Confirm Subcontractor Insurance Coverage Before Commencement of Contruction
A recent insurance case by the California Court of Appeal that denied insurance coverage to a contractor Forecast Homes v. Steadfast Insurance Company (PDF), reminds me of the wisdom of this Japanese proverb: "When you’re thirsty it’s too late to start thinking about digging a well."
It appears from the case that Forecast Homes followed standard procedure by getting its subs to name Forecast as a named additional insured in the subs' respective insurance policies prior to the start of construction. When sued for construction defects, Forecast tendered the claims to its subs' insurance company. The insurance company denied the claims and Forecast filed a declaratory relief action which, in essence, asked the court to declare that the insurance company was wrong in denying the claim.
The trial court found that the insurance company had acted properly because the policies had self-insured retentions that had to be paid by the subcontractors before the insurance company's obligations kicked in. Since the SIR limits had not been paid by the subcontractors, even though Forecast has paid defense costs that exceeded the SIR limits, the insurance company's did not have an obligation to defend and indemnify Forecast.
The proverbial wisdom contractors can learn from this case is this: "When a contractor is sued for construction defects caused by a subcontractor, it is too late to start thinking about coverage as a named additional insured on the sub's policy."
Instead of simply filing the additional named insured certificate in the project file, it would be wise for contractors to spend some time asking questions about the scope and conditions of coverage under the terms of the subcontractors' policies.Even though there are many other things that must be considered prior to construction, the benefits of fully understanding the actual insurance protection that is available will more than compensate for the time required for this risk avoidance exercises. It may also be prudent to include experienced construction insurance coverage counsel in this process.
My friend and construction insurance counselor Scott Turner of San Fransisco indicated that another avenue for the contractor to obtain insurance coverage under the facts of the Forecast case would be to file suit against the subcontrators for indemnity: " While not nearly as good as being an additional insured, the developer here may still have coverage of his indemnity claim against the insured sub." Scott is the author of Insurance Coverage of Construction Disputes (West Group 2nd ed. 2009).
