Action Over Liability Exclusions

Hi, my name is Gordon Coyle and today we’re going to talk about what an action-over claim is or what an action over third-party liability exclusion is in your general liability policy.

Action-over issues are misunderstood by a lot of contractors and insurance brokers in New York.   It’s a pretty confusing topic, so we’re going to simplify it.   And to do that, we’re going to give you an example. In this example there are only three parties that we need to be aware of.   The first one is the contractor who is going to be doing a job or a project.   The second party to this deal is the employee who works for the contractor and the third party to this agreement is the project owner or the property owner.   Now prior to starting a job, the owner of the property or the project is going to send the contractor a construction contract and within that contact is going an indemnity agreement, very common.   An indemnity agreement or a hold harmless agreement as we commonly call them, says something like that the contractor promises to indemnify and hold the property owner harmless from any or all claims which may arise during the course of construction.   They’ll also ask for a certificate of insurance naming the owner and maybe other entities as additional insurance on the contractor’s policies.

How Action Over Claims Occur

So, during the course of construction, the employee, party number two that we talked about is injured during the course of construction.   Normal work place injury, but it’s pretty serious.   So the employee files a claim with the contractor’s workers compensation insurer.   The claim handles all of the medical bills and pays all the loss wages while that worker is out of work.   Now half way through this claim’s process, the employee decides that they’re also going to sue the property owner for negligence to maintain a safe workplace.   Now we don’t need to talk about whether the workplace was safe or unsafe or who had control of it or who didn’t control of it.   The simple fact is that we’ve got a multi-million dollar law suit that the employee has filed against the property owner.   Now the property owner is going to take that law suit and they’re going to tender it, or give it over, to the contractor.   Under the terms of the construction contract, we mentioned earlier, the indemnity agreement makes the contractor responsible for any or all claims which could arise from the performance of that job and this is one of them.   So the contractor takes that claim and they bring it to their insurance broker.

Action Over Exclusions

Now here’s the rub, contractor’s insurance in the down state New York, especially in the Five Boros can get very expensive.   So this particular contractor decided that they were going to exclude action-over liability in their general liability policy and that’s a real problem.   Another way that this can happen is that an unscrupulous broker maybe competing on a contractor’s liability insurance and bid 30-50% less. We’ve seen this happened and they don’t disclose why it was so much cheaper.   The reason that it’s cheaper is because action-over claims are excluded and unfortunately, the contractor didn’t asked enough questions and actions-over claims are going to be excluded.

However this happened, whether it was the contractor trying to save a few dollars or it was due to an unscrupulous broker, it really doesn’t matter at this point. The contractor has a multi-million dollar lawsuit on their hands and they’ve got a contractual obligation to indemnify for it and what are they going to do? They’re either going to try to give it back to the property owner.   They don’t want it, the property owner’s liability insurance company doesn’t want it – they’ll ultimately have to pay the claim but they’re going to subrogate against the contractor under the terms of the contract.   So what ultimately happens in many cases is that the contractor has to go bankrupt.   It’s probably not the best situation.   You’ve put your entire life’s work into a business and now you have to go in to bankruptcy because you didn’t have the right insurance coverage.

Compounding the Problem

Now what compounds this problem even further in some situations is that endorsements or exclusions in some liability policies, don’t specifically say, “Action Over Claims Excluded” – they’re going to have different wordings and that’s going to mask the problem.

I’m going to read some of the titles of these exclusions. They can be: ‘amendment to employee injury exclusion’ or ‘amendment of definition of employee injury’ or ‘carved back of contractual liability’ or something else like that.   And like I said, that masks the real issue.   So you may not even understand that you don’t have the coverage even if you read your policy.

Look, I realize that liability insurance in the Five Boros and downstate New York is really expensive and if you’re working at height, meaning you’re on a ladder or something, you’re a painting contractor, masonry, drywall, those sorts of trade – it gets even more expensive and very limited availability. But the question is – do you want to have coverage for third party action over claim or not?   And I really recommend that you have it because these kinds of claims happen and they happen with regular frequency and they get very expensive.

What’s the solution?

Well, unfortunately there’s no way around the pricing situation.   Action over coverage for contractors in New York is expensive; there’s no changing that.   The only solution I can give you is that you have to read your policy.   Make sure you understand what’s included and what’s not included.   If you’re not sure, ask questions.   If you’re not sure you’re getting the right answers, ask for a second opinion.   You might even want to get your broker’s responses in writing, so if there’s a misunderstanding somewhere down the road, you’ve got it and it’s documented.   The other thing that I’d recommend is read your contracts.   Many times contractors don’t thoroughly understand everything that’s within the construction contract which puts them at risk.   If you need help in this area, contact your attorney, ask them to unpack what’s inside these documents so you can understand them.   Generally, they’re not negotiable or very difficult to negotiate but you’d really want to understand that you’re not being taken advantage of here.

I hope that help shed some light on a kind of confusing topic regarding action-over claims, especially in New York.   If you have any comments, questions or thoughts that you’d like to share with me, why not drop me an email or give me a call on my contact info that’s at the end of this video and I really appreciate you watching.

If you have any comments that you’d like to leave in the comments section below, that’d be great.

Thanks a lot.