Insurance coverage is an integral part of the construction process. The contract documents rely on insurance to facilitate the risk allocation and risk transfer needs of the project. These contractual specifications lay out the types of coverage, policy limits, and policy terms required. Many people engaged in the construction industry view insurance procurement as a commodity based proposition.
In that sense, coverage is perceived as being equal from carrier to carrier with the only variable being pricing. This means that many people are purchasing insurance based on price alone without a thorough understanding of what they are getting for their money.
Consider how that worked out for the contractor and subcontractor involved in the recent case styled Skanska USA Building v. M.A.P. Mechanical Contractors. In that case, Skanska, a contractor, engaged M.A.P. Mechanical, as subcontractor, to provide certain mechanical improvements to a hospital facility located in Midland, Michigan. The subcontractor allegedly installed parts of its work incorrectly resulting in approximately $1.4 million dollars in damage to the facility. Both filed claims against M.A.P.’s commercial general liability carrier, seeking indemnification for these damages. The carrier rejected the claim, arguing, among other things, that a construction defect could not trigger coverage. In other words, the carrier claimed that there was no coverage. The Michigan Supreme Court disagreed and held that a construction defect can constitute an occurrence under a standard commercial general liability policy.
But, that is not the most interesting part. What is notable is that the same insurance company that denied these claims offered a free endorsement for this coverage. This begs the question: why was this endorsement not bound to the policy? The most likely explanation is that this policy was viewed as a commodity with no real eye towards what coverage actually existed according to the policy language coupled with a lack of understanding about the gaps in coverage that frequently exist when insurance programs are not viewed holistically.
The good news is that there are inexpensive ways to avoid the costly mistake of purchasing insurance policies that do not provide the coverage needed. Having an insurance broker that understands the issues and coverage gaps is critical. Having insurance program designs reviewed by legal counsel is also an effective way to analyze coverage before problems arise. With insurance premiums on the rise it is important to make sure that you are getting the coverages you need along with the coverages that you are paying for.
