Many subcontractors do not know exactly what they are purchasing when they procure insurance. It is critical for contractors to understand what their insurance covers. This knowledge is pivotal to evaluating the ultimate risks and liabilities to your business as well.

Workers’ compensation insurance

The most common type of insurance in the building industry is workers’ compensation. While requirements vary from state to state, most subcontracting firms are obligated to procure workers’ compensation insurance, which provides coverage for personal injuries suffered by employees. In some instances, this policy may extend to protect employees or other individuals, depending on how it is written.

In addition to needing to address insurance for your business entity, many jurisdictions require documentation that your individual subcontractors have workers’ compensation insurance. In all cases, you should obtain proper certification and documentation of insurance for all individuals or entities with whom you subcontract. Proof of insurance is something insurance carriers are accustomed to issuing.

Comprehensive general liability insurance

Comprehensive general liability (CGL) insurance comes in many different packaged forms, but its basic hallmark is that it covers personal injury or property damage claims. Many carriers offer extended business packages that provide additional but limited types of insurance coverage. These business package policies may protect against both losses to specific property of the business and also against claims by third parties against the business for covered losses.

Property and builder’s risk insurance

Property insurance often covers the owner against risks of fire and other similar perils that could damage specific listed property. Builder’s risk insurance protects against loss from fire and other named perils during the act of construction.

Wrinkles and misunderstandings

Many contractors believe a full spectrum of insurance will protect them against claims of defective workmanship. While third-party warranty programs exist that cover purely workmanship elements, these policies often place the responsibility for repairs on the contractor. In contrast to warranties, the insurance policies outlined above do not generally cover against purely contract-style economic losses associated with defective workmanship.

As with any statement of the law, there naturally are wrinkles and exceptions. Some policies state if an insured is faced with a claim that is the result of work performed by its subcontractors, coverage is available. Some courts have used this language to find coverage against defective workmanship claims caused by subcontractors of the insured. Other courts have taken a more restrictive view. This decision depends on the specifics of the policy language and the laws in your state.

Another example of coverage disputes relates to the source of alleged property damage. Many property policies provide coverage for storm damage but not flooding. There are a significant number of legal disputes occurring throughout the South as a result of Hurricane Katrina that may add a twist to this.

Similar fights occur on a regular basis as carriers attempt to update their policies and issue new exclusions. For example, many carriers are attempting to limit CGL and property coverage associated with mold claims. Some states are responding by passing statutes barring the insurance companies from issuing such exclusions.

The realm of insurance coverage is highly complex and often the target of bitterly fought litigation. You should understand the language of your specific policy before you purchase it. Sit down with your carrier and have them spell out what the policy does. Present some situations that you may have experienced or could experience as scenarios to see what your coverage would be in those circumstances. You also should understand the context of how courts in your jurisdiction are likely to interpret your policy. This is the only way for you to have a reasonable grasp on exactly what you are buying when you purchase insurance. As always, good construction legal counsel should be able to provide some examples from past cases or what’s currently considered the best type of coverage for your business, based on real-world experience.

This article is not intended to provide specific legal advice, but instead as a general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.

HUGHES is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C. He specializes in construction litigation, corporate- and business-related representation, and complex civil litigation. He may be reached at tim@hughesnassociates.com.