TAKING THE FALL
Should coverage apply to injuries
sustained because of faulty work?
It appears to us that the decision was based on the insured party’s not fulfilling clear requirements.
That is a technicality that should not justify a coverage dispute.
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
By Bruce D. Hicks, CPCU, CLU
What an interesting dispute! Cincinnati Specialty Underwriters Insurance Company v. Best Way Homes, Inc. involves consequences stemming from a subcontractor’s completed work. What happened? Well, in summary, a home builder/general contractor performed a home renovation and used a smaller contractor to build a staircase. Several years later, a worker hired by the homeowner was injured when he fell from that same staircase when it separated from the home. The injured worker sued the homeowner and the home builder. Ultimately, the attempt to secure reimbursement for the injuries failed. The courts hearing the case ruled that a policy exclusion regarding use of subcontractors blocked any obligation for covering the loss.
Specifically, the CGL policy that covered the general contractor included some requirements. In order for coverage to be considered for losses involving subcontractors, the policyholder was obligated to assure that all dealings with subcontractors were in writing, that they carried specific liability and completed operations limits, that the coverage was maintained for a certain period, and that the policyholder was named as an additional insured. Further, the agreement included a provision to hold the policyholder harmless and defend them against any claims and, finally, that any and all coverage was excluded unless all of the requirements were met.
We freely admit that our opinion is a legal version of armchair quarterbacking and, in that vein, we view this as an unfortunate case. In the end, the higher court disagreed with the general contractor’s and injured subcontractor’s arguments that the insurer was not prejudiced by the timing of the claim and that it involved negligent hiring/supervision rather than work/completed operations. Instead, the court ruled in favor of the insurer, agreeing with its position that coverage was excluded because of noncompliance.
Both parties spent time and financial resources in more than one court to reach a decision that misses some points. It appears to us that the decision was based on the insured party’s not fulfilling clear requirements. That is a technicality that should not justify a coverage dispute. But court decisions revolve around the arguments that are actually made, rather than whether better arguments could have been made.
Technically, the policy offered a solid method to address its coverage approach with subcontractors, including reference to specific limits and endorsements. But the situation ignores elements that are quite important in determining whether coverage should apply to the injuries sustained because of faulty work. Let’s remind our readers that all opinions are presented for your consideration.
Is the concept of public policy ignored in this case? In essence, the insurer and the courts, at least partially, embraced a technicality to justify a decision that withheld coverage. Were there requirements concerning the need to secure written agreements with subs or independent contractors? Yes. Did the contract have to meet both financial and coverage parameters? Yes. Did the agreement have to stay in force for an amount of time after it is first established? Yes. Was coverage excluded if these elements were not met? Yes.
In light of this, it may appear that the coverage denial was supported. That’s the danger of allowing technicalities. As a matter of course, facts that are minor and/or out of context can make them irrelevant in regard to the greater purpose of the proper function of insurance.
Policy ambiguity may be an issue. While the policy had requirements that the insurer and the courts believe were clear, straightforward wording must be accompanied by the ability to properly apply it to losses. In this instance, the policy did not contain information on when its provisions applied. If it were to apply at original policy inception, should it not include consideration of its own provisions?
The policy does not appear to align with contract construction. If a loss occurs and it falls within the type of loss that is eligible under the policy, it should be considered an ambiguous situation if a common element goes unaddressed or is overlooked by policy wording. Specifically, there appears to be a defect with what is an occurrence.
So, is coverage logically triggered? Ideally, protection is applied when loss details match policy requirements. If a policy is occurrence based and an event falls within a policy period, everything is fine. If there are conditions or requirements regarding timing of an event, then a simple occurrence may not be sufficient. A claims-made contract can add loss timing consideration. However, a policy written on an occurrence basis cannot react to losses that include inconsistent timing requirements.
In this instance, is it justified to deny a loss that is eligible except for want of the policyholder being incapable of controlling time? The policy did not include wording that considered business that it accepted and wrote for less than two years. Even if every insured complied with all contract requirements, at best, coverage would apply only on a rolling two-year basis. No coverage would be allowed for any occurrence that involved a contractor that did not use a complying written agreement before securing a policy with the particular insurer.
It’s maddening that policies with such holes could be filed, approved, sold and then enforced. Realistically, so many policies work as intended; they are properly written and applied in a way where losses are evaluated and handled in a way that is logical and justified. However, as insurance professionals, we all should be aware of our responsibilities to ourselves, our employers, regulators and our insureds. Sometimes we must dig a little deeper.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company, Inc. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.