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Insurer Defines its Own Insurance Policy as Unacceptable

As a general principle, owners are protected by the policies of general contractors they hire and GCs in turn are protected by the polices of subcontractors.  This puts the burden of insurance on the party closest to the point of the loss, the party who may have actually “caused” a claim.  The same principal applies when a subcontractor hires a sub-subcontractor.

Therefore, each party is interested in the terms of the downstream party’s insurance coverage.

Need to Understand Insurance Terms

On reviewing the policy of our client’s subcontractor’s policy we found a particularly pernicious exclusion for injury to certain workers on the jobsite.  This is a dangerous coverage restriction because most claims, including most serious claims, in construction arise from injury to workers.  Some would go so far as to call this “illusory insurance,” but we’re not claiming that here (see that separate discussion: https://licatarisk.com/2019/01/05/illusory-insurance-exlusions-that-swallow-up-the-policy/ )

Not Quite Illusory

Though it might not be illusory, it feels unethical and is certainly ironic!  The ironic part appears on a separate endorsement to our sub’s policy entitled No Coverage Applies if Contractor Conditions Not Met.  This endorsement details the requirements for insurance carried by our sub’s own downstream subcontractors. 

This endorsement states:

“We will have no duty to defend or indemnify any insured if … the insured fails to satisfy… conditions…  set forth below.  The insured agrees that we need not demonstrate any prejudice… “

These conditions included the requirement that any contractor hired by the sub “maintain adequate insurance” with adequate insurance defined in the policy.

Definition of “Adequate Insurance”

But … what was included in the definition of adequate insurance?  That the sub sub’s policy “not exclude any claim, suit, loss, cost or expense arising out of any bodily injury to ANY WORKER of the contractor.” (emphasis added).

So, the policy of our sub which had the worker injury exclusion, also contained the definition of adequate insurance, under which the sub’s policy would have been “inadequate.”

The insurer’s own policy did not pass that same insurer’s definition of “adequate insurance” !

Inconsistency ?

We’re sure the underwriters and policy writers didn’t dwell on whether there was any compromising inconsistency in their insurance policy.  They are so busy creating and documenting new exclusions, that they don’t have time to be embarrassed.

And, in case you didn’t notice, if the inadequate insurance had no bearing on a particular claim, the insurer “need not demonstrate” they were harmed by the failure.  This means even a non-material technicality can void the coverage.

Understand Your Policy

This case should be a clue that you, or someone on your behalf, has to know the language that is buried inside your insurance contracts. Insurance is a minefield you don’t want to walk through without a guide.

Frank Licata

[email protected]

(c ) Licata Risk & Insurance Advisors, Inc. 2019

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Mar 05, 2019

Licata Risk Licata Risk & Insurance Advisors, Inc.
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LicataRisk Advisors is an independent risk management and insurance consulting firm. We are not brokers and we do not sell insurance. We are not connected to any insurance company or product in any way and do not receive commissions. This is an important difference as you will have an expert on your side who is only committed to you.

Licata Risk is not a law firm and does not practice law. General advice and contract input by the consultants, including those who are attorneys, is to provide insight into the risk and insurance aspects. Your attorney should be the final authority on any legal matter.