May 12, 2022
Insurance coverage issues
BY ROB KENNALEY
Liability insurance policies are designed to respond to claims made against the insured by other people. They are not designed to cover damage to the insured’s own person or property. Where they respond, liability policies generally provide the insured with two types of coverage: the duty to defend and the duty to indemnify.
Where a third party’s claim falls within the scope of a policy’s coverage, the duty to defend requires the insurer to pay for a lawyer to defend the claim, while the duty to indemnify requires the insurer to pay any amounts which the insured is legally obliged to pay in relation to the claim. It should be noted that the insurer also has the right to defend.
Liability policies are never all inclusive. They virtually always include certain exclusions. In the construction context, liability policies can be broken down into two basic categories: “errors and omissions” insurance (otherwise known as “E&O” insurance) and “comprehensive general liability” insurance (otherwise known as “commercial general liability” or “CGL” insurance).
Errors and omissions insurance covers errors and omissions in the performance of services. In the construction context, and depending on the terms of the particular policy, E&O policies cover errors in design, inspection, supervision and, at times, contract administration. If your role in construction is as a consultant or designer, you need errors and omissions insurance.
Contractors, subcontractors and suppliers generally carry CGL insurance. These policies are intended to respond to claims by third parties who allege either personal injury or property damage resulting from an “occurrence.” An occurrence, in turn, is most often defined to refer to some kind of “accidental event.”
In construction, the insured’s own work is generally excluded from the scope of coverage under a CGL policy, as are any obligations which the insured assumes under contract. CGL policies are thus not designed to cover the contractor’s own deficient work. Rather, CGL insurance policies cover damages which a construction deficiency causes to other persons, or other person’s property.
An example helps make the distinctions clear. If you as a contractor are to make a mistake in constructing a retaining wall such that it falls down, your CGL policy will not cover the cost of repairing or rebuilding the wall. From the insurer’s perspective, you did exactly what you wanted to do: there was no “accident.” Further, the exclusions for the contractor’s own work, and for contractual obligations, will generally apply. You will therefore have to rebuild the wall on your own account.
If the wall falls on a neighbour’s car, however, the CGL policy will generally respond to the claim of the car owner, who has a third party claim against you for liability. The damage to the car can be considered an accident. It is an unforeseen consequence of the construction deficiency, unrelated to the work itself. These types of losses are generally described as “consequential” damages, to which the CGL policy usually responds.
Consider, however, where the wall was constructed by a subcontractor you retained to build the wall on your behalf. In this circumstance, the CGL policy may or may not respond, depending on the wording of the particular policy. Some CGL policies expressly cover the deficient work of subcontractors, while some do not. Where the policy covers your subcontractor’s work, it will also generally require you to ensure that the subcontractor itself carries CGL insurance.
What about where the wall falls down and your client claims damages for delay? The CGL policy will generally not respond because it is only intended to respond to claims for property damage and personal injury. It is not intended to respond to what are often described as purely “economic” losses.
Consider also where you have both designed and built the wall. If you have built it according to your design and the wall falls down due to a design error, the CGL policy will generally not respond. This is because the CGL policy generally excludes liability for inadequate or deficient design. As discussed above, errors and omissions insurance is intended to respond to this type of risk. It is accordingly very important that “design-build” contractors obtain both types of insurance coverage.
You should also understand that your insurer may be able to refuse coverage and/or a defence to a liability claim if you breached a condition of your insurance policy. This can occur where: you have undertaken work which you have advised your insurer you do not perform; where you have failed to accurately disclose the nature or history of your business in applying for the insurance; where you have not put the insurer on notice of a claim upon your becoming aware of it; and where you have taken steps to address or respond to a claim without your insurer’s knowledge or consent.
Essentially, under an insurance contract your insurer agrees to provide you with coverage in exchange and other conditions. The insurer will assess the risk (and determine the premium) based on what you tell them in applying for the insurance and on the expectation that you will meet the conditions of the policy.
You have insurance for a reason. It is accordingly important that you make sure it is in place when you need it. You should work with your broker to make sure that you have proper (and enough) coverage, and that you answer your insurer’s application questions fully and accurately. Where your circumstances change such that your answers would change, you should consult with your broker about amending or increasing your coverage.
Finally, where there is the potential for a claim, you should consult with your broker and/or lawyer to ensure you do not do anything to prejudice your insurer and that notice to the insurer is provided as required.
Next issue, we will discuss the scope of insurance and what it can mean to be “under-insured” on a policy.
Rob Kennaley is with Kennaley Construction Law, a construction law firm with offices in Simcoe, Toronto and Barrie.