As the title says, insured parties on a construction project should not be afraid to notify their carrier of a claim or a potential claim. Some think by notifying carriers of claims or potential claims could have a negative impact on the insurance premiums at renewal time. While this may be true, parties, in particular, contractors and/or subcontractors pay extensively for general liability coverage and should not be hesitant to seek insurance protection.
Once an insurance carrier is notified of a claim or potential claim, their response typically falls under three different categories. The first is a denial of the claim. The second is an acceptance of the claim on which the carrier will provide a defense and indemnity. The third is the issuance of a reservation of rights to deny the claim in the future, but in the interim, provide a defense. The second and third categories are highly beneficial to an insured party. In most cases, the benefits received under either, potentially far outweigh the increased costs in an annual premium.
There is a fourth category that sometimes exists. A carrier may request additional information without accepting, denying or reserving their rights under the first three categories. The obvious interpretation of this stance is there has not been a denial and perhaps providing more information may pave the way for an acceptance of full coverage, i.e., defense and indemnity, or at a minimum, a defense under a reservation of rights.
Recently, we were involved in a case for a general contractor who was terminated on a Project for failure to prosecute the work in a timely manner. Thereafter, nearly
contemporaneously with the Notice of Termination, the owner instituted a lawsuit seeking to recover damages from the terminated contractor based upon late completion, repair of defective work, and completion costs that would exceed the terminated contractor’s contract value.
Contractor engaged our firm to defend the claim and to prosecute a counterclaim. The contractor also timely notified its general liability carrier.
Based upon the circumstances of the lawsuit, it was very unlikely the contractor was entitled to a defense or indemnity under its general liability policy due to the fact that the dispute did not concern property damage or other items that are usually covered under such a policy. It was simply a contract dispute, for which the policy did not are provide coverage.
However, the lesson here is always notify your carrier. The carrier for some unknown reason, failed to timely respond to the contractor’s Notice of Claim, despite repeated efforts by the contractor to receive a response. Well over a year after providing the Notice of Claim, the carrier, in lieu of responding, intervened in the lawsuit between the owner and the contractor with a request for declaratory judgment (Dec action), asking the Court to declare no coverage. At the time of filing the Dec action, the carrier had yet to communicate directly with the contractor, its insured, as to its position with respect to the claim.
Another year passed by and the carrier then issued a reservation of rights letter to the contractor and hired defense counsel to defend the contractor. Keep in mind the reservation of rights and engagement of the defense counsel came some two years after the lawsuit had been originally filed and notice was given to the carrier. Moreover, during that two year period, there were absolutely no changes in the owner’s position with respect to the allegations stated in the original Complaint and none of the facts that would determine the existence of coverage had changed. The contractor then counter sued the carrier for coverage and to recover the cost of defense that it had funded out-of-pocket.
The result of these efforts rendered an out of court settlement between the carrier and the contractor whereby the contractor was substantially reimbursed its attorney’s fees and costs incurred in being forced to defend itself. This settlement from a carrier, under a policy that provided no coverage whatsoever, was solely due to the carrier’s inattentiveness and failure to timely respond to the contractor’s Notice of Claim.
For these reasons, insured contractors should never hesitate to alert their carrier. The services a carrier must provide are well paid for by means of the premium, at least this is true in this instance.
Everything within this newsletter is for informational purposes only; it is not and should not be considered legal advice. Laws may have changed or be interpreted differently depending on the facts of your specific situation. Do not send us private or confidential information until you have obtained written confirmation from us that we have agreed to accept the engagement.