Reliance on Insurance Brokers: A Cautionary Tale
The need for appropriate levels and types of insurance coverage is critical for any party involved in a construction project. Despite the importance of procuring construction insurance, all too often parties do not pay enough attention when securing coverage on a given project.
We sometimes hear from clients that they: (1) rely solely on brokers to procure insurance for projects, and (2) fail to review, or have counsel review, the relevant policies to confirm that such brokers secure the appropriate coverage. Such reliance can have catastrophic consequences, as illustrated by the following example.
Client A, a developer, engages an insurance broker to procure insurance for the construction of a new 50-story residential building in Manhattan. The appropriate level of insurance to protect Client A is $100 million. However, the insurance broker secures insurance with a limit of only $10 million; because Client A fails to read its policy, or have counsel review such policy on its behalf, the error goes undiscovered. During construction, a crane collapses causing serious injuries to multiple workers.
Based on the foregoing hypothetical, the insurance company’s maximum liability is only $10 million. Thus, if the injured workers are entitled to damages that total $20 million, Client A’s out-of-pocket exposure is $10 million (this would not be an issue if Client A’s insurance had a $100 million limit).
While Client A might seek to sue its insurance broker, in New York, courts have dismissed many such actions, citing concern that permitting such lawsuits could result in complicated and undesirable litigation.
As illustrated above, it is of paramount importance to review all insurance obtained in connection with any construction project. We encourage each of our clients to not merely rely on its insurance broker, but also undertake (or have counsel undertake on its behalf) an independent review to ensure that appropriate coverage has been obtained.