Every contractor and sub-contractor is required to carry liability insurance called Commercial General Liability or “CGL”. These policies are fairly standardized and most people assume that the coverage shown on the first page of statements is all they need to know: policy coverage limits, period and deductible. But more and more insurance companies are adding endorsements (additional forms that change coverage) to these policies that can weaken the coverage actually provided in the event of an accident. In this article, we’ll discuss two particular endorsements to watch out for, but they’re not the only ones that can cause problems! At the time of renewal, be sure to speak to your broker about all endorsement to your policy.
- The “Limited Coverage” endorsement can reduce your limits to next to nothing based on an obscure rule of coverage law: “Immediate Effective Cause.” When an accident is caused by more than one cause and one of those causes is excluded under the policy, the courts often apply the “proximate effective cause” rule. Under this rule, if the underlying (or “initial”) cause of the loss is covered, then there is cover under the policy, whether or not subsequent events in the chain of causation are excluded by the policy. . For example, if a fire (a covered cause) breaks out, sets off sprinklers and causes water damage to floors, an insurer cannot deny coverage based on a “water damage” exclusion, because the first link in the chain of causation, the fire, is a covered cause of loss.
We are seeing increasing use of an endorsement called “Limited Coverage for Bodily Injury, Property Damage, or Personal and Publicity Injury Involving Effective Immediate Cause (Defense Within Limits)”. The endorsement sets a sub-limit of $100,000 when the effective proximate cause rule results in coverage. This is a very low sub-limit in a policy that typically provides coverage above $2,000,000. Adding insult to injury, the limited coverage endorsement includes defense costs in the sub-limit, meaning that once $100,000 is incurred to defend the insured, there are no more costs left. money to compensate the insured.
We believe that this endorsement could exacerbate conflicts between the insurer and the insured. What motivation does an insurer have to provide a competent and vigorous defense when the maximum amount to which it is liable for both defense and indemnity has already been established? It also raises questions about whether the insurer will have to defend until the sublimit is exhausted or wait for a court to answer the question of immediate causation. We suggest policyholders avoid this endorsement as much as possible.
- The Defense Expenses endorsement may require you to reimburse your insurer for “uncovered” defense expenses. One of the main advantages of a CGL policy is that the insurer will hire a lawyer to defend you in a lawsuit alleging damage covered by the policy. Sometimes it is not clear if the damage is covered, but in these situations the courts have ruled that the insurer must provide a defense anyway, until the matter is resolved at the end of the affair. Insurance companies have tried in several cases to oblige the insured to reimburse the defense costs paid by the insurance company if it turns out that the damages were ultimately not covered. The courts did not allow this to happen, pointing out that nothing in the policy gives the insurance company a right to reimbursement.
The insurers accepted the invitation and drafted the “Defence costs” addendum. The endorsement provides that if the insurer initially defends or pays an insured’s defense costs, but then “determines that none of the claims” are covered, the insurer has the “right to reimbursement”. costs incurred. This right to reimbursement only applies to costs incurred after the insurer has notified the insured in writing “that there may not be cover and that we reserve the right to terminate the defense and ask for a refund.
We are seeing more and more insurers include in their “reservation of rights” letters that the insurer intends to demand reimbursement of defense costs if it turns out that there is no coverage for damages – even when the police do. do not carry a “Defense costs” endorsement. This is an attempt to modify the insurance contract after the fact and must be rejected. But if your policy has a Defense Costs endorsement, your options are more limited. This endorsement will cause insurance companies to wait to clarify coverage issues until the end, and then impose a giant “surprise” defense cost bill on the insured. The relationship between insurance companies and their policyholders is often already strained, which will make it even more contentious.
These are just two examples of endorsements that we are increasingly seeing added to standard CGL policies that significantly weaken coverage. Because they are hidden on the back of long, dense legal documents, they can go unnoticed. Besides, who wants to think of a lawsuit coming out of the carpentry when there is work to be done? But the reality is that lawsuits are part of the construction industry. So make sure you get what you think you paid for, and when you renew your liability insurance this year, watch out for sneaky endorsements.