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April 24, 2014
When a subcontractor causes property damage on a jobsite during the course of construction, the typical knee-jerk reaction by the general contractor and the owner is to insist that the subcontractor’s general liability insurance cover the damage. After all, the subcontractor caused the damage so it’s only fair that his insurance should step up to the plate. Right?
Subcontractors should be aware of builder’s risk insurance, carried by the owner/developer or the general contractor, that protects against property damage that occurs during the course of construction no matter who causes the damage.
Builder’s risk covers damage to property (typically a building or structure) under construction, including foundations and fixtures like HVAC equipment. It also encompasses machinery and equipment used to service the building, as well as building materials and supplies. It does not cover pre-existing property or land.
For example, a subcontractor leaves open a valve during water testing and ruins drywall and flooring. Another example: the sub’s forklift damages an air-conditioning unit.
The unhappy general contractor and owner/developer insist that the subcontractor’s commercial general liability (CGL) insurance policy cover the damage, and the sub is happy to oblige, since he wants to get future work from them.
The subcontractor’s CGL insurance policy pays for the damage, and that’s that. But here’s the problem: The loss goes on the subcontractor’s history with his insurer (a so-called “loss run”), and he’ll pay for it with a higher premium when he renews his policy.
It doesn’t have to be that way. In most cases, the general contractor or owner/developer most likely are aware that their builder’s risk insurance is obligated to cover the damage caused by that subcontractor but, unless they’re pressed, don’t expect them to volunteer that information.
The subcontractor’s best protection regarding damage caused by his crew at a jobsite during construction is two-fold:
1. Have a general understanding of the coverage provided by the builder’s risk policy of an owner/developer or general contractor versus that offered under the sub’s CGL policy. In short, have a high-level idea of what policy covers what occurrence.
2. Immediately contact the insurance broker for advice when the subcontractor’s crew causes property damage at a jobsite. An experienced construction insurance broker will ask the right questions of the subcontractor and explore if other insurance avenues exist beyond the sub’s CGL policy that should cover the claim and thus protect the client’s loss history.
In no way should the subcontractor feel bad about “pushing back” and insisting that the general contractor or owner’s builder’s risk insurance cover the damage. The sub can explain truthfully that they’re simply following the directive of their insurance broker. In everyday terms, it’s certainly OK to throw the insurance broker under the bus that’s part of our job description.
Although the general contractor or owner/developer may not admit it, they’ll certainly understand when the subcontractor and his insurance broker ask about coverage provided by builder’s risk.
Builder’s risk or CGL?
Every subcontractor should have a high-level understanding of the coverage provided by builder’s risk insurance compared to commercial general liability insurance. That will come in handy when damage occurs at a jobsite.
A builder’s risk policy is what’s known as an “all risks” policy that covers any property damage that occurs during the course of construction, unless otherwise excluded (and thus covered under a CGL policy). Builder’s risk provides very broad insurance coverage for a virtually unlimited number of situations on a jobsite that lead to property damage. It offers first-party coverage, meaning that any insurance payout goes to the general contractor or owner/developer who holds the policy.
In addition to the building or structure, builder’s risk also covers damage to fixtures, machinery and equipment used to service the building, and building materials and supplies that are intended to become a permanent part of the building.
A commercial general liability policy, on the other hand, is what’s known as third-party coverage designed to protect the insured party (a subcontractor, for example) for claims being made against them by another party for any type of tort liability (property damage, bodily injury and, on a limited basis, personal and advertising injury such as slander and false advertising).
In general, coverage under a CGL policy kicks in only after several triggers occur. Among them:
• It protects the insured from an incident, such as bodily injury, that results in an allegation of legal liability or negligence against them. An “insured” is typically the subcontractor, who might also add a general contractor as an insured onto its CGL policy for liability resulting from work performed by the subcontractor.
• A specific occurrence (or accident) must have taken place in the coverage territory (typically a jobsite), as defined in the policy.
• The insured is determined to be legally obligated to pay the damages. (A silver lining is the subcontractor’s CGL policy provides coverage for legal defense.)
For subcontractors on condominium projects, today’s insurance coverage offers a slight twist, resulting from the “condo wars” of the late 1990s and early 2000s when the condo market was booming. As many as 40 or 50 subcontractors each with his own insurance carrier might have been working on a major condo project in those days, translating to a litigation nightmare when a general contractor might sue all of those subcontractors when a problem occurred during or after construction.
Since then, subcontractors’ work on condo projects has been covered by a “wrap-up” or OCIP (owner controlled insurance program), or by a CCIP (contractor controlled insurance program). The OCIP or CCIP includes both a builder’s risk and a CGL component, meaning that any occurrence during or after construction is covered by that insurance. Before starting work on a jobsite, a subcontractor is enrolled in either of those insurance programs (depending on the project), which is typically placed with one carrier.
No final exam
For a subcontractor who may have trouble comprehending all of the above builder’s risk, CGL, OCIP, CCIP, wrap, insured, what insurance kicks in and when, etc. not to worry! There won’t be a final exam.
However, the typical subcontractor should remember that there is one test that’s in his best interest to pass: His first step should be to call his insurance broker if or when an incident occurs at a jobsite for which he thinks he might be liable. Let the broker wade through the alphabet soup of coverage; it’s possible that initial call might ultimately result in someone else’s insurance (the general contractor’s builder’s risk, for example) stepping up to the plate.
Trent Schultz, CPCU, LPCS, AIC, is claims manager at Bothell-based Hub Northwest, which provides general commercial insurance, group benefits insurance, surety bonds and risk management products to construction companies.