3 GL Endorsements That Generalist Agents Overlook When Dealing With Contractors
Many agencies have a portion of their client base performing construction operations, and while the premium and resulting commissions can be good for the agency, there are several exclusions involved that can potentially leave a client high and dry when a claim arises. It’s important to understand what these exclusions are and the impact that they could have on your insured.
Sunset Clause: Limits the filing of a claim within a set timeframe after the expiration of the policy. For instance, two years after the policy has expired. Given that most construction defect claims take over five years to develop, the insured has a high likelihood of an uncovered claim.
Let’s take a look at an example. A foundation contractor finishes construction on a new home in 2015. His general liability policy contained a 2-year sunset clause, and he faithfully paid his premium year after year. In 2019, he was sued for a construction defect on the home built in 2015. He subsequently filed the claim with the insurance carrier, and unfortunately, the claim was denied because it was reported after the sunset clause date.
Prior Work Exclusion: Eliminates coverage for injury or damage resulting from the insured’s work that was completed before a stated date. Now, this exclusion can be a bit more complicated and requires more of an explanation. Most general liability policies are written on an occurrence form. This type of policy form covers claims arising out of damage or injury that took place during the policy period, regardless of when claims are made. Many occurrences happen years after a construction project was completed. Contractors with prior work exclusions are often surprised when these claims arise years later, and their claim is denied.
Let’s take a look at an example. A plumbing contractor was insured with Awesome Insurance Co. from 2013 through 2018. In 2015, she installed plumbing on a new custom home. Now, fast forward to the end of her policy term in 2018, and the insurance company lets her know that they are increasing her premiums by 20%. Her agent panics and places her with another insurance company at the same price as her expiring policy, but the policy contains a prior work exclusion. Without fully understanding this exclusion, the agent places the plumbing contractor with the new carrier and fails to inform them in the material differences of the two policies. Midway through 2019, her agent receives a call that the pipe that was installed back in 2015 burst and flooded the home. The agent turns in the claim and several days later, receives a response denying coverage as a result of the project being completed prior to the new carrier’s policy term. The 20% premium increase was a fraction of the cost of the claim, and the agent is going to have to deal with one angry insured, let alone a potential E and O claim.
Designated Work Exclusion: Excludes specific types of work being performed by an insured. This exclusion ended up causing lots of problems for contractors left reeling after the Great Recession. The housing market dried up and the contractors bid on other work that they normally would not have performed to make up for the losses.
Let’s take a look at an example. A flooring contractor who exclusively worked on custom homes prior to the recession in 2008 was looking for more work outside of his usual scope of work. He bid on a condo project, which was one of the few remaining opportunities to keep his company afloat. He reached out to his generalist broker to see if performing work on condos would be okay, and the broker assured him that it wasn’t a problem. The developer of the project was pushing to get the project completed as soon as possible, which led the contractor to cut corners in an effort to complete the job. As a result, the flooring started to curl upward in one spot and one of the new homeowners tripped and split her head open. She required 30 stitches and was suing for $150,000. The contractor turned the claim into the carrier only to discover that his policy contained a designated work exclusion containing an exclusion for work performed on condos. The broker failed to double check the policy before providing the contractor with the answer, and as a result, the claim was denied and yet again, an E and O claim arose in its place.
These 3 examples are not only important to be aware of, but they should serve as a catalyst to spark some concern. It would be wise to remember these examples when you work with contractors, and if you want to learn more about insuring contractors, IRMI’s CRIS Designation program is a great way to go.