Wrongful Acts: Covering The Gaps Standard Insurance Doesn’t
Everyone knows a story that begins like this.
Once upon a time, there was a company who purchased a new building. One day, lo and behold, they discovered the window installation had been faulty. Business came to a halt as they were not able to operate due to the defectively installed windows. When the company went to the builder and the builder’s insurance program was consulted, it was revealed under closer inspection that loss of use coverage was not included. The company who purchased sued the builder directly for loss of use. What was the builder to do? They might have had to pay the loss out of their own pocket, but the builder happened to have a captive program that included wrongful acts coverage. Wrongful Acts picked up the gap left in the commercial program for the loss of use.
This type of exclusion and hundreds of others like it go unnoticed in standard insurance programs every day, until an event reveals the gap. This is why, for captives, wrongful acts coverage represents a growth opportunity. Simply stated, wrongful acts coverage is designed to address specific liabilities that may arise from actual or alleged breaches of duty or negligence, as well as errors and omissions committed in the conduct of an insured’s business or profession that are excluded, limited or not covered in the insured’s standard insurance program.
In other words, it’s the safety net beneath the safety net. While wrongful acts coverage is applicable to virtually any business, as will be seen, it has particular resonance with certain classes of customers.
Covering the World of Contracting
The world of contracting, including both general contractors and subcontractors, is suffused with instances which may not be covered by traditional insurance policies. These can include contractors involved in high-risk trades, such as earthwork and grading, exterior framing and even finishing work such as stucco.
These trades often face significant exposure due to construction defect lawsuits. In addition, some standard policies may exclude coverage for certain types of projects. To cite just one example, CGL policies will typically exclude coverage on condominium projects due to the risk of class action lawsuits related to common construction problems.
Wrongful acts coverage for contractors is a way of making sure that these types of exclusions are covered for the insured. It’s important to note that construction defect claims are handled differently, depending on the state. In many states, construction defects are not considered an occurrence, since there is no specific occurrence date, and these contractors are most vulnerable. However, courts across the country are trying new cases every day. In addition to new rulings, courts have been reversing previous decisions on what should and should not be covered. As a result, all construction companies are susceptible to losses, from general contractors to smaller trade contractors.
A Quick Look at Damage Exclusions
In recent years, rising social consciousness and awareness have had a profound effect on damage exclusions. This is where, for example, the mold exclusion cited in the introductory story comes into play. Mold damage has become a common environmental exclusion in standard construction insurance due to the prevalence of toxic mold litigation cases in the recent decade. In addition, many environmental pollution damage issues arising during construction projects have come under public scrutiny and thus are now typically excluded.
Even in cases where coverage is provided, many insurers who do not specifically exclude mold or pollution damages now require a contractor to provide evidence of a satisfactory risk management program. This can be quite extensive beginning with proof of past history of quality construction, evidence of quality control and a communication plan between management and construction personnel in the field. Other requirements include pre-construction investigation, third-party inspections during critical phases or construction and adequate documentation practices. Satisfying all of these requirements can preclude issuance of a policy.
Further exposure gaps can arise during litigation. For example, many standard carriers exclude defense costs from their policies. Some policies contain language stating that the carrier has “the right, but not the obligation” to defend the insured in the event of a lawsuit arising from the project. Others may state that the insured bears the entirety of the defense costs, including the insurer’s attorneys, in defending a claim made under the policy. Still others may state that defense costs within stated policy limits act as a deductible on the amount of any award or judgment obtained against the carrier.
It gets more complicated still. A contractor’s insurance may exclude liability for subcontractors; or, a contractor may require a certificate of insurance from a subcontractor, which ultimately proves fraudulent. If these or other issues arise, a gap in insurance coverage may result. It is crucial to be aware of these type of exclusions before disputes can arise on a project, so the insured can make an informed decision on how to defend against or prosecute claims.
Standard Policies and Unforeseen Gaps
Even standard insurance policies—such as general liability, auto, professional liability, and employment practices liability—can have unforeseen gaps.
For instance, an entrepreneur who owns multiple companies can discover that his or her general liability policy, believed to cover an additional venture, does not do so, creating a significant gap in coverage.
Additionally, policy holders are often unaware of restrictive or exclusionary endorsements that can affect their liability policies. Professional liability policies, for example, typically come with a lengthy list of exclusions. Policy restrictions and exclusions also typically characterize other coverages, including D&O, E&O, employment practices and even general liability policies. Wrongful acts coverage can be written to cover these exposure gaps.
Auto liability can also produce exclusions during special situations that may arise, as in the example of a business owner whose vehicle has been driven by a family member he failed to list. Or, an employee driving a company car on company business, but in a situation that is potentially excluded by the commercial auto form.
It’s a lot to think about! Which is why you’d do well at renewal time to review your standard insurance policies and have your captive manager do so, as well. A well-written captive program that includes wrongful acts coverage can fill whatever gaps in coverage are left by standard commercial liability policies.
