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Inferior Insurance Product

The Insurance Certificate Looked Fine

James Mahurin | October 4, 2019

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Insurance certificate rolled up

The problem of worthless insurance certificates is widespread. Insurance providers of many types and descriptions deliver unacceptable commercial general liability (CGL) policies to an unsuspecting public and many naive contractors or subcontractors.

Certificates of Insurance (COIs) are readily delivered even when the CGL policy forms fail to meet basic insurance requirements—of the lowest standards—found in work orders, contracts, or leases. The consequences can be very, very expensive.

A Contractor Example

The contractor was a highly regarded family-owned firm with work in about 10 states. As a preferred subcontractor to a general contractor providing ongoing work for a Fortune 500 company, the family firm enjoyed considerable success from the quality of their work over several decades. Over 40 percent of the subcontractor's revenue was for the Fortune 500 company.

The subcontractor had maintained its casualty program with a well-known national construction insurance provider for years. The business outgrew the revenue size category for the insurer's contractor program, and the insurance agent lacked a second market to underwrite the account. The agent placed the CGL portion of the account with a nationally known surplus lines provider.  

The Insurance Requirements Were Plain Vanilla

The subcontractor was providing technical installation services at the end of wrap-up projects. The subcontractor was not enrolled in the wrap-up programs. Any subcontractor using a reputable insurance company could easily comply with the insurance requirements.

The CGL insurance requirements in this subcontract stipulated an Insurance Services Office, Inc., CGL policy form and additional insured requirements with a 30-day notice prior to cancellation to the general contractor.

On this project, COIs were delivered as if the insurance program was fully compliant with the insurance requirements, and the work begins.

Exclusions and Limitations Approached 50 Pages

The policy contained 27 endorsements with 2 limiting and 22 excluding coverage. The endorsements were not identified until after a significant property damage mishap arose on the last day on a project.

A Severe Wrap-Up Exclusion Endorsement

The exclusion not only applied to the wrap-up project but also excluded any project where such wrap-up insurance exists or has ever existed.

Subcontractor Warranty Endorsement

No warranty in any application was signed by the subcontractor. However, a condition precedent for coverage for the subcontractor required any sub-subcontractor to provide limits equal to or exceeding those of the subcontractor, plus name the subcontractor as an additional insured. In this instance, the sub-subcontractor had limits exceeding those of the named insured, but there was no working agreement nor additional insured language.

An Uninsured/Underinsured Subcontractor Limitation

This endorsement required the subcontractor to obtain coverage on any sub-subcontractor equivalent to the type and limits imposed on the subcontractor. Failure to obtain this coverage on any sub-subcontractor voided the subcontractor's insurance for claims arising from the sub-subcontractor's activities.

A Rigger's Liability Exclusion

In this example, the subcontractor did use hoists in its work. This exclusion was uncommonly severe in that it excluded both "bodily injury" and "property damage" claims, creating a major uninsured "bodily injury" exposure.

An On-Hook Exclusion

The on-hook exclusion was limited to "property damage" to property in the care, custody, and control of the subcontractor. Unlike the severe rigger's liability exclusion, these items were excluded in the CGL policy form.

A Total Pollution Exclusion

The limited pollution coverage found in exceptions in the standard form CGL is important to contractors. It was eliminated.

An Underground Utility Locations Warranty

This endorsement requires the named insured to obtain proof, in writing, that all underground lines, pipes, cables, and underground utilities were identified. This was unusual in that the named insured, a subcontractor, was required to obtain documentation of information normally performed by the primary contractor.

A Specified States Exclusion

On this account, the named insured had had operations in an excluded state.

Additional Limiting Endorsements

The policy had additional limiting endorsements and exclusions, including the following.

  • Work on residential property
  • Cross-suits
  • Engineers and architects
  • Silica or silica-related dust
  • Exterior insulation and finish systems
  • Mold or mildew
  • Employment practices
  • Asbestos
  • Lead
  • Nuclear energy
  • Terrorism

What Coverage Was Included?

A careful reading of the CGL policy in view of the named insured's operations, notably there being a service subcontractor on wrap-up projects, essentially limited the CGL insurance to the subcontractor's parking lot, equipment yard, office, and warehouse. The CGL premium, being over 15 percent of an account well in excess of $300,000 annual premium, was striking in that premiums were paid for work in multiple states while coverage was expressly excluded on many of their sites. The named insured had continuing work for large national firms where wrap-up programs either were—or had been—in effect.

One Last Task on the Last Day

On the last day of a project, the subcontractor needed a small item welded in place. The subcontractor's welder had left the project to return home the day before. At 6 a.m., the subcontractor contacted its metals supplier and asked if they had a welder available for a simple and final small weld. The welder arrived on site about 7 a.m. and started the quick job. There was no working agreement between the metals supplier and the subcontractor.

A fire broke out during the weld, causing a six-figure property damage loss. The subcontractor's CGL provider invoked the wrap-up and subcontractor warranty endorsements and denied the claim. The metals supplier CGL provider denied coverage as the welder was following the instructions of the subcontractor's personnel.

A High Price for the Subcontractor

The subcontractor quickly discovered that it was responsible for erecting a temporary structure to be followed by a permanent replacement structure. The firm was in position to erect the temporary and replacement structures from its own resources.

When the general contractor discovered the subcontractor's insurance was worthless, the general contractor terminated the subcontractor from any other work for 2 years. The general contractor and the Fortune 500 company had represented approximately 40 percent of the subcontractor's work for over a decade.

The COI Looked Fine

However, a careful reading of the CGL policy, and the many pages of limiting endorsements and exclusions, found it to be nearly worthless.

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