Departments — May/June 2006

Know Your Policy

So You Think You Have Insurance? . . . Maybe, Maybe Not

Alan Winkler ATTORNEY AT LAW Alan Winkler is a partner at Peckar & Abramson, a national construction law firm with offices in New Jersey; New York; San Francisco; Los Angeles; Miami; Fort Lauderdale; Washington, D.C.; and London. www.pecklaw.com

You renewed your policy-or switched carriers and ordered a new one. You received a bill. You paid the bill. Then you received an insurance certificate. You also received an impressive-looking policy (judging by its weight), which you duly filed away in a safe place. Besides all of that, you have been careful to receive insurance certificates from all your subcontractors. So, you have insurance, right?

The answer could very well be yes and no. You undoubtedly do have an insurance policy. But you may not have insurance to guard against the very risks that led you to get insurance in the first place. The reason is that tucked away in your insurance policy may lurk an exclusion that makes the policy ineffective for the type of work you do. Here are two real-life examples of just this sort of situation, where an exclusion was relied upon by an insurance company to argue that there was no coverage for the project.

In a case I handled, the client was sued for defective construction by a condominium association. Fortunately for the client, it had changed insurance companies from the carrier that issued the policy when the project began and the new insurance company provided a defense to the lawsuit. However, a demand was sent to the original insurance company to participate in the costs of defending and settling the lawsuit. This was only fair since the original insurance company had the policy for the time period when the work was performed and the claimed defects first manifested themselves.

The original insurance company refused to provide coverage because the client had been serving as the construction manager on the project. As justification, the carrier cited to a clause in the policy called the "construction management exclusion." This clause read: "Exclusion-Construction Management Errors and Omissions: In consideration of the premium charged, it is agreed that the insurance does not apply to any injury or damage due to...2. Inspection, supervision, quality control or engineering services by or for you on a project on which you serve as construction manager." On its face, this would seem to exclude coverage for any project for which the client acted as a construction manager.

The rub is that construction management, as opposed to general contracting, was a significant and preferred part of the client's business. As a result, this policy, as applied by the carrier, did not provide the insurance the client needed.

Pushing Back

In the end, the insurance company agreed to contribute to the costs, but only after litigation and facing a trial. To reach that result, several arguments were raised against the application of the "construction management exclusion," including:

• "construction manager" is not a universally defined term. It can refer to a construction manager-at-risk, which, contractually, can be almost like a general contractor; a construction manager-not-at-risk; or a program manager.
  
• the consideration recited in the clause was non-existent because the rate for the policy was not less because it included this exclusion.
  
• enforcing the clause would make the policy illusory since the insurance company would be earning premiums without having to provide coverage in return for a primary business operation of the client.
  
• the insurance company knew that the client entered into contracts as a construction manager and included those contracts in the client's business volume for the purpose of calculating the premium.
  

Had there not been the fortuitous circumstance of the client changing carriers, it would have been in the difficult situation of having to defend the condominium lawsuit on its own.

Another project-wide exclusion was the subject of a recent New York appellate case. There, the construction manager and the owner (a university) had been sued for personal injuries sustained by an employee of the masonry subcontractor who had fallen while working on the project-a new faculty residence.

The construction manager and the owner attempted to tender the lawsuit to the masonry subcontractor's insurance company. To everyone's undoubted surprise, the carrier denied coverage on the basis of a "New Residential Work or Products Exclusion." That clause excluded coverage for work "in any way associated with new residential property [including] the original construction of apartments, single-family and multi-family dwellings, condominiums and townhouses." In the carrier's view, its insurance policy did not provide the subcontractor with coverage for this project.

The appellate court rejected the denial of coverage because the contract identified the project as a "school and faculty residence." Accordingly, the court deemed the project as mixed-use. Since the exclusion applied only to residential projects, the court decided the exclusion did not apply.

Clearer View

Just because there was other insurance available and the exclusion eventually was overcome in both of these cases does not mean that comfort can be taken that all will work out in the end. These exclusions and others are real and were written by insurance companies to disclaim coverage.

It is better not to have to contest the applicability of a project-wide type of exclusion rather than to litigate and hopefully reach a satisfactory result. The only preventive medicine is to "know your policy." Read it, and if you have any questions or doubts, have an attorney and an insurance professional read it too.