Construction Litigation Puts Agents at Risk

Construction is an inherently dangerous activity. Hundreds if not millions of dollars are at stake with each project, and if something goes wrong, contractors often look to their insurance to cover claims. When that happens, tension between the insurer and insured is normal, and the agent/broker will be right in the middle of any conflict, according to Robert Freedman, partner at Tharpe and Howell.

“It’s natural for the insured to want as many benefits as he or she can have, and for the insurer to want to pay as little as it can. And the agent/broker is right in the middle of that three-party business relationship,” he said. Consequently, it’s important for agents/brokers to understand the risks in dealing in construction insurance.

“One out of eight of you in this room will get sued,” Freedman told the audience at a recent Contractors and Builders Conference in Sacramento. “You have to practice defensively to make sure you don’t get sued.”

Among the risks facing contractors are risk of injuries, property damage, post construction, labor issues, employment issues, economic risks, and the “benefit of the bargain,” where the contractor has promised a product to deliver.

The top reasons contractors are sued are:

• Job-site related injuries and damages;
• Delays and cost overruns;
• Contract disputes;
• Abandonment;
• Defective construction; and
• Labor/employment issues.

Typically, when a project is constructed and injury or damage occurs, a claim is made and investigated. To determine insurance coverage, a lawsuit or demand for arbitration will be filed. The parties being sued obtain counsel, secure defense and respond to the complaint.

Then the investigation begins, where documents, witnesses, insurance experts and responsible parties are examined — all of which incurs costs. And that doesn’t include the costs for claims staffing and consultants and vendors, defense counsel, declaratory relief contributions, experts for each major trade of discipline involved, ADR professionals, testing, inspections, copying and court reporters. Add to that loss of productivity and lost business opportunities; conflicts among business associates/partners; personal exposure with SIRs, deductibles and uninsured loss; loss of coverage and increased future premiums; and costs for payment of staff, personal counsel, and the dollar tally seems nearly limitless.

“There are several entities involved in litigation, and it’s coming out of someone’s pockets,” Freedman said. “A lot of people have an interest in construction litigation. If you look at all parties involved, you’ll understand why litigation goes on and on.”

Freedman said only a certain amount of risk is insurable, but from a client’s perspective, “they think, ‘I bought insurance, so someone should pay for it.” But that’s not happening any more, he said. And that confusion on coverage can lead to the agent or broker being sued.

Consequently, an agent’s role is critical before a project has even begun — in selling risk management, Freedman said. “It’s the agent/broker’s job to find coverage that meets the expectations of the insured,” he explained. The agent or broker should understand that his or her relationship with the client involves hundreds of millions of dollars. As such, it’s imperative that the agent does not bind the insurance company without permission to coverage it does not want to pay for.

The No. 1 reason claims arise against agents/brokers and they are sued in the construction market is because they failed to procure the appropriate coverage, Freedman noted. National statistics indicate that this most often occurs during a renewal period. Following the renewal period, claims most often occur with new business with new customers, then new business with existing customers, then a mid-term policy change.

“During a renewal period, an agent can lose touch (with the client) and may fail to communicate between the insured and insurer,” Freedman explained.

Claims against agents can result from negligently obtaining the wrong coverage, failing to adequately explain policy provisions or advise the insured of important exclusions, failing to adequately identify exposures, or misrepresenting coverage, he added.

Ultimately, in dealing with contractor insurance, the agent/broker should recognize that he or she has liability exposure to both the insured and the insurer. As such, Freedman advised that anyone who wants to sell such insurance specialize in the field. Without the appropriate expertise in the field, it is doubtful an agent or broker would have the required amount of knowledge of construction and associated risks, risk management, risk transfer, and appropriate insurance coverages to avoid making errors, he said.

Construction insurance specialists must take an appropriate standard of care, he added, because actions will be expected to adhere to codes, company guidelines, and be compared to previous experiences. And to avoid incurring a claim themselves, agents and brokers should define to the client what their role in the process is, successfully understand the relationship, and keep a paper trail in writing, Freedman concluded.

Freedman was a speaker at the Contractors and Builders Conference in Sacramento organized by the Insurance Skills Center. ISC offers a Certified Construction Insurance Specialist designation. For more information, visit www.insuranceskillscenter.com.