Look out!

Do not rely on nonstandard insurance policies

Roofing contractors increasingly are using subcontractors and expanding the scope of subcontracted work for a variety of reasons, including manpower shortages, competitive cost considerations and construction deadlines.

However, subcontractors hired by roofing contractors often are small, undercapitalized and may lack adequate insurance. If you hire a subcontractor that does not maintain adequate insurance, your insurance policy may need to cover a claim that was caused by your subcontractor, or your company may have to pay all or part of a loss because your subcontractor's insurance was inadequate. You might also be in breach of your upstream contract with an owner or general contractor if your subcontractor does not satisfy contractual insurance requirements.

Insurance requirements

The first step to protecting yourself is to be sure you have a signed, comprehensive written subcontract with every subcontractor you retain. The subcontract should identify each insurance policy the subcontractor is to maintain and minimum coverage limits. At a minimum, you should require commercial general liability (CGL), workers' compensation, automobile liability, umbrella liability and pollution liability coverages. The limits should be at least equal to what you are required to maintain for the project.

A subcontract's insurance provisions should require the subcontractor to maintain the standard CGL policy promulgated by the Insurance Services Office Inc. Do not allow nonstandard CGL policies with nonstandard exclusions and endorsements that take away or limit coverage. Nonstandard endorsements typically exclude, limit or restrict coverage from what would otherwise be provided. When drafting a subcontract, it's a good idea to identify nonstandard endorsements that you will not permit so there is no doubt what is prohibited.

Equally important, be sure to include a provision in the subcontract stating you have the right to require the subcontractor to provide copies of the policies to you. And you should obtain a copy of each subcontractor's current CGL and workers' compensation policies before any work is performed by the subcontractor.

If you anticipate doing repeat business with a subcontractor, you may want to have a master subcontract that includes terms and conditions and insurance requirements that apply to all work the subcontractor performs for your company.

You also will want to be sure your subcontract includes a provision stating your company, as well as the parties that you are required to make additional insureds, is to be an additional insured on the subcontractor's CGL and other liability insurance policies.

Certificates of insurance

The common practice in the construction industry is to require each subcontractor to provide a certificate of insurance. Certificates of insurance customarily have been used in lieu of providing copies of policies for many years, but your receipt of a certificate of insurance from a subcontractor is insufficient to protect you.

Particularly with CGL insurance, you need to see the policy itself. A certificate of insurance lists the types of insurance policies, policy numbers and effective dates and may identify additional insureds, but it does not let you know whether the policy contains nonstandard exclusions or endorsements that may radically reduce coverage from what you intended and expected. A certificate of insurance provides no substantive information regarding the substance of the policy and confers no rights on the certificate holder. You need to know before the start of a job whether an insurance policy you are relying upon contains nonstandard exclusions and endorsements that can drastically reduce coverage.

A case

Consider, for example, what happened in Essex Insurance Company v. Y&J Construction Inc., which was decided in 2016 by the U.S. District Court for the Eastern District of Virginia. Autumn Contracting Inc., North Springfield, Va., was the general contractor for the construction of Building 207 at Fort Belvoir, Va., a U.S. Army base located in the Virginia suburbs outside of Washington, D.C. Autumn Contracting subcontracted with Y&J Construction Inc., Fulton, Md., to do the roofing work. Autumn Contracting's subcontract with Y&J Construction required Y&J Construction to procure CGL insurance. Y&J Construction purchased a CGL policy from Essex Insurance Co., Glen Allen, Va., a surplus lines insurer, through Insurance Plus, a licensed insurance agency based in Maryland, and obtained a certificate of insurance showing it had a CGL policy in the amount of $1 million for any occurrence with a $2 million general aggregate limit.

Consistent with standard CGL insurance policies issued by the Insurance Services Office, the Essex Insurance CGL policy stated it provided coverage for amounts that Y&J Construction became legally obligated to pay as damages resulting from "bodily injury" or "property damage." Similar to other CGL policies, Essex Insurance had no duty to defend the insured against any suit seeking damages for bodily injury or property damage to which the insurance coverage did not apply.

Presumably unknown to Autumn Contracting until after a loss occurred, the Essex Insurance CGL policy purchased by Y&J Construction included a roofing endorsement that excluded from coverage any bodily injury, property damage, personal injury and advertising injury or any injury, loss or damage arising out of "[a]ny operations involving any hot tar, wand, open flame, torch or heat applications, or membrane roofing." The Essex Insurance CGL insurance policy also excluded from coverage "claims arising out of breach of contract, whether written or oral, express or implied, implied-in-law or implied-in-fact."

During roofing operations on Building 207, Y&J Construction started a fire arising from its use of torches. The $3,749,315 loss resulting from the fire initially was paid by the general contractor's insurer, Penn National Mutual Insurance Co., Harrisburg, Pa., which brought a subrogation suit to recover from Y&J Construction's insurer but was unable to obtain any recovery from Essex Insurance. Essex Insurance filed a declaratory judgment suit seeking a declaration that it had no obligation to defend Y&J Construction, no obligation to indemnify Y&J Construction and no liability to Penn National Mutual Insurance based on the roofing endorsement that was part of Y&J Construction's policy.

Penn National Mutual Insurance's subrogation suit alleged Y&J Construction negligently caused property damage. Although it was undisputed that Y&J Construction's use of torches caused the fire, it also was undisputed that Y&J Construction's insurance policy included a roofing endorsement that excluded from coverage damage arising from torch use. The court found the property damage was excluded by the roofing endorsement and Essex Insurance had no duty to defend or indemnify Y&J Construction with respect to the claim; the general contractor's policy would pay the claim without recovery from Y&J Construction's insurer even though the loss was caused by Y&J Construction's negligence.

Penn National Mutual Insurance's subrogation complaint also included claims for breach of contract and indemnification, premised on breaches of the subcontract between Autumn Contracting and Y&J Construction. Again, the court found Essex Insurance had no duty to defend or pay for the loss based on these claims because of the broad exclusion for claims arising out of breach of contract. In short, because of the nonstandard roofing endorsement, there was no subcontractor insurance coverage and no recovery by the general contractor or its insurer. Although Y&J Construction would have liability for the damages caused by the fire, Y&J Construction was defunct as it was dissolved following the fire.

An endorsement excluding coverage for claims arising from the use of torches and hot-applied roofing is not unusual in nonstandard CGL insurance policies offered by surplus lines insurers. Following is a typical, broad exclusion in a nonstandard endorsement issued by Atlantic Casualty Insurance Co., Goldsboro, N.C.: "Further, this insurance does not apply to any claim, loss, costs or expense for 'bodily injury,' 'property damage' or 'personal and advertising injury' as a result of any operations, from initial inspection and pre-installation work to ongoing operations and including completed operations, involving any hot tar, wand, sprayed or sprayed-on material, torch or heat applications, hot membrane roofing or any membrane roofing system requiring heat for application."

Open roof exclusions

Another common nonstandard endorsement found in CGL policies issued to some, particularly small, roofing contractors is an "open roof" exclusion. An open roof exclusion limits or excludes property damage to an existing building, other trades' work, fixtures, interior property and personal property within a building that occurs because of rain or other forms of precipitation during roof construction.

Not all open roof exclusions are the same. Even if a policy includes an open roof exclusion, there still may be coverage depending on the language of the exclusion and the contractor's actions. Consider the differences between these two open roof endorsements:

  • "This insurance does not apply to 'bodily injury,' 'property damage,' 'personal injury' or 'advertising injury' nor do we have any duty to defend any claim for damage to any building or structure and/or the contents, furniture and fixtures, improvements and betterments of any building or structure, directly or indirectly arising out of or caused, or alleged to have been caused by, in whole or in part, wind, hail, snow, rain, ice or any combination of these or any other form of precipitation occurring while the roof or other covering of the building or other structure is being constructed, repaired or replaced, or as a result thereof."
  • "Coverage is excluded when 'appropriate' steps have not been taken to provide a temporary cover for an 'open roof.' 'Appropriate' means industry accepted practices used by contractors to protect or prevent 'property damage' under similar circumstances. An 'open roof' means any roof or section where the protective covering (shingles, tar, felt paper, etc.) has been removed leaving the underlying materials, structure, shell or structure interior exposed."

With the first endorsement, there is no coverage for water damage caused by rain regardless of the circumstances. With the second open roof endorsement, there might be coverage if the contractor can show he or she acted in accordance with normal industry practices.

Both endorsements reduce important, needed coverage provided by a standard CGL policy, and you should not accept either one. If you retain a subcontractor to perform roofing work, you should not accept a policy with an open roof exclusion. If you learn too late—after a loss has occurred—that your subcontractor's insurance policy contains an open roof exclusion and the insurer is denying coverage based on the open roof exclusion, you will want to examine the exact text of the exclusion to ascertain whether it applies to the facts of your damage incident. Perhaps the policy only excludes water damage claims where the contractor did not take appropriate steps and you can show appropriate steps were taken.

Another example

In Essex Insurance Company v. Fidelity & Guaranty Insurance Underwriters Inc., the U.S. District Court for the Eastern District of Michigan and the 6th U.S. Circuit Court of Appeals considered an Essex Insurance CGL policy that included an open roof exclusion. Allstate Roofing & Paving, Sterling Heights, Mich., contracted to replace the roof system on Peppina's Restaurant, Lincoln Park, Mich., for $22,000. Allstate Roofing & Paving purchased a CGL policy from Essex Insurance.

Allstate Roofing & Paving removed a portion of the existing roof. An apparently unforeseen storm popped up while reroofing was underway. Allstate Roofing & Paving placed tarps over the exposed area of the roof, but water entered the restaurant, causing $1.2 million in damages. Allstate Roofing & Paving notified Essex Insurance of the claim. Essex Insurance investigated and declined coverage. The building owner's property insurer paid the claim and brought a subrogation suit against Allstate Roofing & Paving. Essex Insurance filed a declaratory judgment action, seeking a judicial ruling that the Essex Insurance policy did not apply to the loss.

The open roof exclusion in the Essex Insurance policy stated:
"The coverage under this policy does not apply to … any injury, loss or damage arising out of:

  1. Your failure to take prudent steps in advance of any job or work commencing to determine the weather expected by your local weather bureau for that period of time you will be working on any given day, in order to preclude any open roof during wind, hail, snow, rain, ice or any combination of these; and
  2. Your having any "open roof" when any weather in 1. above occurs; any "open roof" must be covered in advance of any precipitation and in advance of your leaving the job for any period of time. You must provide appropriate temporary covering, able to withstand the normal elements; …

The term 'appropriate' as used here means actions customarily and normally taken/used by similar contractors in your area to protect or prevent damage … ."

The trial and appellate courts declined to apply the "open roof" exclusion because Essex Insurance did not present evidence that Allstate Roofing & Paving had failed to check the weather before working on the day of the storm or had failed to cover the section of open roof appropriately. No evidence was presented as to how quickly the storm arose, what steps Allstate Roofing & Paving took and what an average roofing contractor in the area would have done under the same circumstances. Essex Insurance was unable to rely on the open roof exclusion because it did not provide enough evidence to carry its burden of proof that the open roof exclusion should apply.

Preserving action over coverage

You will want to be sure the CGL policy does not eliminate coverage for "action over" claims either by having an action over exclusion endorsement or by simply deleting the exception for an insured contract that applies to a bodily injury claim of an employee.

CGL policies exclude coverage for bodily injury claims of employees because those injuries and claims are covered under workers' compensation insurance regardless of fault. However, what if one of your injured employees, dissatisfied with his or her workers' compensation award, initiates a suit against the general contractor or building owner, seeking to recover additional damages in a state that allows such suits?

In all likelihood, the general contractor or owner will call upon you, citing an indemnification provision in your construction contract, to defend, hold harmless and indemnify them from all expenses and losses arising from your employee's claim. The standard CGL policy provides you with coverage in this situation; as a part of the employer's liability exclusion, it states: "This exclusion does not apply to liability assumed by the insured under an 'insured contract.'" This sentence provides for what is often referred to as action over coverage.

The indemnification provision in a construction contract would normally qualify as an insured contract so you would have action over CGL coverage applicable to the claim initiated by your employee. But if you or your subcontractor had a nonstandard CGL policy that omitted this sentence, you would not have coverage for this type of claim. It is important to make sure the insured contract exception to the employer liability exclusion remains included in the CGL policy and the policy does not contain an action over exclusion endorsement.

Other examples of nonstandard endorsements that you should look for: designated states exclusion; designated work exclusion; and residential property exclusion applicable to condominiums, apartments, single-family homes and tract housing. Nonstandard CGL policies more commonly are sold to contractors in states such as New York where standard policies are expensive and the legal climate is unfavorable to insurers. New York has more than 20 nonadmitted insurers who issue some form of an action over exclusion endorsement to their contractor CGL policies.

Check your policy

In addition to checking whether your subcontractor lacks adequate insurance because of a nonstandard CGL policy, you also will want to ensure your insurance policy does not include an endorsement that excludes coverage for a loss caused by your subcontractor if your subcontractor does not have proper insurance and/or is not licensed. Some insurers include an endorsement that precludes coverage for an injury or damage based in whole or in part upon work performed by a subcontractor unless:

  • You have a written indemnity agreement with the subcontractor.
  • The subcontractor has at least $1 million per occurrence CGL coverage.
  • You obtained proof the subcontractor has workers' compensation insurance.
  • You have obtained proof before the start of work that the subcontractor has all required licenses in the jurisdiction where the work will be performed.

Steps you should take

As mentioned earlier, your first step to guard against a loss with a subcontractor that has inadequate insurance is to be sure you have a written contract that requires your subcontractor to maintain a standard CGL policy as issued by the Insurance Services Office without endorsements that limit or eliminate coverage.

If you retain a subcontractor to perform roofing work, you do not want the subcontractor to have a CGL policy with a roofing limitation endorsement. You also should add language stating explicitly that the subcontractor's CGL policy is not to contain endorsements or exclusions that limit or eliminate coverage for torch applications, hot-applied roofing, open roofs, action over claims, breach of contract suits and residential buildings (if applicable).

The second step is to obtain a complete copy of your subcontractor's CGL policy and have it reviewed by your insurance adviser, your risk manager or other qualified professional for nonstandard provisions and endorsements. You can start by obtaining and having a qualified person review the subcontractor's Schedule of Forms and Endorsements to ascertain whether a nonstandard CGL policy has been issued and there are any nonstandard endorsements that limit coverage.

In addition to listing additional insureds on the certificate of insurance you receive from your subcontractor, you might also require a statement on the certificate of insurance stating: "There are no nonstandard exclusions or endorsements in the above policies." You could be more explicit by requiring a statement on the insurance certificate that "there are no 'Action Over,' 'Bodily Injury to Independent Contractors,' 'Torch,' 'Open Roof' or other similar restrictions, exclusions, endorsements or limitations in the policies listed on this certificate."

Although the certificate alone will not provide you with legal protection, having your subcontractor's insurance broker insert a sentence on the certificate of insurance along these lines reduces the likelihood that your subcontractor has a nonstandard policy. Similarly, you might require a letter from your subcontractor's insurer, insurance broker or agent stating there are no nonstandard endorsements or exclusions.

In all cases, you always should obtain a copy of your subcontractors' insurance policies and have a qualified insurance professional review the policies before you make a final decision to do business with that subcontractor. Pay attention to the details so you don't find yourself in a position where you learn you did not have the coverage you thought you had. A good, construction-knowledgeable insurance professional should be able to make sure you not only have good coverage but also that your subcontractors have good insurance policies without loopholes.

Stephen M. Phillips is a senior partner with Atlanta-based law firm Hendrick Phillips Salzman & Siegel P.C.

Identifying provisions

Sometimes, a nonstandard provision will be relatively easy to spot because it will be a separate endorsement. At other times, the nonstandard language may be buried in the policy or hidden in the form of a deleted key sentence or provision from the policy. Language within the insurance policy stating "… includes copyrighted material of the Insurance Services Office Inc." is usually a tip-off the policy or endorsement differs from the standard CGL policy issued by the Insurance Services Office and immediately should cause you to examine the policy.


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