Construction can be a dangerous activity. Despite increased attention to job safety over the last several decades, accidents on construction sites continue to occur. These accidents frequently result in bodily injuries, property damage, project delays and resulting economic losses. As a result, those involved in construction should plan carefully not only how to minimize the risks of accidents but how to maximize their insurance and indemnification recoveries should an accident happen.
As a first step, take stock of the different types of losses and liabilities involved in the accident. These can include 1) bodily injuries, including death, 2) property damage both to the project itself and to neighboring property, and 3) project delays. Once you understand the potential losses and liabilities resulting from the accident, the next steps are to identify potential sources of recovery, including other project participants, their insurance companies, and your own insurance, to put them all on notice of the event and any claims resulting from it, and to demand defense and indemnity as appropriate. As part of this process, you will need to consult the contract documents, which typically provide for insurance and indemnity obligations, and may also provide for liquidated damages for project delays.
Liability Insurance and Contractual Indemnification
Claims for bodily injuries, wrongful death and third-party property damage should be covered under commercial general liability (CGL) policies, umbrella and excess liability insurance policies. Wrongful death and other grave injury claims should also be covered under employer’s liability (1B) coverage of workers compensation policies, which often provides unlimited coverage as required by state statutes. While establishing coverage for these claims can be straightforward, disputes generally arise over the order in which the various project participants’ liability policies must contribute to defense and indemnity costs.
These disputes arise because of additional insured requirements in the contract documents, which generally require, for example, that the owner of the project be named as an additional insured under the general contractor’s and all subcontractors’ liability insurance policies, and that the general contractor also be named as an additional insured under all subcontractors’ liability insurance policies. The end result is that various project participants may be covered for the same claims under the same policies, and the insurance companies may seek to avoid liability by arguing that their obligations do not commence until another policy has been exhausted. Although the contract documents generally provide for an order of priority, courts typically ignore those provisions and instead decide the dispute based on the “other insurance” clauses of the policies, with the end result sometimes turning out very different from what the contract documents provided. Controlled insurance programs (OCIPs and CCIPs), under which all or most project participants are enrolled in a single, project-specific liability insurance program, have cut down on these types of disputes but have not eliminated them entirely.
Your defense and indemnity demand to other project participants should also trigger the indemnitor’s contractual liability coverage under its own CGL, umbrella and excess liability policies. This is so if the indemnitor would have incurred the liability even absent its contractual indemnity obligation or the contract giving rise to the indemnity obligation is an “insured contract.” The “insured contract” generally includes an agreement under which the indemnitor assumes the tort liability of another party to pay for bodily injury or property damage to a third person or organization.
First-Party Property Losses and Project Delays
For first-party property damage (damage to the construction project itself), the owner and other project participants should look to builder’s risk insurance to pay for the rebuild of the project to bring it back to its pre-loss condition. This coverage typically covers “hard” costs such as labor and materials for the rebuild, along with various “soft” costs associated with the rebuild, including additional interest/financing expenses, real estate taxes, insurance premiums and other costs.
The builder’s risk coverage also may cover the owner and possibly others for losses arising from delay in opening (lost profits, resulting from project delays stemming from the covered accident). The owner should also avail itself of any liquidated delay damages it may be entitled to recover from the GC and others under the contract. Assuming the delays are attributable to a subcontractor, the general contractor should seek indemnification from its subcontractor, which should be covered under CGL policies as damage “because of” property damage.
These time-element related coverages and contractual obligations typically result in disputes concerning project schedule-related issues, as insurance companies and indemnitors seek to blame delays on uncovered causes or the work of other project participants. In some cases, it may be necessary to retain a scheduling expert to work through these issues or present your position in litigation or arbitration.
Proper planning at the outset of a construction project arms its participants with various risk transfer strategies when accidents occur. Navigating the labyrinth of those risk transfer strategies following an accident on a construction site can be a daunting task, rife with pitfalls. Numerous overlapping insurance and indemnification issues will arise. With diligence and the proper guidance of experienced construction insurance and indemnification professionals, however, project participants can execute on these strategies effectively in order to minimize if not eliminate losses and maximize recoveries.