insured.  And, from an owner’s perspective, sometimes it is preferable to allow the contractor to assert a claim for a loss associated with a peril that may be covered even if the peril is due to the negligence of the contractor.  While the standard form contracts require the owner to bear the cost of the deductible, an owner may want to shift that deductible to the contractor if the contractor is seeking to recoup losses under the policy for a peril due to its negligence.

 

Finally, the standard form contracts do contain a waiver of subrogation for losses against the owner, contractor, subcontractors, etc. to the extent covered by property insurance.  This means that the property insurer is waiving rights to recoup insurance proceeds it paid associated with a claim against a third party included in the waiver of subrogation provision.  This provision should not be deleted as the contractual waiver of subrogation benefits both the owner and contractor.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

ARE YOU FAMILIAR WITH SUBCONTRACTOR DEFAULT INSURANCE (SUBGUARD)?

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Are you familiar with subguard?  If not, subguard is an insurance product also known as subcontractor default insurance.  It is an insurance product obtained by the general contractor and subcontractors are enrolled by the contractor into the subguard program; the general contractor does the prequalification based on the subcontractors and suppliers it wants to utilize.  The general contractor can recover its losses (direct and indirect) from defaulting subcontractors (including consequential losses, losses from defective work, losses from a defaulting subcontractor’s non-payment to others, etc.).  Subguard is typically more cost effective than requiring subcontractors to obtain performance bonds and allows the general contractor to recover losses (above a deductible) much quicker than if there was a subcontractor performance bond.  (Subguard is not the only subcontractor default insurance product on the market, but it is perhaps the most recognized product.  For purposes of this article, subguard will refer to all subcontractor default insurance products.)

 

Large general contractors on large-scale projects prefer subguard versus requiring subcontractors to obtain performance bonds considering general contractors are in a position to prequalify subcontractors and remedy a potential subcontractor default (without having to jump through the required performance bond hoops that could result in further financial loss to the contractor while the claim is being investigated by the surety).    Unlike a performance bond where there is the principal, the surety, and the obligee, with subguard, there is only the general contractor–the insured that obtains the subguard–and the insurance company.  Subcontractors, while enrolled in the program, are not parties to the policy; the general contractor is the only party that can submit a claim on the subguard policy.

 

Subguard is a first party insurance policy but it works different than a typical first party insurance policy.  The general contractor obtains a subguard policy with a policy limit and (large) per claim deductibles / self-insured retentions.  The policy is written for a set period of time (in numerous instances the 10 year statute of repose period).  When there is a claim, after the general contractor pays its deductible, there is a co-pay requirement where the general contractor and subguard insurer share in the losses until the general contractor pays a retention aggregate amount which is the capped amount the general contractor will have to pay relating to a claim.  Once the cap has been paid, the subguard insurer pays the balance of the claim up to the policy limit.  The sentiment is with a large deductible and co-pay requirement until an aggregate amount is paid, the general contractor has more incentive to prequalify subcontractors, manage the work, and eliminate subcontractor default since the contractor has a vested financial interest to prevent the default from occurring.  For example, a subguard policy can have a large deductible of $500,000, a retention aggregate of $1,000,000, and require the contractor to pay 20% of the loss after the $500,000 deductible.  So, if a subcontractor default costs the contractor $2,500,000, the contractor will pay the first $500,000 and then 20% of the remaining $2,000,000 up to its retention aggregate.  In this example, the contractor would have to pay another $400,000 (20% of the $2,000,000), which would be a total of $900,000 and below its retention aggregate of $1,000,000.  The subguard insurer would be responsible for the remaining portion of the claim.

 

Additionally, a contractor that is well equipped at managing subcontractor defaults may procure a subguard policy with a retrospective premium agreement. This is advantageous to the experienced contractor because deposit premium (sometimes referred as the experience portion of the premium) can be returned to the contractor based on no subcontractor defaults or minimal claims on the policy that the deposit portion of the premium would be applied to.

 

From an owner’s perspective, subguard is not a substitute for requiring the general contractor to obtain a performance and payment bond.  A major reason being that the owner is not an insured under the policy.  With that said, subguard is a valuable alternate to requiring subcontractors to obtain performance and payment bonds and is a product on large projects by large contractors that an owner should consider since most of the work will be performed by subcontractors (and, as mentioned above, it is typically more cost effective than requiring subcontractors to be bonded).  With subguard, the general contractor is bearing the risk (with no excuses) for subcontractor default since it obtained an insurance product to specifically cover this risk (and the direct and indirect losses associated with this risk) and, thus, is incentivized to best manage the trades and eliminate default.

Check out this presentation for more information on subcontractor default insurance as an alternative to subcontractor performance bonds.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.