For construction professionals, Commercial General Liability Insurance (CGL) is an important part of project management. Between verifying contractors’ and subcontractors’ coverage, ensuring that policy provisions match up with the work being done and checking that client requirements are met, project leaders can spend a significant amount of time thinking about CGL insurance.
While reviewing policies and policy requirements may seem like a bothersome part of the job, it’s something that should never be given short shrift. Two recent cases highlight the importance CGL has to construction projects.
Alabama Supreme Court Rules on Interpretation of CGL
A case that originated in Alabama in 2008 was finally closed by the Alabama Supreme Court last year. It involved a couple that had a home built by Jim Carr Homebuilder (JCH) in 2007. A year after completion, the couple noticed significant water damage. They sued JCH for damages and JCH made a claim on its general liability policy to cover the claim.
However, the insurance provider attempted to deny the claim, asserting that damage caused by the contractor’s work or the work of its subcontractors did not qualify as a covered “event” and therefore was not eligible for compensation under the policy.
The court ultimately found in favor of JCH, ruling that the insurance company had to pay the claim because of a “products-completed operations hazard” clause in the policy. In the end, JCH received money from its insurance provider to compensate the couple.
This case has obvious implications for construction professionals operating in Alabama, but it’s also instructive to businesses elsewhere in the United States. When considering a CGL policy, be sure to determine:
- whether the policy has products-completed operations hazard coverage;
- whether the subcontractors’ policies have this coverage; and
- whether state case law has established how damage caused by faulty work is handled by insurance providers.
“A Pilot’s Checklist for Construction Risk Management” by George F. Burns offers some excellent tips on reviewing CGL policies for thoroughness. Of course, it is crucial to monitor the work performed by subcontractors on the company’s behalf to reduce the possibility of shoddy workmanship in the first place.
Importance of Insurance Provider Approval for Arbitration Settlements
In a vastly different case heard by the U.S. Court of Appeals for the 4th Circuit last year, the ruling was much less favorable to the contractor. Here’s what happened:
- Gaylord National, LLC hired construction firm Perini/Tompkins Joint Venture (PTJV) to manage the construction of a $900 million hotel and convention center project.
- Gaylord National took out CGL and Builder’s Risk policies, naming PTJV as an additional insured on both.
- Things went wrong (for example, a glass atrium collapsed). PTJV sued Gaylord and Gaylord countersued.
- The two parties agreed to a settlement that involved Gaylord paying some of what PTJV claimed it owed and PTJV crediting $26 million to Gaylord.
- However, prior to agreeing on the terms of settlement, PTJV did not contact its insurance provider.
The last point was the crucial one. The insurance policy covering the two businesses included two important clauses (a voluntary-payment clause and a no-action clause) that specifically prohibited the insured from entering into a settlement or similar payment without approval from the insurance company.
In other words, while the insurance provider might well have covered the $26 million settlement had PTJV followed the protocol outlined in the policy, it didn’t have to because PTJV did not follow those rules.
Insurance is a complex risk management tool, and the higher the stakes (i.e., the bigger and costlier the projects), the more complex it becomes. Reading the fine print of the policy (or, as Burns recommends in his article, consulting with a risk management professional who can demystify the fine print) is an excellent idea.
In order to receive benefits from an insurance policy, it’s important to play by the rules established by the insurance company and laid out in the policy. Failing to do so can have major financial consequences.