Conversations in the lunchroom at ZZZ Sheet Metal often revolved around the flaws of other parties to construction projects. The dictatorial traits of general contractors were a favorite topic. Sloppy, incomplete plans and amateurish architectural work were also a frequent source of complaints. Overly aggressive construction managers, nit-picky building inspectors, and unreliable suppliers all came in for their share of criticism. However, the one topic certain to drive the group to a near-frenzied state was insurance. There seemed no limit to the anecdotes about “exclusions from coverage” that revealed themselves only when a claim was filed. In addition, premium costs and availability of coverage seemed to fluctuate without any logical rationale. The only certainties were that insurance would be required on every project, and that the coverages would be expensive.
When ZZZ successfully bid to install an air-handling system in an office building, the subcontractor followed its normal procedures to bind the insurance coverages. The insurance section from the subcontract was forwarded to ZZZ’s insurance consultant, and insurance certificates were obtained. The certificates were delivered to the general contractor, and several large premium checks were sent to the insurance agent.
One of the coverages required was Commercial General Liability (CGL) insurance. As the subcontractor understood it, this was the “catch-all” coverage that filled in the gaps between builder’s risk, workers’ compensation, employer’s liability, property and casualty, and other risk-specific coverages. ZZZ assumed that the CGL policy covered all risks that were not covered under the other policies. The required policy limits for the project were $5 million, and the subcontractor could not imagine a catastrophe that would reach anywhere near that level.
ZZZ set to work on the office building. One of the complexities of the project was the limited space within which to work. The building was located in an older downtown area with buildings abutting on both sides and common walls. The project specifications would require the installation of two large rooftop air-conditioning units, but the usable rooftop area was quite small. It was obvious that the rooftop units would require the installation of significant structural bracing.
ZZZ approached the architect who suggested that ZZZ propose a structural system on which the roof top units could be placed. The architect indicated that ZZZ’s proposed system would be reviewed, and approved by the structural engineer. The subcontractor’s personnel set about designing a support system for the very small roof top area. (It was noted by several of the subcontractor’s personnel how difficult it was to tell where one roof top ended, and the other began.) The structural system that was ultimately designed included bracing bolted to the roof top structure and to various adjacent walls. Due to the weight of the equipment, the structural system would cover most of the roof top area. The design was approved by the architect and engineer, and ZZZ’s personnel immediately began installation of the structure.
In the course of the installation, ZZZ’s project manager noted that some of the plan measurements did not conform to the dimensions on site. As a result, various components of the bracing had to be relocated, some on the other side of a low wall, when there was not enough room in the intended area. With the air conditioning units ready to be installed, it was an around-the-clock scramble to get the structural system in place. The roof top units were finally installed, and the project neared completion.
Several weeks later, the general contractor called the ZZZ project manager to an urgent meeting. A letter had arrived from the adjacent property owner. His building had suffered extensive water damage following a rain storm the prior weekend. Multiple tenants were claiming that their computer systems were destroyed, and that invaluable company files were now worthless. The water had allegedly so permeated the building that a mold problem was anticipated. In fact, the owner asserted that the entire building might be unusable for months to come. The claims were in the multiple millions of dollars.
The ZZZ project manager indicated sympathy, but wondered what any of this had to do with his firm. The general contractor then read a paragraph from the letter that caused the ZZZ manager’s blood to run cold: “Our initial investigation has indicated that the installation of structural bracing on the roof of your building resulted in severe damage to our roof, leading directly to the casualty. In fact, two of the structural braces you recently installed are in trespass of our property, and are affixed to our roof top structure. This is the specific area where the water leakage occurred.” The general contractor was furious, and told the subcontractor to “deal with it now - this is your responsibility, not ours.”
The ZZZ project manager rushed to the roof, and examined the location of the structural supports. There was clearly a problem. While only one small segment of the structure encroached onto the neighboring property, the encroachment did exist. It was also clear that the structure had caused a depression in the roof, and that water had pooled in that area. The project manager immediately called the ZZZ office, and told the administrative staff to notify the insurance carriers. Lawsuits followed close behind.
ZZZ’s CGL carrier came out to investigate immediately. The subcontractor breathed a sigh of relief. At least there was insurance coverage up to $5 million, and ZZZ would have its defense costs paid in the various lawsuits. Then the letter arrived from the insurance carrier. The carrier would not defend or indemnify ZZZ for any of the damages to the third-party property because of exclusions 2j(5) and to 2j(6) in the CGL policy. Exclusion 2j(5) stated that there was no coverage for “damage to...real property on which you...are performing operations, if the ‘property damage’ arises out of those operations.” Exclusion 2j(6) indicated that there was no coverage for “property damage to...property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”
ZZZ’s president was stunned by this turn of events. Expensive insurance had been purchased, huge claims had arisen, and the insurer now denied coverage. It was a disaster that could put the subcontractor out of business. Several shouting matches between the president and the claims adjuster did nothing to change the insurance company’s position.
Apparently having no insurance coverage, ZZZ disposed of the claims as best it could. It borrowed against every asset, and the owners made large loans to the company to fund the settlement of the various lawsuits. The company teetered on the brink of bankruptcy, but ultimately and barely survived. The subcontractor would be financially crippled for years to come.
Even though the lawsuits were settled, the president of ZZZ harbored a simmering anger toward the insurance carrier. He finally authorized the company’s attorney to sue the insurer. The attorney described it as an “uphill battle,” but the president of ZZZ told him to “Do whatever it takes - this has already cost us a fortune, and we would hardly notice spending a few thousand more dollars on legal fees. Go after them.” ZZZ promptly lost at the trial court, and the subcontractor appealed. Surprisingly, the state supreme court ruled in favor of ZZZ. The court found that such insurance policy exclusions should be strictly construed against the insurer, and that both of the exclusions were ambiguous. It held that since the provisions were not clear in their application to this situation, the court should find in favor of the existence of coverage. The court noted that it had previously interpreted Exclusion 2j(5) in a relatively broad manner “consistent with the expectations of contractors and CGL insurers.” The court also concluded that “Exclusion 2j(6) refers only to work performed in a faulty or defective manner and, thus, does not bar coverage where the subcontractor did not necessarily perform its work in a faulty or defective manner, but only in the wrong location.” The court held that coverage existed in favor of the subcontractor up to the policy limits, and awarded the policy limit amount to ZZZ. The subcontractor paid off the remaining settlement amounts, repaid all of its loans, bought some new equipment, and fired its insurance agent. Everyone at the company, and particularly the project manager, breathed a sigh of relief.
This Bulletin is based upon the actual decision of a state supreme court in a recent case. While subcontractors should not assume that the courts of any particular state will follow this precedent or that the policy exclusions would be negated under any other set of facts, there are some general principles to be gleaned from this situation:
- A subcontractor must make certain that it has the coverages contractually required for each project, and has considered additional coverages that might be useful, even if not contractually required.
- A subcontractor must work closely with its insurance agent or consultant, and should place its insurance with companies that have a reputation for dealing fairly with claims.
- A subcontractor should never necessarily accept the insurer’s interpretation of a policy, if such interpretation results in a denial of coverage. It is in the insurer’s financial interest to minimize claims, and it is the responsibility of the subcontractor to be aggressive in protecting its own interest.