Handling Insurance Issues in the Construction Industry

By C. Jaye Berger, Esq.

Everyone in the construction industry knows how tight the market is for insurance at this time, yet it is something that every contractor has to have. It is routine for clients to require in their contracts with contractors that a Certificate of Insurance be provided prior to any work being done.

It generally must list the client, the managing agent and possibly others as additional insureds. Clients who are given these certificates of insurance count on them as proof that insurance coverage will be there should they be sued in connection with any accident that may occur while the contractor is doing work for them.

It goes without saying that this insurance must be in place before any work is started, but that does not always happen. I have seen instances where a contractor signed a contract agreeing to provide insurance, started the project and then "forgot" to obtain the insurance. When the client reminded him about the insurance, he bought it, but that was done weeks after the project started. In those few weeks an accident occurred. Naturally the owner would not be covered under the contractor's policy, as he had planned. Hopefully he has his own insurance to call upon to defend him, but he will likely pursue a breach of contract claim against the contractor.

Even when the insurance has been properly purchased and is in place when an accident occurs, giving prompt notice to the insurance carrier is essential if the parties are to be covered. Late notice to the insurance carrier can be the basis for denying coverage, even if there is insurance. Sometimes a contractor is aware that an accident occurred in which an employee claims to have been injured. The workman may come back to work for a few days and the employer is not sure whether he will return to work or try to sue. The workman may leave the company and the contractor may not hear from him again. It could turn out that the workman has sued the owner of the project where the accident occurred, but the contractor was unaware of this. That lawsuit may have even been going on for over a year when the contractor first learns about it.

The contractor's first notice of that lawsuit may be when he is sued in a third-party lawsuit by the client who is claiming indemnification. When the contractor gives notice to the insurance carrier of the lawsuit and asks to be defended, the carrier may deny coverage and claim there was late notice. The accident occurred over a year ago and this is the first time that the carrier is being advised of this "claim" by its insured. While it may be the first notice that the carrier is receiving from the insured, the carrier may already be aware of the lawsuit from the other parties. The client may have contacted the insurance carrier and asked to be defended pursuant to the contract requiring a Certificate of Insurance.

This is where declaratory judgment actions come into play. A contractor may sue his insurance carrier and ask the court for a determination that the carrier should be required to defend it in the underlying lawsuit. There could also be such a lawsuit by one carrier against another carrier. These lawsuits are in progress while the underlying lawsuits are proceeding. Occasionally the court will stay the underlying action while the declaratory judgment action is litigated. The facts concerning who gave notice and when people were notified can become very important.

An insurance company may start to defend a lawsuit, then decide that it is not covered under the policy. If the insurance company did not reserve its rights, the contractor may claim that the carrier is precluded from changing its mind at such a late date.

This is a complicated area of the law and hopefully any company involved in such a situation will seek knowledgeable legal counsel to understand their rights.

C. Jaye Berger is principal of the Law Offices C. Jaye Berger.