You’re a general contractor. Your subcontractor does defective work that results in property damage and a lawsuit against you by the owner. Must you defend against the owner’s claims, and could you bear the ultimate costs to repair the property?
You’re a commercial property owner. Your tenant’s employee is injured on the job. She collects workers’ compensation benefits from her employer (your tenant), so your tenant is immune from suit under the Massachusetts workers’ compensation statute. But when she sues you, must you defend against her claims, or do you risk paying her continuing damages?
You likely cannot avoid these types of lawsuits, but you can shift litigation costs to your subcontractor or tenant with strong indemnification and hold harmless clauses in your contracts. Additionally, it is critical that you contractually require them to maintain adequate insurance that covers you as an “additional insured”. You can undertake this risk mitigation strategy long before suit, at the time you contract with parties whose operations expose your business to potential claims by third parties.
Despite your best efforts, however, insurance companies sometimes will resist covering your claims. To minimize the chances of that happening to your business when facing its next claim or lawsuit, consider the following best practices and pitfalls to avoid:
Your Contract Should Have An Additional Insurance Clause
Indemnification clauses, in which one party agrees to indemnify the other for all liability arising from the other’s fault, omissions, negligence, or misconduct on a jobsite or premises, are critical clauses worth insisting upon during contract negotiations. Indemnification provisions properly drafted by counsel are a great start, but they should not be your only contractual protection against claims.
An additional insured clause provides a second avenue of relief, separate and apart from an indemnity clause. Additional insured clauses require the subcontractor to maintain, at its expense, a commercial general liability policy that insures the general contractor against all bodily injury and property damage claims arising out of the subcontractor’s project work. The same is true for tenants and property owners for bodily injury or property damage claims arising out of the tenant’s use, control, condition, or occupancy of the premises. The additional insured clause should specify the amount of required insurance based on the size of your project or property. The additional insured clause also should specify that the coverage is “primary and not contributory” to any insurance that you carry, which shall be excess. This means that when there is a claim or lawsuit, your subcontractor’s or tenant’s insurance policy is used first, and yours only will be used to cover any damages above your subcontractor’s or tenant’s policy limit.
How To Obtain Additional Insurance Coverage
As a practical matter, there are two ways a subcontractor or tenant can comply with an additional insurance clause. They can request a blanket endorsement on their commercial general liability policy that provides coverage for anyone who enters into a contract with them that requires additional insured coverage. Alternatively, they can name you and the project or premises on a specific endorsement or schedule that entitles you to coverage under the policy. Your contract’s additional insurance clause should specify the type of endorsement you require to name you as an additional insured to ensure proper coverage.
You should ask your attorney to review your contracts before execution, specifically for indemnification and additional insurance clauses, to ensure that they are thorough, clear, legally enforceable, and favorable to you. If you are a subcontractor or tenant, you also should have your attorney review your contracts so you can better understand your contractual obligations and avoid inadvertently breaching them by not maintaining adequate insurance coverage.
Require Proof of Insurance Before Contract Performance
Your additional insurance clause also should require that the subcontractor or tenant provide you with proof of insurance before it begins work or occupying the premises. General contractors and property owners often start (and unfortunately stop) with certificates of insurance. These are documents that an insurance agent prepares at an insured’s request. They provide a snapshot of the policy type (e.g., commercial general liability), number, limits (e.g., $1,000,000 per occurrence, $3,000,000 aggregate), and the names of any additional insureds.
Certificates of insurance, however, often are incomplete or incorrect, leading you to believe that you have insurance coverage that you do not. For example, a certificate of insurance could list you as an additional insured on a construction project, but if the insurer or agent was not careful, the policy’s specific endorsement might erroneously name you as an additional insured in your capacity as a “mortgagee or lessor only,” instead of as a contractor. If that policy does not have a blanket endorsement to serve as a back-up, then the insurance company could deny you coverage on this technicality.
Best practice is to request (1) a certificate of insurance, (2) a copy of the policy, and (3) a copy of the blanket endorsement or specific endorsement providing you coverage as an additional insured. You might notice that, despite having a blanket or specific endorsement, the policy excludes coverage for liability that its insured assumed by contract. There generally is an exception, however, for “insured contracts”. It is critical that your attorney review your contracts and insurance documents to ensure that they are consistent and provide you with your entitled coverage.
Know Your Rights If You Are Denied Coverage
If the subcontractor or tenant complies with their contractual obligations, then you can tender the defense of a lawsuit to their insurance company, who should hire an attorney, and defend it on your behalf, at no up-front cost to you.
If, despite having the correct insurance policy and endorsements, the insurer refuses to accept your tender, then you can assert claims directly against the insurer. Your claims can invoke the Massachusetts Consumer Protection Statute, G.L. c. 93A, for committing unfair and deceptive insurance practices under G.L. c. 176D by failing to honor a contractual duty to defend you, its insured. If you prevail against the insurer, then you could recover your attorneys’ fees and costs, and be eligible for double or treble damages.
If the subcontractor or tenant fails to maintain adequate insurance and/or properly name you in its policy endorsements, you also can sue the subcontractor or tenant for breach of contract (that is, failing to name you as an additional insured). Typically, this is a less lucrative approach, however, because a subcontractor or tenant might not have the funds to pay a judgment against them. Therefore, it is a better practice to ensure, up front, that they have procured the correct insurance coverage for you so that your recourse is against their insurance company, which is more likely to defend you, negotiate a settlement of the claims, and be able to satisfy any judgment against you.