Management Can Head Off Construction Crises

The days when contractors could say "I've never been sued" are quickly fading away. While having the right insurance is critical, smart contractors also need to have a game plan for handling litigation, from tracking administrative details to ensuring good counsel.

By C. Jaye Berger

Construction work is certainly a dangerous occupation. For this reason, construction companies tend to have more litigation than many other types of businesses. It is not even unusual for a construction company to have several litigation matters pending simultaneously. Gone are the days when those in the industry can say, "I have been in business for 25 years, and have never been sued."

Having appropriate insurance policies to defend against such claims is critical. But if the contractor does not know how to properly handle the crises that arise, the carrier may not be there to defend the company.

The first aspect of managing a crisis is to be certain that you know about it. That may sound a little absurd, until you consider that many contractors never update vital data with their respective Secretary of State's office, which records an address on where to serve process at the point of incorporation. When the Secretary of State receives a complaint, it is considered good service. But if that office sends the complaint on to a contractor that moved five years ago and no longer has active mail forwarding service, the business may not find out about the lawsuit, inviting a serious problem. A court could rule against the contractor on the lawsuit, creating a default the business does not even know about.

Consider this scenario: the contractor is seeking a loan, but during the title search or a credit check, a large judgment appears. Or another: I had a contractor client who was pulled over by the police for speeding. When they checked his driver's license, they saw a large unpaid judgment and immediately suspended his driver's license.

This is why I always counsel my clients to have me periodically update this information. Once attorneys for a plaintiff serve the Secretary of State, they can proceed to obtain a default judgment if they do not receive an answer within the requisite period of time. Since there is no one presenting the contractor's side of the story to the court, default judgments can be large - $1 million is not out of the question. And if more than a year has passed before the contractor learns about this default judgment, it may be too late to vacate it.

The next aspect of handling a crisis is knowing whom to consult about it and when to do so, such as when a contractor knows an accident has occurred. Imagine a construction worker has fallen at a job site or been hit by an object. The worker brushes himself off and says, "I'm fine." But he may or may not be fine. If that worker sues one year later, and the contractor reports the claim to the insurance carrier for defense at that time, the carrier may say there was late notice and refuse to defend.

From the carrier's perspective, if the contractor had reported the incident when the worker got hurt, there would have been a chance to investigate it by interviewing people, studying settlement options, and protecting the company's interest. A year later, it may be too late for the carrier to be in a position to protect itself.

For that reason, contractors should err on the side of reporting such accidents rather than remaining silent, waiting to see what happens. Clients should always discuss these crises with legal counsel knowledgeable in the area, since there may be other options depending on the contractor's particular insurance policy and deductibles. Some contractors have such high deductibles that they are close to being self-insured for most claims.

For all of these reasons, a contractor must have good counsel advising on how to handle such crises. On several occasions, I have been able to change the carrier's position so that they agree to provide coverage.

C. Jaye Berger is an attorney and principal of Law Offices of C. Jaye Berger in New York, N.Y.