August  27, 1999

Bulletin # 30: What Do You Mean I'm Not Covered?

ZZZ Sheet Metal had grown over a twenty year period from a three man operation to a firm employing over 200 people and bidding on the largest and most sophisticated HVAC projects in its region. As the business and the projects grew in size and complexity, the company’s insurance requirements had also changed. Many of the contracts ZZZ was asked to sign had detailed insurance requirements and the subcontractor was often required to produce certificates, or even policies, evidencing the existence of the requested insurance coverage.

Since the meeting of insurance requirements was typically rolled into the whole, somewhat chaotic, process of bidding, ZZZ was not able to devote a lot of staff time and effort to insurance issues. Instead the company relied largely upon the brother-in-law of the president, who was an insurance agent. The personnel working on a bid would typically call the agent and pass along what they knew about the insurance requirements for a particular project. The agent would send over a certificate of insurance to be submitted to the general contractor or construction manager. Often the certificate had to be re-worked (usually for problems with the “additional insured" designation), but the subcontractor was always able to obtain an acceptable certificate prior to the commencement of work. An invoice for the insurance would arrive several weeks later. Most often the invoices got paid (although there were a few circumstances in which payment was substantially delayed and one instance in which the subcontractor forgot to pay altogether). The actual insurance policy came about a month later, but was typically thrown into the project file without further review.

Despite its less-than-perfect handling of contract form and documentation issues, ZZZ remained a successful business. What it lacked in skill as to the handling of paperwork, it made up for in sheet metal fabrication skills. Over the years it had experienced a minimal number of insurance claims, other than run-of-the-mill workers compensation claims. It had come to view insurance as a “necessary evil” and simply a matter of more paperwork. It was certainly not anything that the firm saw a particular need to focus upon.

This all changed one Friday afternoon in the middle of construction on a large office tower. The project’s air-handling system required the installation of a number of large roof-top units. These huge chiller/compressor units had been purchased by ZZZ under its subcontract and had been shipped to the ZZZ office/warehouse facility pending installation. When it was time for installation of the roof top units, ZZZ loaded several on a company truck for transport to the construction site. The equipment appeared properly situated on the truck bed and was strapped down by the driver and other ZZZ employees. It was not obvious to any of the employees was that a portion of the truck bed had rotted and was severely weakened. The truck left for the construction site.

The problems with the truck became apparent when, in the middle of downtown traffic, a portion of the truck bed collapsed and one of the roof-top units slid off into the street (hitting several vehicles in the process). After 20 minutes of mayhem, the police arrived, took down the necessary information, and told the truck driver to get the equipment out of the street. When the driver informed the police that he could not do so because of the damage to the truck (and the absence of a crane to lift the equipment), he was told to get the truck out of there and to arrange for another truck to immediately remove the roof-top unit now blocking traffic.

The driver continued on to the construction site and while ZZZ management scrambled to deal with the dropped equipment, the ZZZ driver and project superintendent made arrangements for removal of the remaining unit from the truck. The building crane hoisted the equipment halfway to the roof where, due to some unexplained cause, the equipment shifted, hit the side of the building and fell ten stories to the ground. The second roof-top unit was totally destroyed. The crane operator claimed that the equipment had not been properly attached to the hoisting cables. The ZZZ superintendent insisted that the operator had lifted the equipment too quickly and caused it to hit the building. A bad day for ZZZ had gotten quite a bit worse.

ZZZ’s management suddenly developed an intense interest in understanding its insurance coverage. The insurance file on the project was retrieved and certificates for comprehensive general liability and property insurance were found, but no policies were located. While ZZZ personnel proceeded with removing the one roof top unit from the street and the remains of the other from the building site, the firm awaited delivery of the policy forms from its agent. The policies arrived two days later along with a claim form. ZZZ immediately completed the claim form and returned it to the agent. A claims adjustor had already inspected each piece of equipment. The company breathed a sigh of relief and directed all inquiries by third parties (including the drivers of the damaged cars) to ZZZ’s insurance carrier.

Ten days later, the subcontractor received a letter from the insurance company denying coverage on all claims. The letter noted that the property insurance procured by ZZZ for the project contained specific exclusions for equipment in transit and for equipment damaged in the process of installation. There was no insurance coverage on the damaged or destroyed equipment. Had ZZZ purchased an “installation floater”, the damage to each piece of equipment would have been covered. The loss would be catastrophic for the subcontractor. The insurance company also intended to contest coverage as to the damage to the other vehicles caused by the falling equipment, despite ZZZ’s purchase of vehicle liability insurance. The insurance company argued that the damage to the third party property had occurred, not as a result of the operation of the company vehicle, but due to the method of attaching the equipment to the truck. The next two calls by ZZZ’s president were to his insurance agent brother-in-law (cancelling all future golf outings) and to the company’s attorney. ZZZ management had the sinking feeling that its attorney would become a familiar figure at the company offices during the months to come.

Insurance is a fact of life in the construction industry. Meeting the minimum requirements under a particular contract is certainly the first step in dealing with the issue of insurance, but only the first step. Having a competent and diligent agent who knows the construction industry is also extremely important. In addition, there are some projects where the required package of insurance is not enough. It is essential that the subcontractor evaluate each project for any special risks and disclose those risks to the agent as part of the insurance underwriting process. If something unexpected occurs in the course of a project (i.e. the need to transport or install an expensive piece of equipment, the need to store expensive equipment off-site, a material change in the scope of work, etc.) the subcontractor should be in contact with its insurance agent as to special coverages that might be appropriate. In some cases, a floater policy might be in effect for only one day and the premium relatively small. However, the availability of insurance coverage for the subcontractor may prove absolutely critical to the survival of its business.

It is not expected that a subcontractor will be an expert on all aspects of insurance, but there are few things that can more detrimentally affect a business than having incomplete or inadequate coverage. It is only through attention to the details (and close work with a competent agent) that the subcontractor can avoid finding out what its true coverage is only when a catastrophic event has occurred.


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