Building contractors’ Commercial General Liability (CGL) insurance premiums keep going up. But what many contractors may not realize is that the hefty checks they write each month may not cover them for things that are written in their insurance contract. Contractors need to be extra careful about the completed operations coverage in their policies, which is supposed to cover them for damage to a completed project that is caused by faulty work of subcontractors.
“Most carriers deny coverage for such claims even though their policies clearly say this is covered,” says Steven Schember, senior litigation partner at Schumaker Loop & Kendrick law offices in Tampa Bay.
Smart Business spoke with Schember about builders’ CGL policies, the problems facing contractors trying to file claims for the faulty work of subcontractors, and what is being done about the problem in the state of Florida.
What is happening with CGL ‘completed operations’ policies at the moment?
Right now, by law, insurance companies must pay for any claim filed by a contractor for shoddy work done by a subcontractor who has already completed the job and has left — by going out of business or not being otherwise available.
This policy takes effect if, for example, a general contractor gets a roofer to install a roof. The roofer completes the job, the contractor pays the roofer, and then shortly thereafter the roofer goes out of business. Later, the roof leaks and the contractor must pay to repair the damage and install another roof. The CGL policy should cover this expense and reimburse the contractor.
The problem is that insurance companies — which were very vocal in the press a few years ago about providing this kind of insurance — are now denying the claims that are coming in for this kind of coverage.
Right now, it is law that these claims must be paid because of a ruling in a Tampa appeals court. However, this case is on appeal in the Florida Supreme Court. We are hoping that the decision will fall in the favor of the contractors. But this whole area is in a state of flux, and some states have gone in favor of the contractors, others in favor of the insurance companies. If the Supreme Court reverses the appeals court ruling, it certainly will be a huge blow to the construction industry.
What is some of the confusion surrounding this issue?
The problem is that a lot of contractors don’t even know they have this protection in place at all. And those that do — and try to submit a claim — are getting denied. This has really be a disingenuous move by the insurance company; first agreeing to provide this coverage a few years ago and now denying claims that contractors are filing.
What is the fallout from this move by insurance companies to deny these claims?
Premiums continue to go up because, in part, contractors are paying higher premiums to cover completed operations. In addition, surety bonds, which are mandatory for government projects, are getting very expensive and more difficult to obtain because the bonds are being forced to cover items that should be covered by the CGL policies.
How can a builder be sure that a CGL policy covers what he or she wants covered?
Almost all CGL policies today specifically provide completed operations coverage. However, to insure that they are truly covered, contractors should get in writing from their CGL carriers that they will cover damage to the completed project caused by the faulty work of subcontractors, as is it set forth in the CGL policy. Many contractors not only have their CGL insurance with a particular company, but also its property, auto and other insurance.
If an insurance company balks and doesn’t want to put it in writing, renewal time is a good opportunity for contractors to gain leverage and threaten to seek out another insurance company. I’ve seen this done by contractors and it is quite effective in getting the insurance company to commit to ‘completed operations’ policy in writing.
Are there other things builders can do to cover any exposure they may have not covered by their CGL policy?
The standard CGL policy contains several exclusions — an example being damage caused by spillage or overspray or other contamination by pollutants on the job site, such as painting, spraying, airborne particles, etc. Depending on the type of work done by the contractor, the CGL policy exclusions should be reviewed and removed from the policy where appropriate. It may cost an additional premium but it will be worth it.
STEVEN SCHEMBER is senior litigation partner at Schumaker Loop & Kendrick law offices of Tampa Bay. Reach Schember at (813) 227-2247 or [email protected].
