When our contractor clients turn in General Liability claims for covered property damage arising from past work, they often want to perform their own repairs on behalf of their insurance carrier because they are already familiar with the job and believe they can do the work for a lower cost. However, their Contractor General Liability Insurance carrier may balk at paying the portion of the work attributable to overhead and profit.

Claims adjusters and case law are split on this issue. Insurance carriers often refuse to pay for contractor overhead and profit in this situation because they allege it violates the principal of indemnity; that an insured (contractor performing repairs) should be indemnified for actual loss sustained and not profit from a loss.

Contractors performing their own repairs counter that:

• They don’t actually profit since they suffer an opportunity cost of not being able to perform work on another job at the same time where they would earn overhead and profit.
• If another contractor were to perform the work, they would certainly charge for overhead and profit.

Since the insurance carrier claims departments and courts are split on this issue, it is safer for such contractors not to repair their own damages covered under their General Liability policy unless they agree in writing up front with the claims adjuster that they are entitled to overhead and profit.

Source: IA Magazine

Here are the basic facts: 16 Jade Street, LLC was the property owner that entered into a contract with general contractor, R. Design Construction Co., LLC for the construction of a four unit condo project. R. Design Construction Co., LLC was owned by its members Carl Aten and his wife. Aten held a residential home builders license. Aten subbed out part of the work to Catterson & Sons Construction, a corporation, for framing and block installation. Michael Catterson was the sole shareholder of Catterson & Sons. Catterson himself did not perform any construction but served as a liaison between his foreman and his own workers. Problems arose with the quality of work of Catterson and following a payment dispute, Catterson withdrew from the job. Aten did not quickly fix defects and R. Design eventually left the project. A new general contractor was hired to finish the project. Jade Street subsequently sued R. Design, Aten individually, Catterson & Sons, and Catterson individually for breach of contract, negligence, and breach of implied warranties.

Aten argued that he was personally shielded for his ordinary negligence as an LLC member by the provisions of the Uniform Limited Liability Company Act as enacted in SC. The Supreme Ct. was not swayed by this argument even though it admitted that the statute appeared to provide such protection. The court cited the following arguments: 

•  “… a majority of states to examine similar statutory language have concluded that a member is always liable for his own torts and cannot rely on his status as a member of an LLC as a shield.”
• “Additionally, many scholars opine that LLC statutes do not insulate a member from tort liability primarily due to the common law concept that one is always liable for his torts.”
• “… the liability shield erected (for LLCs) is one against vicarious liability for non-tortfeasor members, such as Aten’s wife in this case.”
• “… the right to sue one’s tortfeasor is a long-standing right in our legal system, and we will only find it abrogated by statute through ‘clear legislative intent’.”
• “… this also has been the rule with respect to shareholders and officers of corporations, an organizational structure from which LLCs borrow heavily. See S.C. Code Ann. 33-6-220(b) ‘A shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liability by reason of his own acts or conduct’.”

Here is the practical implication of the court’s holding for each individual:

• Aten is not shielded for his own personal negligence by the LLC status of his company.
• Aten’s wife is shielded by the LLC status of her company since she was not personally negligent.
• Catterson is shielded by the incorporation status of his company since he was not personally negligent.

This ruling has caused an outcry from the building community in SC; however, in my opinion, this has been the case law for many years as regards incorporation by builders. I have always explained things to my clients as follows:

• Incorporation or LLC status only protects an individual executive superintendent shareholder or member against the negligence of his or her employees (passive negligence).
• Incorporation or LLC status does not protect an individual executive superintendent shareholder or member against their own active negligence.

As a result, builders will need to look towards their General Liability policy for protection against lawsuits that involve their own active negligence. As regards construction defect claims, Exclusion CG2294 can be a big problem for builders. See other blog posts for strategies to deal with this exclusion.

Two couples purchased homes from Centex and entered into a home owners warranty agreement that limited Centex’s liability to a specific list of defects. Upon purchase of their homes, the couples noticed that their computers, cordless phones, and TVs did not work due to magnetic disturbance allegedly caused by steel beams used in the construction.

Both couples sued for breach of contract, breach of express and implied warranties, negligence, and failure to perform in a workmanlike manner. Since magnetic disturbance was not listed among the defects that were covered in the limited warranty, the trial court granted summary judgment in favor of the builder and this was upheld by the Tenth District Court of Appeals. The Ohio Supreme Ct. overruled and found in favor of the homeowners stating that the limited warranty could not waive the common law right to assert claims based on failure of workmanlike performance.

Many General Liability carriers that specialize in insuring builders require the use of home owners warranty products in order to decrease the chances of a liability claim being filed for construction defect. However, this philosophy is usually based on the ability of the arbitration provision in most home owners warranty products to resolve the majority of disputes.

Source: Ohio Court: Builders Must Construct Homes In Workmanlike Manner; Insurance Journal, April 2, 2012

“Do your organizations’ policies require vendors and associates to meet the same network security and data protections standards that your own organization follows?  They should, said Michael Dandini, senior vice president of The Hartford’s management and professional liability underwriting unit.  Because if there is a breach, consumers and the public may hold your organization responsible, even if a vendor actually caused the breach.”

“Key Questions For Risk Managers:

1. Does the company follow industry standards and best practices for handling specific types of data?
2. Does the company have data breach insurance coverage?
3. Does the company have a designated person in charge of IT security?   Does it have written data security policies and procedures in place?
4. Doest the company have a data back-up plan?
5. Does the company have an incident response plan?”

 Source: Risk & Insurance and the Hartford, December 2011

Some states exempt homeowners building their own home from the requirement to carry Workers Compensation by statute, case law, or regulatory ruling. You may want to visit www.workerscompensation.com for a summary of such laws.

If your state does have an exemption, you may be able to rely on your Homeowners Liability to some extent. If Workers Compensation is not in play, the remedy for the injured worker is a direct lawsuits against the homeowner under negligence theory. Most Homeowners Liability forms will respond to negligence lawsuits from injured workers if there is no Work Comp in force or “if not required by law to be provided”. However, many carry minimum limits such as $100,000 which certainly won’t be enough for serious injuries such as falls off of roof. At a minimum, $300,000 should be carried and a $1,000,000 Personal Umbrella policy should be carried in addition.

It is certainly safer to carry Workers’ Compensation. However, the premiums can be very expensive unless a certificate of insurance evidencing Workers’ Compensation is collected from all subs. Or better yet, just hire a qualified General Contractor to build the home and carry the Workers’ Compensation.

This blog does not address the equally serious issue of whether General Liability insurance should be carried by the homeowner building his/her own home. This topic has been addressed in other blog postings.

Source: Building Your Own Home…Insurance Implications, Independent Insurance Agents & Brokers Association

However, the new Crossmann decision expands the scope of its prior decision by overturning Century Indemnity to delve into the sharing of liability between successive insurance carriers in progressive property damage situations. First, the court upheld the “modified continuous trigger theory” under Joe Hardin where the period of damage was defined as the term in which the actual injuries occurred. Next, the court turned its attention to Century Indemnity.

Under Century Indemnity, liability among successive general liability insurers in progressive property damage situations was determined by a “joint and several” approach where each carrier was responsible for full indemnity for all damages.  Crossmann reasoned that the “joint and several” approach under  Century Indemnity allowed policyholders to take advantage of the system by choosing a single carrier with the broadest coverage form and by allowing coverage for periods of policy lapse. On the other hand, the approach adopted by Crossmann, the pro rata allocation method, corrects these abuses by assigning each triggered insurer a pro rata portion of the loss based on that insurer’s time on the risk.

Furthermore, Crossmann provides a basic formula for estimating time on the risk with a numerator that represents the number of years that an insurer provided coverage and a denominator that represents the total number of years during which the damage progressed. This fraction is multiplied by the total policyholder liability to the injured party in a progressive property damage situation to determine the liability of any carrier. This formula results in the fair allocation between the respective insurance carriers based on their proportionate time on the risk.

Overall, the new Crossmann decision is a victory for builders due to the defeat of the “no occurrence claim denial strategy”. However, even the court now points out in the footnotes that carriers have the right to use various exclusions (ex: CG 2294) to escape responsibility for covering construction defect claims. The overturning of Century Indemnity does represent a minor defeat for builders, since they are now out of pocket during periods where a carrier has an exclusion that applies or where there has been a lapse of coverage. But, this decision at least is consistent with the intent of the drafters of the General Liability policy form.

Source: John Sadler

See Crossmann Decision

An excellent training video and checklist was recently released by Builders Mutual Insurance Company on the new OSHA fall protection directive. This is information worth knowing and implementing since falls are the largest single source of contractors Workers Compensation payouts.

“Section 38-61-70 (1)(b) mandates the 1986 CGL policy, to the extent that it applies to ‘construction professionals’ is ‘deemed’ to contain a definition of ‘occurrence’ that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship, exclusive of the workmanship itself.”

However, the last word has not been spoken due to the following new developments:

1) The SC Supreme Court reheard arguments on the Crossmann case on May 23, 2011 as a result of complaints from the construction industry.

2) Harleysville Insurance Company filed a lawsuit on May 23, 2011 with the SC Supreme Ct arguing that 38-61-70 is unconstitutional and should be overturned. 

Expect a decision on both of the above within the next several months. Stay tuned.

The newly enacted SC Code 38-61-70 is a positive development that corrects a serious case of faulty logic and misunderstanding by the SC Supreme Ct as evidenced by Crossman v. Harleysville. However, it’s unfortunate that the legislature had to become involved.

Source: Construction Industry Scores Big Win With Anti-Crossmann Act, Ned Nicholson, McNair Law Firm, South Carolina Builder Journal, Volume 4, Issue 3, 2011

Here is the list of the top 50: http://www.pmpcertificationtraining.org/risk-management

Sadler points out that even if the proposed legislation passes, insurance carriers can still use Endorsement CG 2294 to deny construction defect claims under builder General Liability insurance policies.

Read full text of article: Leaky Legislation