Coverage Gaps New Owners of General Contractors Find

The gaps worth hunting for first sit in the endorsements and exclusions, not in missing policies. Start with five. A subcontractor exception may have been removed, which is the clause that can pay when a sub's work damages a finished job. Additional insured status, which protects an owner or lender under your policy, may end when the job does. An indemnity promise may no longer be backed by the policy. Design-build work may fall under a professional services exclusion. And subcontractor certificates may prove less than they seem to. This guide shows how each looks on paper and the usual fix, for buyers of a general contracting company who know the core policies.

Which gaps should a new contractor owner check first?

The table lists nine places where an inherited program commonly needs a second look. Form numbers belong to the commercial general liability (CG) family published by ISO. Carriers can use their own forms or equivalents, so look for the idea, not only the number. Only your policy can say whether a given endorsement is on it.

If a sub's bad work damages a finished job, does my policy pay?

Most general liability forms exclude damage to "your work" after you have finished it. A general contractor's policy usually carries a subcontractor exception to that exclusion, so damage to a finished project caused by a sub's defective work may be covered depending on the policy. An endorsement can take that exception away. Published form descriptions of CG 22 94 say resulting damage to other parts of the finished project is then no longer covered, while bodily injury and damage to other property are not affected. The same descriptions say the endorsement is most often seen on homebuilders and condominium developers, and that contracts requiring completed operations coverage on the standard form "or equivalent" may not be satisfied with it on the policy.

Two limits keep this in proportion. The cost to repair the defective work itself is generally never covered, with or without the endorsement. And whether a construction defect claim is covered "has been heavily litigated," according to the International Risk Management Institute (IRMI), so do not conclude anything from a form number alone. Ask the carrier how it treats a sub's work, and ask a construction coverage attorney about your state.

Will my policy protect the owner after the job is finished?

Additional insured status (an owner or lender gets protection under your policy) is added by endorsement (a page that changes the policy). The ongoing operations endorsement covers the additional insured for injury or damage caused, in whole or in part, by your ongoing work at the scheduled location. Completed operations is usually a separate endorsement. According to published descriptions of the form (CG 20 10), the ongoing operations endorsement does not cover the additional insured's own sole negligence and never increases limits. Ask the carrier whether its completed operations wording works the same way.

A hypothetical example. A commercial owner's contract with your company requires additional insured status for completed operations and primary and noncontributory wording. The policy you inherited carries the ongoing operations endorsement and nothing for completed work. The owner's lawyer rejects your certificate two weeks before final payment. You now need the right endorsements from your carrier and a decision on who absorbs any gap in the meantime. Checking the endorsement schedule in the first month would have left time to compare options.

What each customer asks for, and the certificate side of it, is covered in contracts, licenses and bonds for a general contracting company and additional insured, waiver of subrogation and primary wording for new owners.

What if the seller did design-build or preconstruction work?

Design and engineering are a common gap in a contractor's liability program. The ISO exclusion CG 22 79 removes coverage for injury or damage that arises from engineering, architectural or surveying services. That covers services you provide to others and services you hire independent professionals to provide on your own construction work. It applies even when the claim alleges negligent supervision or hiring. A related form, CG 22 80, is described as different because it does not exclude services hired in connection with your own construction work. Whether either form is on your policy, and how the wording treats how a job is built and supervised (called means and methods), can only be answered by reading the actual wording. Ask the carrier in writing.

If the seller advised owners on design or took design-build contracts, ask for professional liability coverage. That policy is usually claims-made, which means the retroactive date matters: a replacement policy that starts its retroactive date at your closing date generally does not respond to older work. Read new owner review of professional liability and prior acts and tail coverage.

What if my subs' insurance is thinner than their certificates look?

Three gaps recur in the paper behind a contractor's subs.

• Workers' comp. The standard policy counts what you pay other people who do work that could make your insurer liable. If a sub has not lawfully secured its own coverage, your insurer can add that pay to your premium base at audit. The workers' comp and payroll guide has the detail.
• Liability. A sub's own policy matters most when it names you as an additional insured, with primary wording and a waiver where the contract promised them. Ask for the endorsement pages.
• Waivers that do not match. The waiver needs an endorsement on each policy the contract names (general liability, auto, workers' comp, umbrella) and must be made in writing before the loss.

You inherit whatever certificates and written subcontracts the seller collected. See do your subcontractors carry required coverage and contractual risk transfer for subcontractors.

Do the seller's finished jobs follow me?

Some gaps come from how the sale was structured, not from any endorsement.

• Old jobs. The standard form defines "your work" as work performed by you or on your behalf, with no matching language for a predecessor whose business you bought. Get the carrier's treatment of the seller's finished jobs in writing.
• Timing. An occurrence policy responds to damage that happens during its policy period. Damage that began before your policy and continues may be treated as known, and the seller's older policies may be the ones that respond.
• Long tails. California, for example, bars most latent defect lawsuits after 10 years from substantial completion under Code of Civil Procedure section 337.15, and other states set their own limits.

Buyers discuss tail coverage, the seller keeping coverage for discontinued operations, and indemnity or escrow with counsel. Start with completed operations claims from the seller's past jobs and stock vs asset deal: who covers old claims.

How do you decide which gaps to close first?

Work from evidence in this order: pull the endorsement schedule, line it up against your largest contracts, order the mismatches by what a loss would cost you, and ask the broker to quote fixes for the top few. A gap that no contract requires may be a risk you accept rather than a premium you add. A Morrow review can do the comparison and request quotes, but new terms depend on carrier underwriting, and a quote is not coverage until a carrier binds it.

If cost is your main worry, see what drives insurance cost for a general contracting company. For the core policy stack, go back to what insurance you need after you buy a general contracting company.

Keep reading

• Just Bought a General Contracting Company? What Insurance Do You Need?
• Contracts, Licenses and Bonds for a General Contracting Company
• Completed Operations Claims From the Seller's Past Jobs: Who Pays?
• Insurance Exclusions That Quietly Kill Coverage
• Do Your Subcontractors Carry the Coverage Your Contracts Require?
• All guides for new business owners

Frequently asked questions

Which gap should I check first?

Start with the endorsement list against your largest contracts. Mismatches on additional insured status, completed work and indemnity are common causes of rejected certificates and disputes.

Does general liability cover damage caused by a subcontractor's defective work?

It may, depending on the policy. Many contractor policies carry a subcontractor exception to the damage to your work exclusion, but an endorsement can remove it. The cost to repair the defective work itself is generally not covered. State law and the facts also matter.

My lender and a customer both asked for different endorsements. Which do I fix first?

Start with the one tied to the next payment or loan covenant, then work down. A broker can help rank them, but only the carrier can add an endorsement.

Do I need professional liability if I do design-build work?

You should ask. Some liability policies carry an exclusion for design and engineering services, so check yours. A separate claims-made professional liability policy, with a retroactive date that covers prior work, is the usual question to raise with a broker.

How do I tell if my policy has CG 22 94 or CG 21 39 on it?

Look at the forms and endorsements schedule, a list of form numbers attached to the policy, usually after the declarations page. Ask your broker for a plain list of every endorsement and what it does, because carriers can use their own form numbers for the same idea.

References

• InsuranceXDate: CG 22 94, Exclusion, Damage to Work Performed by Subcontractors
• InsuranceXDate: CG 22 79, Exclusion, Contractors, Professional Liability
• InsuranceXDate: CG 21 39, Contractual Liability Limitation
• InsuranceXDate: CG 20 10 and CG 20 37, additional insured endorsements
• InsuranceXDate: CG 20 37, Additional Insured, Completed Operations
• InsuranceXDate: CG 24 04, Waiver of Transfer of Rights of Recovery
• IRMI: Construction defect
• IRMI: Waiver of subrogation
• California Code of Civil Procedure section 337.15
• NCCI: Workers Compensation and Employers Liability Insurance Policy, WC 00 00 00 C (Part Five, section C)

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.