Action Overclaims
By Blake Johnson

There are numerous challenges facing contractors today - finding qualified subs, poor or incorrect build specs, and the ever increasing cost of building materials. The ever present problems specifically related to construction insurance are issues such as mold, EIFS (Exterior Insulated Finish System), subsidence, construction defects and action-over claims.

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In every state in the nation, an injured worker's 'sole remedy' from his employer is through the Worker's Compensation Act. So, if a subcontractor's employee is injured on the job, they are prohibited from suing their employer for damages because of the insurance coverage. The Worker's Compensation law does not, however, prohibit that injured worker from suing anybody else.

In most cases, this 'anybody else' is the general contractor. With the duty a general contractor has to maintain a safe working environment, under what we are calling the 'Safe-Place-to-Work Doctrine,' the subcontractor's injured employee can make an argument that the general contractor did not maintain a 'safe place to work,' and the employee was injured as a direct result of this.

This leads the injured worker to bring a suit against the general contractor for, frequently, an amount that is way beyond the Worker's Compensation payment he has received.

Once this action takes place, there is not only a Work Compensation claim with the employer, but also a claim against the general contractor for bodily injury arising out of the "Safe-Place-to-Work Doctrine." Little does the employer of the injured worker know, but this is soon to become a claim against his Commercial General Liability Policy. This is only true, of course, if the subcontract contains language that allows this shifting of liability.

Most construction subcontracts contain an Indemnification and Hold Harmless provision where the subcontractor agrees to indemnify and hold harmless the general contractor from claims arising out of the subcontractor's work. In addition to this, they require the subcontractor to name the general contractor as an Additional Insured under their commercial general liability policy.

Depending on the contract, this achieves several things. First, the subcontractor's policy has been 'endorsed,' so that the general contractor is listed as an additional insured. Any legal actions for bodily injury are now covered, for the general contractor, under the sub's policy. Secondly, the Indemnification and Hold Harmless agreement obligates the subcontractor to hold himself responsible for injuries arising out his work for the general contractor.

So, if the injury to the worker arose out of his subcontractor's activities and as a result the employee sues the general contractor under the "safe place to work" theory, once the general contractor receives the lawsuit, he tenders the defense of the suit back to the subcontractor. Because the subcontractor has coverage for contractual liability assumed by contract, their liability carrier is obligated to defend the general contractor and pay a judgment, if one in issued. This is what we call an Action-Over claim.

Action-over claims are not new to the construction industry. Many contractors either have been fortunate not to have experienced this type of claim, or have experienced it and didn't know it actually had a name. In a perfect world, Worker's Compensation would be enough for an injured worker. We don't live in a perfect world. The sad reality of these claims is that, despite the millions the attorney tells the injured worker he or she will receive, typically the only one who prospers is the attorney. Once a judgment is rendered, and provided there is any award, the Worker's Compensation carrier is first in line to be repaid for all they spent on the claim. Right behind them is the attorney, looking for their percentage. In the end, the injured worker often receives very little.

As a result of these types of claims, the insurance industry is reacting in much the same manner that they did with mold - coverage is being excluded. It is very important if you are a subcontractor to know what coverage is being afforded under your liability policy or, more importantly, if coverage is not being provided. It is also crucial for subcontractors and general contractors to understand their contractual agreements.

Blake Johnson is a Vice President of Minard-Ames Insurance Group. For details about Blake, this article or Minard-Ames, please contact us at 602-273-1625.