In the intricate world of construction, builders often rely heavily on insurance brokers to secure appropriate insurance coverage, and trust that they will be protected against unforeseen liabilities. However, a recent Colorado district court decision serves as a stark reminder of the perils associated with such reliance, especially when the builder’s expectations and communications with the insurance broker are not meticulously documented.
In this case, the homeowners hired a contractor to renovate their residence. The homeowners expected the contractor to possess comprehensive insurance coverage to protect against potential construction defects resulting from the contractor’s work. An insurance company, acting as the general contractor’s insurance broker, procured a policy for the general contractor at the contractor’s request. However, when the homeowners alleged that construction defects were discovered, the insurance company denied coverage, citing multiple policy exclusions. In addition to pursuing legal action against the general contractor, the homeowners also pursued claims against the insurance broker, alleging failures in securing adequate insurance and misrepresentations regarding the scope of coverage.
The insurance broker moved for summary judgment, which the court granted, ruling in favor of the insurance broker. When the homeowners moved for reconsideration of summary judgment, the judge emphasized that there was no indication the homeowners had given the insurance broker explicit directives regarding the desired scope of coverage and that there was no mutual understanding or agreement between the parties concerning the insurance coverage’s limitations.
This case emphasizes several critical takeaways for builders and contractors:
Do Not Soley Rely on an Insurance Broker
Here, the contractor believed it had coverage for the renovation project based on the broker’s representations. However, exclusions in the policy (like subcontractor exclusions) led to denial of coverage. Always review the insurance policy, or have it reviewed by knowledgeable coverage counsel – even if working with a trusted broker.
Understand Key Exclusions in Commercial General Liability Policies
Coverage can be denied for a myriad of reasons, including exclusions specifically prohibiting work in specific states. Know which exclusions in the proposed insurance policy could apply to the work and whether those exclusions are standard in the industry or negotiable. Consider whether the exclusions could apply to potential claims.
Avoid Assumptions
Just because a builder has obtained similar policies through a broker before does not mean that coverage will remain the same in a new policy. Every new policy should be reviewed in full, even if issued by the same carrier or broker.
Communicate Clearly and Document Requests
Builders should articulate their needs explicitly to brokers, ensuring that all parties have a mutual understanding of coverage needs. Put all insurance-related questions and instructions to brokers in writing as this documentation can serve as vital evidence if coverage disputes arise.
Regular Updates
As projects evolve, so do associated risks. Regularly providing information to the broker/carrier about current project status should result in continuous and comprehensive protection.
Higgins, Hopkins, McLain & Roswell does not practice coverage law. However, we encourage our clients – and all builders and contractors – to prioritize securing comprehensive and appropriate insurance coverage and to actively review policies suggested by insurance brokers. Doing so is critical, especially in the event of a construction defect claim.
