Red flags abound.  First, the project owner insists that you use a particular subcontractor, even though you have never used or heard of that subcontractor.  Second, the subcontractor does not have sufficient capitalization or expertise to perform the work.  Third, the subcontractor sends you a certificate of liability insurance listing an insurance company that sounds vaguely, but not entirely, familiar.

None of these red flags mean much until a claim is asserted relating to the subcontractor’s work.  That’s when many in the construction industry receive an unwelcome refresher course on the doctrine of caveat emptor: buyer beware.  To avoid having to learn this lesson the hard way, we have assembled 3 subcontractor insurance traps for the unwary.

Trap No. 1:   The Design-Assist or Design-Build Subcontractor

As part of your due diligence during the contracting phase, you receive certificates of the commercial general liability insurance from the subcontractor.  Having learned that such certificates do not bind or even evidence coverage, you obtain a copy of the declaration page and policy, and spend your waking hours poring over the listed exclusionary endorsements.  Fun times!  Convinced that the correct insurance is in place, you enter into a contract with the subcontractor.  But is the insurance sufficient to cover a potential loss attributable to the subcontractor?

As the names indicate, design-assist and design-build subcontracts involve design and construction. Depending on the type of project, trades as varied as swimming pool subcontractors  to roofing subcontractors may fall into that category. Commercial general liability policies typically contain design liability exclusions.  To obtain coverage for the design part of its work, the subcontractor would need to procure a separate insurance policy for design errors and omissions.  Many design-assist and design-build subcontractors (and even general contractors) mistakenly believe that a commercial general liability policy is sufficient for all trades.  When it comes to design-build trades, it is not.

Trap No. 2:  The Highly Exclusionary Policy

Spirit Airlines used to advertise itself as the Ultra-Low-Cost Airline.  The insurance world also has its version of Spirit Airlines, known as underwriters of ‘highly exclusionary policies’.  While it may sound exclusive in a red-carpet and bouncer-at-the-door kind of way, it is actually the exact opposite.  A roofing contractor with a roofing exclusion?  A wastewater plumbing subcontractor with a broad form pollution exclusion?  An additional insured endorsement that requires a written contract for indemnity to be effective?  Yes, yes and yes, again.  We have litigated cases involving each of these exclusions (and sadly, many more) to coverage.

One way to weed out the highly exclusionary policy is to obtain not just the certificate of liability insurance, but the entire insurance policy.  Reading a liability policy is akin to having a root canal, with our apologies to the insurance coverage lawyers who enjoy it enough to have a root canal every day.  While it is important to read the insuring agreement particularly in non-standard insurance policies, the exclusions, usually added as endorsements to the policy, are where most of the bad stuff is usually found.  Obtaining all the exclusions and reading through them, or better yet, having your risk manager or broker or coverage attorney do it, is the best way to avoid this insurance trap.

Trap No. 3:   Claims-Made Policies

Even though your contract form requires an occurrence-based insurance general liability policy, you might be surprised—again, not in the red-carpet treatment kind of way—to learn that the subcontractor has provided a claims-made policy.

While the distinction between occurrence based and claims-made policies is worthy of a treatise of its own, one of the simplest distinctions is that claims-made policies only provide coverage for claims made during the policy term.  For instance, if the subcontractor provides claims-made general liability insurance for a term of Jan 1, 2021 to Jan 1, 2022, only a claim made in that time frame is covered by the policy.  If the claim arises in 2023, a result of a latent defect, and the subcontractor has not bought any policies after Jan 1, 2022, the subcontractor will (potentially) be uncovered for the loss.

It is not always easy to discern an occurrence-based from a claims-made policy.  Sometimes, the insurance company tries to warn us by placing the words ‘claims made’ in large, bolded font somewhere in the insurance policy.  Other times, it is tucked into an endorsement appended to the insurance policy.  In either event, reading the entire policy is, yet again, the best way to avoid this insurance trap.

The attorneys in our Austin and Dallas offices have litigated many cases where the wrong insurance product was procured to cover the risk, and can share many invaluable lessons about how to better insure the work and protect your profit.

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