Ever-increasing insurance costs have led to many contractors to adjust coverage in order to reduce their premium. In many instances, contractors do not even know or understand all of the exclusions in their policy. It is critical that contractors, and more importantly general contractors (GC), construction managers (CM) and owners know what the contractors' policies contain and do not contain.
One of the biggest pitfalls is the Action Over Exclusion, which can leave a GC, CM or Owner without the ability to transfer the loss to the negligent contractor. It also can leave the employer/contractor exposed having provided a contractual indemnity with no insurance coverage. The Action Over Exclusion comes into play when there is a third party over action.
The operative example is when an employee is injured on the jobsite and pursuant to law cannot sue his/her employer. He/she must recover from worker's compensation. However, he/she can bring an action against the GC, CM and/or the Owner for losses, pain and suffering, etc., that he/she cannot recover from Worker's Compensation.
The standard ISO Commercial General Liability Policy contains the following exclusion in Section I Coverages, 2. Exclusion, e. Employer's Liability:
"Bodily Injury" to:
- An "employee" of the insured arising out of an in the course of:
- employment by the insured; or
- Performance duties related to the conduct of the insured's business; or
- The spouse, child, parent, brother or sister of that "employee" as a consequence of Paragraph (1) above.
This exclusion applies whether the insured may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury.
This exclusion does not apply to liability assumed by the insured under an "insured contract"
The bolded language makes it imperative that you have a written contract with the contractor which includes the appropriate indemnity and hold harmless language necessary to trigger this clause.
If the contractor's policy is unmodified and you have an appropriately written contractual indemnity, the GC, CM and/or Owner will be insured against the third-party over action.
However, more and more, carriers are adding the Action Over Exclusion endorsement to the policy which changes the policy language by removing the bolded section. Without that section, the carrier will disclaim coverage under the exclusion.
The Action Over Exclusion, like most endorsements, is not referenced on an Acord certificate you may get from the contractor. The only way to know whether this exclusion exists is to request a list of the endorsements to the policy and review any endorsements which suggest they relate to the Action Over Exclusion.
A properly written contract and understanding and knowledge of the contractor's insurance are the only ways you can protect yourself from this scenario. For further information and/or assistance, please contact us at Greenberg, Trager & Herbst, LLP.