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.

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. 

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.

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.

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.

The Mississippi Supreme Court has decided to retain the case styled Architex Association, Inc. v. Scottsdale Insurance Company; Case No. 2008-CA-01353. The construction industry is hopeful that the Mississippi Supreme Court will provide some clarity in the area of insurance coverage for defective construction under CGL policies. Several years ago, the United States Court of Appeals for the Fifth Circuit in ACS Construction Company v. CGU, 332 F.3d 885 (5th Cir. 2003) muddied the waters when it held:

Under Mississippi law, Moulton [Allstate Ins. Co. v. Moulton, 464 So.2d 507 (Miss. 1985)] and Omnibank [United States Fidelity & Guaranty Co. v. Omnibank, 812 So.2d 196 (Miss. 1996)]make clear that in a CGL insurance policy which defines an "occurrence" as an "accident," coverage is triggered if the underlying act was intentional and deliberate. These cases also make clear that an "occurrence" defined as an "accident" in a CGL insurance policy does not refer to the unintended consequences of the act. Thus, the district court did not err when it applied Moulton and Ominbank and concluded that ACS’s intent to subcontract with Chamberlin/Southern and its intent to install the waterproofing membrane to the bunker roofs did not constitute an "occurrence" under its CGL insurance policy with CGU to trigger coverage. For the foregoing reasons we AFFIRM the judgment of the district court.

After ACS, the insurance industry became strident in its position that there was no coverage under the CGL policy for defective work by a subcontractor because such defective work did not constitute an "occurrence" thereby triggering coverage under the CGL policy. There are a number of jurisdictions that have confronted the issue with differing outcomes. However, there is currently no definitive Mississippi decision which specifically addresses this issue.

The issues which the Mississippi Supreme Court have been asked to address by the construction industry in Architex are as follows:

Whether unexpected, unforeseen and unintended defects in a subcontractor’s work, resulting in unexpected, unforeseen and unintended property damage, is an "occurrence" as defined in a CGL policy?

Whether a CGL policy written on the 1986 standard form that includes an exception from exclusion for property damage arising out of the work of a subcontractor provides completed operations coverage if that subcontractor’s work proves to be defective and causes property damage?

Amicus briefs have been filed by the Associated General Contractors of America; the Associated General Contractors of Mississippi, Inc.; Associated Builders and Contractors, Inc. Mississippi Associated Builders and Contractors, Inc.; the Mississippi Asphalt Pavement Association, Inc. and the American Subcontractors Association, Inc. and the American Subcontractors Association of Mississippi, Inc. Pursuant to Miss. Code Ann. §9-4-3, the Mississippi Supreme Court is required to render decisions on appeal within 270 calendar days after final briefs are filed, which was June 17, 2009. Accordingly, a decision from the Court should be issued sometime in April 2010. Stay tuned.

 

 

The Mississippi Supreme Court recently made it unmistakably clear that a contractual indemnity provision cannot exceed the limitations set in Miss. Code Ann. § 31-4-41 which provides:

With respect to all public or private contracts or agreements, for construction, alteration, repair or maintenance of buildings, structures, highway bridges, viaducts, water, sewer or gas distribution systems, or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise and/or agreement contained therein to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable.

 

This section does not apply to construction bonds or insurance contracts or agreements.

(Emphasis added.)

In this recent decision, the Court considered an indemnity provision in a Shipyard Agreement. The Court found the statute unambiguous and concluded that to the extent that the indemnity provision sought to indemnify one party for its own negligence the provision was void. The Court further held that this defense can be preserved by setting forth the defense that plaintiff failed to state a claim upon which relief can be granted pursuant to Miss. R. Civ. P. 12(b)(6).

Remember to read your contract and carefully consider the language of any indemnity provision when you sign the contract and again if you become involved in litigation. Depending upon the particular circumstances, you might even consider purchasing additional insurance coverage of your own for adequate protection.

Every contractor generally requires proof of insurance from its subcontractors, especially with respect to worker’s compensation insurance. In satisfaction of this contractual requirement, subcontractors commonly provide a certificate of insurance to the prime contractor. Is the certificate of insurance sufficient? It may not be.

Many certificates of insurance contain a disclaimer that the certificate is for informational purposes only and does not extend the policy. The disclaimer is a warning that you must look at the policy itself for specific coverage.

In Complete Roofing Services, et al. v. Doherty Duggan & Rouse Insurors, 5th Circuit Court of Appeals (5th Cir. 2009), a certificate of insurance was issued to a general contractor, but the worker’s compensation coverage denoted in the certificate was limited to occurrences only in Georgia. The subcontractor’s employee was injured in Mississippi. The court determined that the "Georgia only" policy did not provide coverage for the injured employee. As a result, the general contractor’s worker’s compensation was required to cover the claim. In this case, it was a catastrophic claim costing the worker’s compensation carrier over $1,000,000.

The best business "policy" is to always obtain and read the actual insurance policy itself. In reviewing the policy, take into consideration the circumstances related to each particular project. For example, consider the following factors: Is the subcontractor from another state? If so, are the subcontractor’s employees from another state or local? Is the subcontractor’s insurance policy state specific? If so, does it cover the state where the project is located? Will any leased employees be used for the project? If so, does the insurance policy cover leased employees or is other insurance required? Are there any warnings or disclaimers in the policy? If so, take heed and consider whether other additional insurance is necessary.

Although the Complete Roofing Services case dealt with a contractor/subcontractor relationship, these basic rules apply to any situation where one party contractually requires insurance from another party. The bottom line is this: get the full policy and read it. This applies to your own insurance policy as well!

(D. Drew Malone is a member of Robinson, Biggs, Ingram, Solop & Farris, PLLC who practices in the area of insurance defense. Drew personally handled this case and contributed to drafting this blog.)