Commercial General Liability (“CGL”) insurance policies are the backbone to any contractor’s risk management plan.  One endorsement with a significantly reduced sublimit that is finding its way into more CGL policies issued in Texas is worth a closer look and careful monitoring.

Several CGL insurers have begun including endorsements that make coverage subject to having lower tier subcontractors fulfill certain insurance requirements.  In one such endorsement that we recently reviewed for a general contractor, the following subcontractor insurance requirements were listed as conditions precedent to coverage.

1.    Written agreements executed by each and every independent contractor, subcontractor or sub-subcontractor requiring that the general contractor be held harmless, defended and indemnified for all liabilities, including costs of defense, arising from or relating in any way to the work of the independent contractor, subcontractor or sub-subcontractor; and

2.    Certificates of insurance from each independent contractor, subcontractor or sub-subcontractor indicating that the general contractor is named as an additional insured under each independent contractor’s, subcontractor’s or sub-subcontractor’s general liability insurance policy and that coverage under each policy is maintained equal to or greater than provided by this policy, with limits of at least $1,000,000 per occurrence; and

3.    Proof that the independent contractor, subcontractor or sub-subcontractor has workers’ compensation insurance if required by the state in which the job(s) is located; and

4.    Proof that the independent contractor, subcontractor or sub-subcontractor has all licenses active and in good standing, as required by local and/or state statute, regulation or ordinance; and

5.    Records evidencing compliance with subsections 1 through 4 for a minimum of ten (10 ) years from the expiration date of this policy.

The consequence of not complying with or more of these requirements is Draconian.  If records are not maintained or the policyholder is otherwise unable to establish the existence of the required agreements and certificates of insurance, the insurer has no duty to investigate, adjust or defend, indemnify or to pay for any investigation, adjustment or defense costs (including attorney’s fees), with respect to a claim.

In addition, the limits of the CGL policy are dramatically reduced, from whatever is reflected on the declaration page to as little as $25,000 for the entire project.  Almost all of these endorsements include defense costs in the sublimit, meaning that attorney’s fees and experts’ costs can easily erode the entire sublimit, leaving no policy limits to settle a dispute or pay a judgment.

In our conversations with client and insurance agents, most are surprised and dismayed that the endorsement was appended to the policy. Aside from creating significant personal exposure for policyholders, this endorsement also creates significant exposure for insurance agents who do not read the entire policy and warn the clients, the policyholders, of the significant reduction in coverage.

Our attorneys in Dallas and Austin are available to answer any questions you may have and to help you and your company understand the requirements of your CGL policy as part of an overall risk management strategy. Please contact us at info@gstexlaw.com if you have any questions.

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