Liability insurance policies insuring sponsors, general contractors, subcontractors, and design professionals are confusing and loaded with complex terminology that make them difficult to understand. Yet, it is these policies that hold the key to the ability of a community association to recover damages from design and construction deficiencies. Rather than making your eyes glaze over by going through a lengthy analysis of the arcane language of these policies, here, in a nut shell, stripped of the legal jargon, are the basic concepts you need to know:
Policies Insuring Sponsors, General Contractors, and Subcontractors
Sponsors, general contractors, and subcontractors are usually insured under commercial general liability ("CGL") policies. These CGL policies are "occurrence" based policies. That means coverage under the insurance policy is triggered by negligent conduct that happens during the one year policy term. If the policy is renewed for additional one year terms and the damage continues unabated across multiple policy periods, you may be able to argue that there has been a "continuous trigger" that allows you to obtain coverage under the policy in place when the occurrence first triggered coverage, plus one or more of the renewal policies. This is known as "stacking" the policies. CGL policies are typically—not always—sold with coverage limits of $1 million per occurrence, $2 million in the aggregate. That means the limit of coverage for any one claim in the one year policy period is $1 million and the limit for all claims made against the insured by all claimants (no matter how many claimants and how many claims there may be) is $2 million.
An insurer under a CGL policy will generally be obligated to pay if the Association can prove that, during the term of the CGL policy, as a result of negligent workmanship by an insured, damage occurs to the work or property of someone other than the insured. This is known as "consequential" damage. The concept of consequential damage is most easily explained by the following example. A framing contractor frames the walls and roof of a two story house. When the framer is done with its work, the roofing subcontractor installs the underlayment, flashings, and shingles. If, as a result of negligent workmanship by the roofer, water penetrates his roofing materials and damages the sheathing of the roof installed by the framer, the negligent work of the roofer damaged the work of the framer and there should be coverage under the roofer's CGL policy.
Policies Insuring Architects and Engineers
Design professionals are insured under professional liability insurance policies. These are completely different from the CGL policies discussed above. The most important differences are:
- Claims made policy: Professional liability policies are "claims made" policies, not occurrence policies. In other words, the policy that is called upon to provide coverage for an insured design professional against whom a covered claim has been made is the policy in existence at the time the claim is made, not the policy in place when the work was done. Thus, if the architect or engineer negligently performed design work that caused damage beginning in 2014 but a negligence claim by the Association was not asserted until 2019, it is the policy in place in 2019 that provides whatever coverage may exist. The 2014 policy is irrelevant. The timing of "occurrence" of the damage is also irrelevant. It is the date that the claim was made that controls.
- No consequential damages required: There is no need to prove consequential damages. All the Association needs to prove is that the design professional had a duty to exercise reasonable care in performing its work, it failed to do so, and that, as a direct and proximate cause of that breach of its duty of reasonable care, the Association suffered damages. This is much easier than proving the existence of consequential damages which usually requires expensive forensic engineering investigations that prove the cause and document the extent of the consequential damages.
- No stacking of policies is allowed: the Association only gets to collect from the one policy in effect at the time the claim was made. There is no continuous trigger allowing stacking of multiple policies.
- Professional liability policies are depleting limit policies: This means that for every dollar the insurance company spends in attorney's fees, expert fees and costs, it gets to deduct those fees and costs off the face amount of the policy. By way of example, if the policy limit is $1 million and the carrier spends $450,000 in attorney's fees, expert fees and costs, the policy limits have been depleted from $1million down to only $550,000.
Please bear in mind that insurance issues are very complex and require consideration of myriad factors and extensive case law that is beyond the scope of this article. Among many other things, there are exclusions, notice requirements, engineering, and legal considerations that must be evaluated in analyzing coverage. This discussion is very limited and general in its substantive content. It is provided as a way of cutting through the technical legal language and summarizing for community associations the basic concepts property managers and Board members need to know. Before embarking on transition negotiations or litigation over design, construction or other transition issues, the property manager and Board members should make sure they have a thorough understanding of insurance coverage issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.