Due Diligence for Insurance Coverage in Transportation Construction Contracts (2015)

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19 contractor of the project. The package typically includes CGL, worker’s compensation, and every other type of insurance that may be needed for a particular project. Because of the scope of insurance involved, it can be complicated and expensive to put in place, but the benefits can be significant. As mentioned above, disputes can arise in the typ- ical CGL context as to whether the incident occurred because of professional liability in the rendering of or failing to render certain services. There can be issues as to whether the incident occurred to a particular part of property. By combining all necessary cover- ages through a package policy, these types of prob- lems can be avoided because a single policy with a single carrier will address the claims, subject to a few exclusions. The use of a package policy can help stan- dardize jobsite safety procedures, and allow for bet- ter staffing and safety audits. Also, since all enrolled parties are covered under one policy, issues about multiple attorneys being needed to provide defenses, and the possibility of cross-claims and even counter- claims, can potentially be avoided. The policy specifi- cally includes a Named Insured Endorsement, an example of which is below: NAMED INSURED ENDORSEMENT Policy Declarations, “Named Insured” is amended to include as Named Insureds: All contractors and/or subcontractors/consultants for whom the Owner or Owner’s agent is responsible to arrange insur- ance to the extent of their respective rights and interests. Coverage afforded by this policy is automatically extended to contractors who are issued a Worker’s Compensation policy under this OCIP. All other contractors not issued a Worker’s Compensation policy must be endorsed onto the policy to be afforded coverage under this policy. “Named Insured” does not include vendors, installers, truck persons, delivery persons, concrete/asphalt haulers, and/or contractors who do not have on-site dedicated payroll.70 All other terms, conditions, and exclusions remain the same. There can be some disadvantages to this coverage, aside from the administrative burden of ensuring the proper coverages are in place. One potential disad- vantage is that a contractor could submit claims for non-contract injuries, and those may be difficult to determine. However, with the proper carrier and risk management, that disadvantage could be elimi- nated entirely. Another potential disadvantage is determining who has the responsibility for what aspect of the project, but with the proper partnering and definitions, those problems can be avoided. Under an OCIP, aggregate and per occurrence limits apply to all contractors and subcontractors for the term of the project. There are options for extend- ing completed operations coverage beyond the com- pletion of the total project, not just the contractor’s or subcontractor’s portion of the project. IV. COMMON COVERAGE ISSUES Most of the litigation involved with construction contracts ultimately boils down to issues of interpre- tation of the insurance policy language. In a perfect world, agencies would be able to assume that the insurance carrier will supply coverage to comply with its specifications. However, agencies should be aware that carriers will not always comply with the specifications and will not always provide coverage that is in line with the agencies’ expectations. For instance, if the specifications call for the agency to be named as an additional insured, the agency intends to be named as an additional insured with- out exception or subject to endorsements that water down or exclude the coverage. Only by a careful review of the policy and endorsement language can the agency be certain that the proffered coverage is acceptable. All of the issues discussed in this section ultimately concern the language of the insurance policy. The following topics were common concerns among state agencies responding to the survey. A. Coverage for Accidents in the Construction Zone Many agencies expressed concern about coverage for accidents that occur within their construction zones. Usually the coverage questions relate to whether the accident occurred due to activities aris- ing out of the contractor’s operations or the contrac- tor’s failure to perform the work in accordance with the specifications and plans. For instance, in a situa- tion where a construction vehicle or equipment strikes a member of the traveling public, the con- tractor can easily make the argument that the acci- dent arose out of the activities of the contractor and should expect to be covered by either the CGL or automobile liability policy. A more difficult situation would be where the plaintiff alleges that deficiencies in design plans led to his or her injuries. If the plans were prepared internally by the transportation agency, an argument can be made that the engineer who designed the plans is protected by a discretion- ary immunity. In Texas Department of Transporta- tion v. Hathorn,71 a fatal accident occurred when a 70 Tracy Alan Saxe, Construction Wrap-Ups: Owner and Contractor Controlled Insurance Programs, in ConstrUC- tion Law handbook, § 19.03[B] (2009). 71 No. 03-11-00011-CV, 2012 Tex App. LEXIS 5906 (July 19, 2012).

20 vehicle hydroplaned in a rainstorm and struck a parked dump truck. Plaintiffs alleged that the Texas Department of Transportation’s (TxDOT) design of the cross slopes on the highway caused the accident to occur. The court found that the state and the indi- vidual employee were protected from liability due to the state’s discretionary immunity doctrine. Other states allow immunity for the individual employees, but not their employers.72 If the state transportation agency did not design the highway plans internally, a claim for negligent design can likely be made against a consulting engi- neer or the contractor. The consulting engineer should be protected by his or her professional liabil- ity insurance for malpractice errors and omissions, assuming damages are related to the insured’s per- formance of professional services. The consultant does not enjoy the protection of discretionary immu- nity afforded to state engineers. Another related issue is whether coverage is avail- able to a state transportation agency when an alleged roadway deficiency is either caused or allowed to remain by the actions or inactions of the transporta- tion agency. The carrier will ultimately look to the language of the policy to determine coverage. If the facts can be construed such that the state’s sole neg- ligence caused the accident, coverage will likely ulti- mately be denied unless the contractor agreed to indemnify the state for its own negligence. B. Status of Additional Insured and Additional Named Insured Regardless of whether the entity has been named as an additional named insured or an additional insured, it is insured to some extent under the con- tractor’s policy. The most significant difference between the two usually comes from language in the additional insured endorsement that limits the cov- erage extended to the additional insured to liability arising out of operations performed by or on behalf of the named insured. This means that typically the coverage will only be available for damages incurred by the additional insured if there is some connection with the operations of the named insured (the con- tractor). For example, if an accident occurred within a contractor’s construction zone and the contractor had implemented a traffic control plan that was developed by the state, both entities would likely be covered because the claim arose out of operations performed by the contractor. Essentially, coverage to the additional insured would be available if the alle- gations (and proof) were that the contractor and the state agency were both negligent in regards to an activity that occurred within the construction zone. When the agency is an additional named insured, it is closely associated with the first named insured (the contractor) and enjoys very broad coverage. This may include entities such as bonding authori- ties or other entities whose operations nearly always involve the first named insured. By adding an entity as an additional named insured, the contractor extends coverage under its liability policy to all operations of the entity. It should be noted that addi- tional named insureds do not necessarily share all the privileges and responsibilities of the named insured, such as the obligation to pay premiums, cancel coverage, and receive notice of cancellation. One of the disadvantages to the additional insured or additional named insured status is the agency’s loss of control over the litigation. Typically in a CGL policy, the insurer has the right to direct the litigation, such that the insured may benefit from the insurance protection but lose control over the defense of the claims made against it. The agency may also be concerned about the pos- sibility of its own insurer being required to partici- pate with the named insured’s company in defend- ing claims against them both. One of the reasons that the additional insured status is requested is so the agency can obtain a given amount of primary coverage under the liability policy. Many times an additional insured will be covered by its own policy and its contractor’s policy and the carriers will have to closely examine the language of the policies to determine which is primary. It is not unheard of for this issue to be litigated if the policies have conflict- ing clauses, which can cause delay in the underlying litigation and uncertainty for the agency, particu- larly if the agency does not know whether it is cov- ered for the underlying claim. Another concern the state may have with regard to additional insured coverage is the contractor’s deductible. If the contractor has a high deductible, it must have the resources available to meet the deductible, otherwise the coverage anticipated by the state will never be used. For this reason, the agency must be certain that the coverage is truly primary, and the carrier has a duty to defend both the agency and the contractor. The state should be certain that the contractor’s insurance policy would be applied, in full, before any coverage the state may have is reached. C. Prevention of Lapse in Coverage The contractor must always have insurance in place during the course of the project. Every state that answered the survey indicated that it considered 72 See, e.g., Heins Implement Co. v. Mo. Highway and Transp. Comm’n, 859 S.W.2d 681 (Mo. 1993).

21 the contractor to be in breach of its contract if insur- ance was not in place, and all of the state specifica- tions require insurance to be in place before the proj- ect begins. Each specification further provides that the contractor will be in breach of the contract if insurance lapses without a replacement. Many of the specifications also require notification by the contrac- tor to the state 10 to 30 days in advance of lapse of coverage. The problem is that if the contractor respon- sible for the potential lapse does not notify the state, the state may not know about it. For that reason, the state requires the insurance carrier to notify it of a potential lapse in coverage. A certificate holder as noted on the certificate of insurance is entitled to receive notice of cancellation. Many times, the insurance carrier does not want the responsibility of notification and may include language in the policy to the effect that it will attempt to notify the certificate holder in the event of a change in or lapse of coverage. Under most poli- cies, a notice of cancellation is only provided to the first named insured or named insured as the owner of the policy. To address this problem, ACORD® insurance producers changed the language in the ACORD®- 25, which is the certificate of liability. A revised edition of the ACORD®-25 was pub- lished in October 2009. One of the more significant changes was to the language referencing policy can- cellation provisions. Following is a comparison of the old and new text: Old Text. Should any of the above described policies be can- celled before the expiration date thereof, the issuing insurer will endeavor to mail X days written notice to the certificate holder named to the left, but failure to do so shall impose no obligation or liability of any kind upon the insurer, its agents or representatives. New Text. Should any of the above described policies be can- celled before the expiration date thereof, notice will be deliv- ered in accordance with the policy provisions.73 The notes describing the reason for the change are as follows: The word “endeavor” was removed because policy cancella- tion provisions generally do not use the word “endeavor.” Only a policy can obligate an insurer to provide notice of cancellation. Unless a policy’s provisions explicitly provide for notice to a party also listed as the certificate holder on the certificate of insurance, the insurer is not obliged to notify that party. The new language is compliant with state insurance regulatory requirements in all states, and specifi- cally responsive to bulletins issued last year by the South Dakota Insurance Department. Since the form is national, not state-specific and is filed where required, only the ver- sion of the form containing the new language should be used in all states. Certificates of insurance may be viewed as a summarized reflection of an insurance policy and are only informational. The policy is the definitive source for its provisions, not the certificate. If any party in addition to the first named insured desires a copy of a cancellation notice in the event the policy is cancelled, that party should be expressly endorsed onto the policy as a cancellation notice recipient.74 To avoid a failure of communication and potential lapse in coverage, the agency should request certifi- cate holder status at the time it is added to the pol- icy. This status entitles the agency to receive notice of policy cancellation. An alternative would be to require the carrier to use the ACORD® 25 certifi- cate, or its equivalent. D. Uncertainty of Coverage One of the first problems the state will face in a lawsuit involving allegations of negligence of both the contractor and the state is uncertainty of insur- ance coverage. After a claim is tendered to the insur- ance carrier, the carrier will do one of three things: accept the tender, decline the tender, or accept under a reservation of rights. If the carrier issues a reser- vation of rights letter, the state may not be assured of coverage until a jury verdict is reached and fault is apportioned among parties. While the agency does not want to receive a reser- vation of rights letter, because it normally indicates that the defense is being accepted conditionally, the letter itself is an appropriate response by an insur- ance company that does not have enough informa- tion to decide whether to defend a claim. In Passiac Valley Sewerage Com’rs. v. St. Paul Fire and Marine Ins. Co.,75 the court stated that an insurance com- pany “acted appropriately in proffering a defense while preserving its rights through the issuance of reservation of rights letters…by reserving rights and providing defense costs on covered claims, an insurer fulfills its defense obligations.”76 The reservation of rights letter must clearly and timely communicate to the insured if it is delaying a decision on coverage for the claim or if it is accepting the defense. The letter should outline the factual basis of the suit and the applicable policy provisions. If the tender is accepted, the company should inform the insured of the conditions of acceptance and then state that if further factual information is discov- ered that affects the available coverage, the carrier may modify its position and seek reimbursement for defense costs and any indemnity payment made. 73 See ACORD® Frequently Asked Questions, https:/www. acord.org/standards/forms/documents/acordcertificates faq_201004.pdf. 74 See ACORD® June 28, 2010 Forms Notice, https:// www.acord.org/standards/forms/documents/20100628_ acordformsnotice.pdf. 75 206 N.J. 596, 21 A.3d 1151 (2011). 76 Id.

22 If an insured does not respond to the reservation of rights letter, the lack of response can be construed as consent to the reservation.77 If the agency is not satisfied with the conditions set out in the reserva- tion of rights letter, it can hire its own counsel to defend it and pursue the insurance company for costs, or file a declaratory action against the insur- ance company demanding that the court determine whether or not coverage exists. While the costs of these actions should be recoverable by the agency if it is determined that the carrier should have pro- vided a defense and did not, those options take time and resources away from the defense of the claim. E. Rights of the Insurer and Rights of the Insured All the parties to the insurance contract have basic rights and fiduciary obligations to each other. The following paragraphs discuss the most basic obligations of the parties. 1. Rights of the Insurer There will likely be a provision in the insurance contract that requires the agency to notify the insur- ance carrier as soon as possible after receiving notice of the suit. The insurance company does not have a duty to defend until after it has been given proper notice of the suit. If appropriate notice is not given, the carrier may refuse to defend. Notice is typically accomplished by a tender of the defense as discussed in the following sections of this digest. In order for a carrier to successfully claim that it has been preju- diced by late notice of the suit, it has to be able to show the court that the lack of timely notice materi- ally impacted or prejudiced its ability to defend the claim. A 15-month delay in notification has been held to be unreasonable and to materially impact the defense of the claim.78 Insurance carriers must take their obligations as fiduciaries very seriously as there can be severe financial repercussions if the obligations are breached. The duty to defend is determined by a careful review of the allegations in the complaint or petition. The insurer will compare the allegations in the petition to the language of the policy in order to make a coverage decision. The insurer is required to defend the claim if the allegations in the petition arguably or poten- tially state a claim for which the state could be responsible. Facts known to the insurer, or ascertain- able through a reasonable investigation, may also create a duty to defend. Additionally, the carrier has a duty to defend allegations that appear to be within the policy’s coverage even if it may not ultimately be obligated to indemnify the insured. While the burden is on the insured to prove there is coverage under the policy, the insurer has the burden to prove when exclusion applies.79 Once the defense has been accepted, the insurer will send a letter outlining the terms of its defense. Under the terms of the typical CGL policy, the insurer has complete control of the litigation, includ- ing the right to select an attorney for the defense of the claim or to settle the claim. The insured has no authority to compel the carrier to settle or to compel it to go through the litigation process. The insurance carrier has the right to expect cooperation from its insured. If the insured (the state) refuses to cooperate with the defense, in such a manner that the insurance company is substan- tially prejudiced, the insurer will be relieved of its responsibility to defend. It is important to recognize that if the carrier is relying on a duty to cooperate provision in requiring the agency to assist in the investigation of the claim, safeguards should be put in place to avoid a waiver of privilege in case the car- rier does not ultimately end up defending the state. For example, if underlying litigation is occurring during the investigation of the claim, the agency should be careful about the method and manner of communication regarding the investigation by the carrier so it can avoid the potential for information that may be adverse to the agency being improperly disclosed. In a typical construction contract, the insurance carrier has the right of subrogation, which means it has the right to attempt to recover the money it has paid on the claim from another party, essentially standing in the shoes of the insured.80 The right of subrogation may be waived by the insurer, either via contract or simply by its failure to attempt collection at the time of settlement, or by taking other affirma- tive actions to preserve its rights to subrogate. Both the insurer and the insured have a good faith and fair dealing obligation to the other, which means that both parties agree that neither of them will do anything to keep the other party from receiv- ing the benefits of the agreement. To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests. Breaching the implied 77 the Law of LiabiLity insUranCe, Section 5.17 (Rowland H. Long, ed., Matthew Bender 1988). 78 E.B. General Contracting v. Nationwide Ins. Co., 189 A.D. 796, 592 N.Y.S.2d 455 (N.Y. 1993). 79 Valentine-Radford v. American Motorists Ins. Co., 990 S.W.2d 47 (Mo. App. 1999). 80 See S.S.D.W. Co. v. Brisk Waterproofing Co., 76 N.Y. 2d 228, 556 N.E.2d 1097 (N.Y. 1990).