A relatively recent endorsement is becoming more and more prevalent in the construction industry, and given the large risks associated with it, we recommend that our clients make sure that it is not included as part of their policies. In addition, we strongly recommend that our clients make sure that their subcontractors are not carrying the endorsement on their policies, as it could result in the indemnity provisions in your subcontracts resulting in uninsured claims against subcontractors.
The endorsement at issue is called the “Contractual Liability Limitation” and generally appears as follows:
Though it may seem relatively unobjectionable at first glance, the practical impact of this endorsement in the construction industry is that it likely removes the indemnity provision contained in your construction contract from coverage. Some contractors and subcontractors do not understand that, and have been adding the endorsement to obtain huge savings on policy premiums. This should be unacceptable in your own policy (to avoid a large, uninsured claim from your customer or third parties), as well as in the policies of your subcontractors. If not already there, add a provision to your subcontracts stating that subcontractor’s insurance policies shall not contain this endorsement.
But, this is probably not going far enough. We recommend that you get copies of your subcontractor’s entire insurance policy, rather than just their insurance certificate, to confirm that the policy does not contain the endorsement. Because the certificate of insurance will not identify the presence of the endorsement in the policy, some subcontractors are adding the endorsement to their policy to save on premiums without notifying their customers/general contractors.
While on the topic, this is a good time to remind clients of two other endorsements that should never be acceptable in your policy, or that of your subcontractors. First, the products completed operations Hazard exclusion:
Policies with this endorsement will not cover any claims that occur after the completion of construction, meaning there would be no defense or indemnity provided by the carrier for any latent construction defect litigation or even third-party personal injury occurring after the project was completed.
The Damage to Work Performed by Subcontractors on Your Behalf endorsement is another that can create savings in premiums, but can represent large problems in the future. It usually will look like this:
This endorsement will prevent coverage when there is damage to other parts of the project due to your subcontractor’s work. Similarly, should your subcontractors have sub-subcontractors, if this endorsement is included, their policy will not cover damages caused by their sub-subcontractor’s operations.
Similar to the Contractual Liability Limitation, we recommend: (1) ensure that your own policy does not contain these endorsements; (2) include a provision in your subcontracts that requires that subcontractors carry policies without these endorsements; and (3) obtain actual copies of your subcontractor’s policies, rather than just the certificate, and check to make sure these endorsements are not present.
Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701.
