Some time back we received a well-written letter about liability insurance from a contractor in Washington state.
"I am writing this because I was surprised to find out that my contractor's liability insurance has conditions that can sabotage my own coverage and are easy to overlook. I believe they are conditions that many of us smaller general contractors neglect because of time or energy or interest. I was surprised to find out however that even though I paid $1000 per month for my policy and asked my subcontractors to provide me with insurance certificates and made sure our company was listed as additional insured, we still had no coverage.
We recently had an unrelated third party enter our construction site and injure himself in a fall. We had carefully observed the rules of excavation laid out by the Department of Labor and Industries for job site safety. There was a 2 ft. step in the dirt were some excavation had been done. The third party, not a customer or any of our subcontractors, fell and was injured. We were subsequently served with a lawsuit stating the we were negligent maintaining a safe ditch.
Thinking I purchased liability insurance just for this sort of event, I went to my insurance company and told them about it. They called a claims adjuster who subsequently contacted me with several questions. First he wanted to see the contract we had written with our customer. I produced that. Then he wanted to see the subcontractor's certificate of insurance naming us as additional insured. We provided that. He then asked for the "Indemnification and Hold Harmless agreement" we had the subcontractor sign. I didn't know we needed such a thing. Then he wanted to see the subcontract with our excavator with the specific language asking to be named additional insured by them. We didn't have that either.
A week later, we received a notice from our insurance company that they had filed a "Reservation of Rights" claim and that, because we failed to have all of the above documents, they, depending on the outcome of the trial, reserved the right to not cover us or the attorney fees for their attorney to defend us.
The legal process is a slow one and when something of this nature comes along, even with proper coverage, it is a significant time commitment as well as yet one more emotional destraction in a business in which our cups already "overfloweth" with distractions. It will be some time before we hear the outcome of this complaint against us but in the mean time, I have been on the phone with our current insurance agent and the representative of the company who insures with questions of exactly what they require in order to provide the complete liability insurance we thought we were getting.
Meanwhile, we have had a valuable lesson in understanding the roles, processes and responsibilities of insurance companies, customers, attorneys and employees in the matters of insurance coverage.
As it was explained to us, simply purchasing liability insurance is all the State of Washington demands of a general or sub-contractor. They are completely satisfied with this. The insurance companies are more than willing to write the policies and accept the premiums required to provide this requirement of the state. What is implied is that we will follow all of the requirements and special conditions of that policy. There are usually many types of work, customer and contracts they restrict. Reading an insurance policy ranks right up there on my list of fun things to do with having the stomach flu but I am now convinced it is equally as inevitable.
From what our attorney expressed to us, what the insurance company takes legal responsibility for with that policy is 1) Responsibility to insure and 2) Responsibility to defend. There is however a little known dichotomy in this responsibility that we all need to know about.
In the event of a claim, the insurance company has a responsibility to hire and pay the fees for an attorney to work on our behalf. On the practical side of the coin, the insurance will understandably take every recourse legally available to it to avoid paying a claim. This may however include, quite simply, finding a way out of insuring their own customers.
If the attorney, paid for by the insurance company, discovers a reason why the insurance company may not have to insure the contractor, that information can easily make its way back to the insurance company and your attorney could end up being the very one who reports information to the insurer to invalidate your entire claim.
Our attorney explained to us that the courts recognize this potential compromise and provide wording in the law that defines the roles and responsibilities of attorneys hired by insurance companies as 1)Having loyalty to the insured while 2) Having accountability to the insurance company. Needless to say this is a fine line to maintain from any attorney's position. It comes very close to a conflict of interest that we as contractors need to understand and avoid getting caught in if we are to stay in business and provide the quality product and service we strive to provide the general public.
If you will excuse me now, I have to go get my magnifying glass and continue reading my 47 page insurance policy."
It's easy to say this contractor woulda, coulda, shoulda, but this could happen to anyone. Do you know the fine print in your insurance policy? Do you know whether your state laws protect you in this situation?
Talk with your insurance agent, ask them to list for you exactly what paperwork is required for a liaibility claim. That's should be part of the service they provide.
As I mentioned in the beginning, we've had this letter for awhile and have lost track of who sent it. If this is you, send us a note and let us know the outcome or the current status.