Every contractor and subcontractor is required to carry liability insurance referred to as Commercial General Liability or “CGL” coverage. These policies are fairly standardized and most people assume that the coverage that is presented on the front declarations page is all that they need to know: the policy’s coverage limits, time period, and deductible. But increasingly insurance companies are adding endorsements (additional forms modifying coverage) to these policies that can weaken the coverage that is actually provided if there is an accident. In this article, we’ll discuss two particular endorsements to look out for—but these aren’t the only ones that can cause problems! At renewal time, make sure to talk to your broker about every endorsement to your policy.
- The “Limited Coverage” Endorsement Can Reduce Your Limits to Almost Nothing Based on an Obscure Rule of Coverage Law: “Efficient Proximate Cause.” When there is an accident that is caused by more than one cause, and one of those causes is excluded under the policy, courts often apply the “efficient proximate cause” rule. Under that rule, if the initial (or “incepting”) cause of loss is covered, then there is coverage under the policy regardless of whether subsequent events within the chain of causation are excluded by the policy. For example, if a fire (a covered cause) erupts, triggering sprinklers and causing water damage to the floors, an insurer cannot deny coverage based on a “water damage” exclusion, because the first link in the causal chain—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 Advertising Injury Involving Efficient Proximate Cause (Defense Within Limits).” The endorsement sets a sub-limit of $100,000 when the efficient proximate cause rule results in coverage. That’s a very low sublimit in a policy that usually provides upwards of $2,000,000 in coverage. 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, no money remains to indemnify 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 it is liable for both defense and indemnity is already established? It also raises questions about whether the insurer will have to defend until the sub-limit is exhausted or wait until after the proximate causation question is answered by a court. We suggest that policyholders avoid this endorsement as much as possible.
- The “Defense Costs” Endorsement Can Require You to Repay Your Insurer for “Uncovered” Defense Costs. One of the key benefits of a CGL policy is that the insurer will hire a lawyer to defend you in a lawsuit that alleges damage covered by the policy. Sometimes it is not clear whether the damages are covered are not, but in those situations courts have held that the insurer has to provide a defense anyway, until the issue is resolved at the end of the case. Insurance companies have tried in several cases to force policyholders to reimburse defense costs paid for by the insurance company if it turns out that the damages were not covered after all. Courts have not allowed that to happen, pointing out that nothing in the policy gives the insurance company a right to reimbursement.
The insurers accepted the invitation and crafted the “Defense Costs” endorsement. The endorsement provides that if the insurer initially defends or pays for an insured’s defense costs, but later “determines that none of the claims” are covered, the insurer has the “right to reimbursement” for the costs incurred. This right to reimbursement only applies only to costs incurred after the insurer has given written notice to the insured “that there may not be coverage and that we are reserving our rights to terminate the defense,” and to seek reimbursement.
We are increasingly seeing insurers include in their “reservation of rights” letters that the insurer intends to demand reimbursement of defense costs if it turns out there is no coverage for damages– even when the policy does not carry a “Defense Costs” endorsement. This is an attempt to change the insurance contract after the fact, and should be rejected. But if your policy has a “Defense Costs” endorsement, your options are more limited. This endorsement will incentivize insurance companies to wait to clarify coverage issues until the end and then spring a giant “surprise” defense costs bill on the policyholder. The relationship between insurance companies and their insureds is frequently fraught already—this will make it even more contentious.
These are just two examples of endorsements that we are seeing more and more frequently added to standard-form CGL policies that significantly weaken coverage. Because they are tucked away at the back of long and dense legal documents, they may go unnoticed. Besides, who wants to think about a lawsuit coming out of the woodwork when there is work to be done? But the reality is that lawsuits are a part of being in the construction industry. So make sure you are getting what you think you’ve paid for, and when you renew your liability insurance this year, watch out for sneaky endorsements.