By: Bryant Byrnes, Esq.
If you are a contractor and you have assets – a home, retirement savings, or the like – you need to protect them by purchasing or maintaining a commercial general liability policy (CGL).
A CGL policy is in the category of really important stuff. In addition to providing coverage for injuries on the jobsite (those not workers’ compensation claims), it covers “consequential damages” resulting from defective work. The most common example of a consequential damage in residential work is water intrusion.
Consequential damages are defined as those losses that do not flow directly and immediately from the injurious act, but result indirectly from the act. Translated into plain English, that means it’s not the original foul up that’s covered; it’s the thing that happens as the result of the foul up.
Again, the example of water intrusion well illustrates this point. If a window leaks because it was installed incorrectly and the leak ruins a hardwood floor, the CGL policy will pay to replace the flooring – but not to reinstall the window. The leaking window is defective work, which per se is usually not covered; the damage to the flooring is a consequential damage and thus covered.
What’s Not Covered?
To the chagrin of some contractors contemplating and/or making their first claim, the range of things covered is frequently less than one would think.
Every insurance policy has exclusions; CGL policies seem to have more than most. Two that most often come up – although sometimes under different labels – are the “pre-existing disputes” exclusion and the “craftsmen” exclusion. A pre-existing dispute exclusion is exactly what it sounds like – if you had a claim/dispute before you purchased the insurance policy, the policy generally won’t cover it. (And such claim/dispute must be disclosed when you initially sign up for the policy.)
The “craftsmen” exclusion applies to “mere” defective work, but there is no resulting consequential damage. For example, if the contractor installs the wrong windows – but they don’t leak – the typical commercial general liability insurance policy won’t cover their replacement.
What Happens If No Coverage?
If a contractor unhappily finds himself in a dispute and does not have coverage under his or her CGL policy (or no policy), win or lose the contractor generally has to pay attorney’s fees and related costs. These can be huge. And if he is found at fault, he will also have to pay damages.
If the business is a sole proprietorship or a partnership, the contractor is personally liable. If the business is a corporation, personal assets are protected but corporate assets are not. If the damages exceed the value of the corporate assets, the company may have to go through a bankruptcy.
When Do You Use It?
Some contractors will always make a claim (i.e. “tender” a claim) regardless of the nature or size of the dispute. Other contractors will go to almost any lengths not to make a claim; one of my contractor clients was prepared to pay up to $50,000 out of pocket before he would even notify his insurance carrier of a dispute. This contractor was willing to pay out of pocket because he felt any claim would sully his record with his carrier and make his rates go up. And he was waiting for the Big One.
I think one makes a claim sooner than later. After all, that is what insurance is for. Besides, all policies require that you report even potential claims.
Moral of The Story
You need commercial general liability coverage. And you need to understand it. Read your policy and talk with your broker.
Part 2 will discuss how to make a claim under your commercial general liability policy and the obligations of your insurer to you.
Bryant H. Byrnes, Esq. practices construction law in the San Francisco Bay Area and is counsel to the NARI Board of Directors. Questions? Please feel free to contact him by email at email@example.com.