Construction general liability policies are expensive in today’s market. In response to this, insurance underwriters have attempted to make policies less expensive. Insurance companies do this by adding exclusions to policies which limit the instances where a carrier may have to pay.
How exclusions make insurance less expensive
So for example, projects for new residential construction result in far more claims than residential remodel projects. Therefore, if a contractor only performs residential remodels, adding a new residential construction exclusion to the policy will likely make the policy much less expensive and make sense for that contractor. In a perfect world, this is picked up when the contractor fills out an application with the broker during the re-insurance process.
As the construction insurance market has become more competitive, I have seen more and more of these specific exclusions in the marketplace. Some of these include but are not limited to:
- Residential framing exclusions
- Earth movement exclusions
- Residential construction exclusions
- New construction exclusions
- Medical facility exclusions
Another common exclusion limits coverage to the type of work listed by a contractor on the re-insurance application. For example, if a contractor states on an application that he works as a framing contractor, it may not be covered if he subsequently performs concrete repairs.
Miscommunications between brokers and contractors
All too often, I have a contractor come to my office seeking help because they are being sued and the insurance carrier has denied coverage. When I look at the policy, I soon find that the policy contains an exclusion which makes no sense given the type of work performed by the contractor.
For example, I have had foundation drilling contractors with earth movement exclusions, general contractors with framing exclusions and contractors who build new homes with new residential constructions exclusions. Most of the time, these contractors had no idea that these exclusions were in their policies.
When I investigate this issue, almost always the problem relates back to miscommunications between the brokers who sold the policies and the contractors. Often the brokers did not take the time to completely understand what it is the contractors do, failed to tell the contractor what new exclusions were added to the policies to get a cheaper price and/or the contractors did not understand what information the brokers were actually seeking on the reinsurance applications.
The result can be catastrophic to a contractor’s business and may lead to malpractice claims against the brokers
Unfortunately, these miscommunications lead to terrible legal conflicts. If a contractor ends up being uncovered, they may go out of business as a result of the tens or hundreds of thousands of dollars of attorney’s fees in defending an uncovered lawsuit. The broker may also face professional negligence claims.
To address this issue, both brokers and the contractors must spend more time communicating exactly what work the contractors perform. The insurance professionals who sell constructions polices need to become more familiar with the basic aspects of construction. Finally, the contractors need to speak with an insurance attorney whenever they have any questions regarding the reinsurance process.