What?! I thought being named as an additional insured gave me coverage for any defective construction by my subcontractor.

Contractors frequently require subcontractors to specifically name the contractor as an additional insured in the subcontractors’ commercial general liability (CGL) policies. The "proof" of compliance frequently provided to the contractor is the Certificate of Insurance. Contractors can generally rely upon benefits of being an additional insured when there is a problem with the subcontractor’s work that causes property damage. It may also provide the contractor with the cost of a defense where it has been sued by the owner for the subcontractor’s defective work and property damages. However, timing is critical. Both the Mississippi Supreme Court and the Firth Circuit Court of Appeals have opined that "ongoing operations" coverage may not give the contractor coverage as an additional insured for damage that arises after the subcontractor has completed its work.

In Noble v. Wellington Assoc., Inc, [Link to Decision] the contractor hired a subcontractor to perform site work for a home. After the home was completed the owners experienced settlement and substantial cracks in the home. The contractor claimed the insurance carrier had a duty to defend it against claims for defective construction under the subcontractor’s CGL policy as an additional insured. The insurer argued that the defects did not develop until after the subcontractor had completed its site work and there was no duty to defend or coverage. The contractor argued it was the subcontractor’s "ongoing operations" during construction that ultimately resulted in the damage to the home. The Mississippi Supreme Court concluded "in order for ‘ongoing operations’ to have any meaning, it cannot encompass liability arising after the subcontractor’s work was completed".

The same conclusion was reached by the Fifth Circuit Court of Appeals in Carl E. Woodward, L.L.C v Acceptance Indemnity Insurance Company. [Link to Decision] Here, the allegation was that the subcontractor’s failure to comply with the plans and specifications caused the construction defect which manifested after a condominium complex was completed. The subcontractor’s additional insured endorsement limited coverage to "ongoing operations". The Fifth Circuit found, much like the Court in Noble, that "liability for construction defects, while created during ongoing operations, legally arises from completed operations." The contractor was therefore left to pay the defense cost when it believed it would be protected by the subcontractor’s additional insured endorsement.

The lesson to be learned from these decisions is that contractors must obtain a copy of the insurance policy and additional insured endorsement to ensure that there is coverage not only for "ongoing operations" but also "completed operations". Relying upon a certificate of insurance alone as evidence of coverage may lead to an unhappy finding that there is no coverage at the very time you need it. Further, absent an additional insured endorsement that includes "completed operations" coverage, the contractor may be left without the insurance coverage for defective construction by its subcontractor.

Claims for Construction Defects--Where did I put my insurance policy?

Mississippi contractors should know that Mississippi law (§15-1-41) allows a party to bring suit for defective construction within six (6) years “after the written acceptance or actual occupancy or use, whichever occurs first, of such improvement by the owner thereof.”   The last thing a contractor wants to be confronted with, especially if the contractor is no longer in business, is a demand or lawsuit to address allegedly defective work. This scenario may not have seemed likely five years ago, but with the downturn in the economy, many contractors are being forced to close their doors.  Don’t panic—yet. Your insurance or that purchased by your subcontractors where you were identified as an additional insured may provide you with defense and indemnity protection. 

When you do get a demand or served with a lawsuit from a former client alleging defective construction, you should contact your legal counsel and insurance agent. Your legal counsel can advise you how to respond to the demand or lawsuit and your insurance agent can help you find the policy in place when the project was constructed. You will then be in a position to notify your insurance carrier of the situation. Hopefully, your policy will either cover the claim of defective construction or pay for the cost associated with defending against the claim. If your insurance carrier or that of your subcontractor sends you a letter denying coverage, do not take no for an answer—at least not right away. You should have your attorney review the applicable policy language to verify whether there is coverage. 

Only One Bite at This Apple: The Exclusive (Maybe) Remedy of Workers' Compensation

In Mississippi, workers’ compensation laws replace traditional negligence actions against the employer in exchange for a no-fault system of payment to the employee. This exclusivity of remedy is the product of the "bargain" underlying the workers compensation laws. According to that bargain, the benefit to workers is compensation for all work-related injuries without reference to fault of either the employee or employer. Employees, in return, surrender the right to pursue "all other liability." Employers benefit by having the amount they have to pay to any worker capped. Employers in turn agree to assume the financial burden (through insurance) of all work-related injuries without reference to fault.

The exclusive remedy creates immunity to suits for damages by the employee against the employer but only if the employer actually provides the insurance required by the statutes. If the employer is required to provide insurance and fails to do so, then the employee may pursue a claim under the workers’ compensation act or can sue the employer for damages. The employee gets to decide which route to take and, if a suit for damages is filed, the employer is even prohibited from asserting that the employee assumed the risk or contributed to the injury.

The penalty for failing to maintain required workers compensation insurance gets even stronger. The employer (including the president, secretary and treasurer if the employer is a corporation) can be subject to criminal prosecution for a misdemeanor which carries a potential penalty of $1,000 and/or imprisonment of up to one year, in addition to the recovery to which the employee is entitled. A civil penalty up to $10,000 can also be assessed by the Mississippi Workers Compensation Commission.

For contractors, the burden is even greater. General contractors are considered "statutory employers" of the employees of subcontractors. If the subcontractor provides workers compensation insurance, then the general contractor gets the same protections as the subcontractor has. However, if the subcontractor does not provide workers compensation insurance, the general contractor is statutorily responsible to provide the insurance and be liable for payment or compensation to the injured employee.

The potential consequences (damages, fines and jail time) for failure to provide required insurance are too great to ignore. General contractors cannot assume that subcontractors are carrying workers compensation coverage. As a matter of routine, general contractors should require proof of such insurance, together with an acknowledgement from the insurance provider that coverage will not be cancelled without advance written notice to the general contractor. It is also wise for the general contractor to require that the subcontractor’s coverage add the general contractor as an additional named insured.

WHEN IS AN INSURED "MADE WHOLE"?

A basic tenet of law is that when one party is injured by another party the innocent party is entitled to be "made whole." This concept in its simplest terms means that the innocent party should be awarded damages sufficient to put the innocent party back in the position it was in before the injury occurred. Often, the innocent party has insurance which will provide compensation to the innocent party until a recovery from the wrongful party can be obtained. The insurance company holds what is called a "right of subrogation" to any funds the innocent party receives from the wrongful party—a concept entitled to prevent the innocent party from double recovery (i.e., recovery from both the insurance company and the wrongful party).

In the case of Armstrong and Hill v. Miss. Farm Bureau Ins. Co., Armstrong and Hill were both injured in an automobile accident. Farm Bureau made payments to Armstrong and Hill under an insurance policy. Armstrong and Hill sued the negligent party and obtained a judgment which they collected from the negligent party. Farm Bureau took the position that it was entitled to receive the funds the negligent party had paid pursuant to Farm Bureau’s right of subrogation. Conversely, Armstrong and Hill took the position that Farm Bureau was not entitled to the money because their damages were higher than what they had been awarded by the jury in the trial and, therefore, they were not "made whole."

In a case of first impression, the Mississippi Supreme Court decided what "made whole" means in a factual setting of this kind. The Court ruled that the jury had decided what dollar amount of damages were necessary to make Armstrong and Hill "whole" when the verdict was rendered. Since it was a jury verdict, Armstrong and Hill could not contend that their damages were higher and re-litigate the issue with Farm Bureau. Thus, since Farm Bureau had already paid Armstrong and Hill, Farm Bureau was entitled to the funds paid by the negligent party.

This decision still leaves unanswered what would happen if the insurance company pays more than the jury awards. We’ll have to await that answer for another Court ruling.

Hurricane Preparedness: Are You Contract Ready?

According to the May 27, 2010, press release issued by NOAA, the National Oceanic and Atmospheric Administration, there is an 85% chance that the 2010 Atlantic hurricane season will be above normal. Specifically, NOAA states: "We estimate a 70% probability for each of the following ranges of activity this season: 14-23 Named Storms, 8-14 Hurricanes, and 3-7 Major Hurricanes."

Hurricane season began June 1, 2010, and we have already gone through "B" in the alphabet of hurricane names. Just this past week tropical storm Bonnie passed through the Gulf of Mexico with everyone holding their breaths that the already damaged coastal areas would be spared further destruction. Bonnie was a reminder that we all need to immediately prepare for the anticipated hurricanes, if not already prepared. Helpful checklists can easily be found on the internet for your preparations. However, one major item is often overlooked: contracts.

A recent decision by the Mississippi Supreme Court highlights the need to be "contract ready" for hurricane season. In the case of Hill Brothers Construction Co. v. Miss. Transportation Comm., Hill Brothers Construction ("Hill Brothers") was hired by the surety to complete a project on which the original contractor had defaulted. The construction contract included a provision that provided for monthly cost adjustments based upon a baseline price established at bidding for pay items such as diesel fuel and asphalt which are affected by oil prices. However, the contract also included a provision which stated: "After the expiration of contract time, including all extensions, adjustments will be computed using fuel and material prices that are in effect at the expiration of the contract time." When the contract time expired and the project was incomplete, the Miss. Transportation Commission ("Commission") applied this provision to change the "baseline price" for adjustment purposes to the price in effect on the date the contract should have been completed.

Thereafter, disaster struck. Hurricane Katrina hit the Mississippi Gulf Coast and the price of petroleum products skyrocketed. The adjustment of the baseline price to the price in effect on the date of the contract expiration resulted in about $500,000 of unreimbursed petroleum costs to Hill Brothers. The Commission refused to pay and Hill Brothers sued. When the trial court granted summary judgment in favor of the Commission, Hill Brothers appealed.

On appeal, the Mississippi Supreme Court agreed that the "Commission’s interpretation of the provision was correct." However, the Court also determined that the provision exceeded the authority granted by statute to the Commission and, therefore, had to be stricken from the contract. This case is but one reminder that the effects of a hurricane will still be sorted out years after the landfall.

Have you prepared for the active hurricane season we now face? Get prepared:

  • Review your contracts, especially the contracts you are contemplating entering into now. Make certain you have provisions that will protect you in the event of a disaster. If you are unsure what a provision means, seek clarification before you sign and modify the language in the contract so it is clear what is meant!
  • If you are a subcontractor, your subcontract often binds you to the terms of the prime contract. What does it say? Do you even have a copy of the prime contract? Get a copy and read every word of it.
  • Consider entering into contracts in advance of disaster that will provide you the assistance and/or pricing you may need if disaster does strike.
  • Review your insurance policies to determine whether your coverage is adequate for the types of losses you might incur, including any unusual contract provisions that might be applied.