In the construction industry, insurance policies have become a necessary, if not required, part of doing business, and your policies now cover a variety of risks such as worker's compensation, employer's liability, automobile, property and third-party liability. As the proud new owner of a German shepherd puppy, I have concluded that insurance policies are like dogs. You see, like our canine friends, insurance policies come in all shapes and sizes and offer many different types of protection. And, overall, you just feel good at night knowing they are there. You simply must determine what type is most appropriate for your needs, find it, and then give it lots of love and attention so that it doesn't "chew your shoes," so to speak.
Although several different types of policies may ultimately be appropriate for your business, this article will focus on what I like to think of as the "German shepherd" of insurance policies the policy that protects you from third parties, traditionally known as the commercial general liability policy (CGL Policy).
The CGL Policy
The CGL Policy provides defense and indemnity coverage to your business for covered third-party liability claims. It can provide coverage to you for the unexpected and unintended harm allegedly done to others in the course of your business. The typical CGL Policy contains a Declarations Page, Policy Jacket and Endorsements.
The Declarations Page sets forth the name and address of your business, the effective dates of the policy and its limits of liability. The Policy Jacket contains the Insuring Agreement, and the specific conditions, definitions and exclusions of the policy. Endorsements are affixed to the Policy Jacket and represent changes to your policy.
A CGL Policy can provide primary insurance, which will afford defense and indemnity coverage up to the applicable limit of liability for covered third-party claims. Like its name suggests, an umbrella CGL Policy provides coverage over and above the primary CGL Policy upon the exhaustion of the primary CGL Policy's applicable limits of liability, and may, under certain circumstances, provide for a defense obligation in addition to the duty to indemnify. An umbrella CGL Policy frequently affords coverage that is broader than that afforded at the primary level. Finally, an excess CGL Policy provides coverage in excess of and upon the exhaustion of underlying primary and umbrella limits, and typically does not contain a defense obligation, but rather, provides only for indemnification of covered third-party losses.
The Underwriting Process
The discussions and negotiations leading up to the issuance of a CGL Policy are known as the underwriting process, and an insurance broker can assist you with your efforts in this regard. During this process, it is typical for a potential policyholder to be given an application that requests specific information. It is very important that you provide full and complete information on the application, as the failure to do so may afford the carrier a number of defenses (i.e., misrepresentation) that could render the policy void.
Although there are a myriad of factors to consider when negotiating a CGL Policy, one important consideration is who will be the "named insured" on the policy. In addition, you must consider who will be provided coverage as an "additional insured" and/or qualify as a "named insured" based on the definition set forth in the Policy Jacket. Other important considerations include the type of coverage (primary, umbrella and/or excess) and the limits of liability (including aggregate limits, retained limits and deductibles) that best suit your business.
In addition to the above considerations, you should fully review your CGL Policy to determine whether any additional provisions may impact your business. Of interest to the construction industry, the CGL Policy contains specific definitions and exclusions that deal with terms such as "property damage," "bodily injury," "products," "work" and "completed operations," all of which may effect the scope of coverage for certain types of claims. For example, "property damage" generally includes physical injury to tangible property or the loss of use of tangible property, as opposed to claims for merely "lost profits" or other "economic loss." Further, the CGL Policy typically does not respond to claims for "faulty workmanship." Finally, your CGL Policy also sets forth your duties and obligations as an insured under the policy, and these duties will play an important role should a claim or lawsuit arise for which you later seek coverage. Indeed, a number of defenses are afforded carriers based on a failure to comply with these important provisions, and as a result, you should familiarize yourself with them during the underwriting process.
Once the CGL Policy has been negotiated, a Certificate of Insurance will be issued to you. This is not the insurance policy; rather, it memorializes the significant terms and conditions of the policy and is evidence of the coverage that was negotiated. Once the CGL Policy is issued, it becomes the "contract of insurance" between the parties and represents the parties' entire agreement as to the nature and scope of the CGL Policy.
The Claims Process
Unfortunately, more likely than not, you will be on the receiving end of a claim or lawsuit at some point, if for no other reason than you were at the wrong construction site at the wrong time. Even in the case where you were merely named (along with every other contractor and subcontractor) as a defendant in a lawsuit based on your presence at the job site, it is imperative that you properly and promptly handle the process of making a claim under the policy.
Once you receive a claim or are served with a lawsuit, forward written notice to your CGL carrier as soon as possible. Throughout the claims process, it is important to err on the side of providing as much information as possible as soon as possible. Delay in this regard can afford the carrier with a possible defense to coverage under the policy and, in some jurisdictions, the carrier need not establish prejudice to prevail.
Upon receiving notice of the claim or lawsuit, the carrier will perform an investigation and issue a written coverage determination. In theory, a primary CGL Policy will be the first to respond to a new claim or lawsuit, and as a result, the carrier must determine whether there is a potential duty to defend. Because the duty to defend is broader than the duty to indemnify, it is not uncommon for carriers to provide a defense to the claim even if significant questions exist at that time as to whether or not the claim will ultimately be indemnified under the policy. Umbrella and excess policies are potentially triggered only after all applicable underlying coverage has exhausted by the payment of covered claims. Accordingly, you should consider the potential value of your claim, and notify all carriers whose limits may be impacted, even if only under a worst-case scenario.
Typically, the insurer's coverage determination will be to: 1) defend you; 2) defend you under a reservation of rights; or 3) deny coverage. In many instances, the carrier will also issue a request for additional information, either prior to or at the time that it issues its coverage determination. It is important that you comply with such requests as completely and promptly as possible, as the policy also imposes upon you the duty to cooperate. Should the carrier agree to defend you in the litigation, the CGL Policy will dictate the terms of the defense.
In addition to the duty to defend, your CGL Policy may indemnify you for any judgment or settlement of the claim or lawsuit. The duty to indemnify is also impacted by the terms, conditions and exclusions of the CGL Policy. For example, the CGL Policy routinely excludes damages that are the result of the insured's intentional conduct. As a result, that portion of any judgment or settlement that is based on such conduct will not be afforded coverage. Many CGL Policies also exclude coverage for punitive damages, and as a result, any portion of the judgment or settlement that includes such damages will likewise not be covered. The carrier will memorialize its position on these issues in its coverage determination.
Finally, there will be situations where the parties question or disagree as to whether the CGL Policy provides coverage for a particular claim or lawsuit. In those situations, one or both of the parties can seek a "declaratory judgment" from the court as to whether or not the CGL Policy provides coverage for the underlying claim or lawsuit at issue. In this situation, both parties will retain, at their own expense, separate insurance coverage counsel to represent them in the insurance coverage litigation.
Although many different types of insurance coverage may be appropriate for your business, the CGL Policy is a fundamental type of policy that can protect you in the event of a covered third-party claim. In closing, and in answer to the burning question will you sleep more soundly knowing that your CGL Policy is on the watch? Possibly. The better question will you sleep more soundly knowing that your German shepherd is on the watch? Absolutely. Although mine still chews my shoes every now and then...
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