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Every contractor and subcontractor is required to carry liability insurance referred to as Commercial General Liability or 鈥淐GL鈥� coverage. These policies are fairly standardized and most people assume that the coverage that is presented on the front declarations page is all that they need to know: the policy鈥檚 coverage limits, time period, and deductible. But increasingly insurance companies are adding endorsements (additional forms modifying coverage) to these policies that can weaken the coverage that is actually provided if there is an accident. In this article, we鈥檒l discuss two particular endorsements to look out for 鈥� but these aren鈥檛 the only ones that can cause problems! At renewal time, make sure to talk to your broker about every endorsement to your policy.

鈥淟imited Coverage鈥� Endorsement
The 鈥淟imited Coverage鈥� Endorsement Can Reduce Your Limits to Almost Nothing Based on an Obscure Rule of Coverage Law: 鈥淓fficient Proximate Cause.鈥� When there is an accident that is caused by more than one cause, and one of those causes is excluded under the policy, courts often apply the 鈥渆fficient proximate cause鈥� rule. Under that rule, if the initial (or 鈥渋ncepting鈥�) cause of loss is covered, then there is coverage under the policy regardless of whether subsequent events within the chain of causation are excluded by the policy. For example, if a fire (a covered cause) erupts, triggering sprinklers and causing water damage to the floors, an insurer cannot deny coverage based on a 鈥渨ater damage鈥� exclusion, because the first link in the causal chain 鈥� fire 鈥� is a covered cause of loss.We are seeing increasing use of an endorsement called 鈥淟imited Coverage for Bodily Injury, Property Damage or Personal and Advertising Injury Involving Efficient Proximate Cause (Defense Within Limits).鈥� The endorsement sets a sub-limit of $100,000 when the efficient proximate cause rule results in coverage. That鈥檚 a very low sublimit in a policy that usually provides upwards of $2,000,000 in coverage. Adding insult to injury, the Limited Coverage endorsement includes defense costs in the sub-limit 鈥� meaning that once $100,000 is incurred to defend the insured, no money remains to indemnify the insured.

We believe that this endorsement could exacerbate conflicts between the insurer and the insured. What motivation does an insurer have to provide a competent and vigorous defense when the maximum amount it is liable for both defense and indemnity is already established? It also raises questions about whether the insurer will have to defend until the sub-limit is exhausted or wait until after the proximate causation question is answered by a court. We suggest that policyholders avoid this endorsement as much as possible.

鈥淒efense Costs鈥� Endorsement
The 鈥淒efense Costs鈥� Endorsement Can Require You to Repay Your Insurer for 鈥淯ncovered鈥� Defense Costs. One of the key benefits of a CGL policy is that the insurer will hire a lawyer to defend you in a lawsuit that alleges damage covered by the policy. Sometimes it is not clear whether the damages are covered or not, but in those situations courts have held that the insurer has to provide a defense anyway, until the issue is resolved at the end of the case. Insurance companies have tried in several cases to force policyholders to reimburse defense costs paid for by the insurance company if it turns out that the damages were not covered after all. Courts have not allowed that to happen, pointing out that nothing in the policy gives the insurance company a right to reimbursement.

The insurers accepted the invitation and crafted the 鈥淒efense Costs鈥� endorsement. The endorsement provides that if the insurer initially defends or pays for an insured鈥檚 defense costs, but later 鈥渄etermines that none of the claims鈥� are covered, the insurer has the 鈥渞ight to reimbursement鈥� for the costs incurred. This right to reimbursement applies only to costs incurred after the insurer has given written notice to the insured 鈥渢hat there may not be coverage and that we are reserving our rights to terminate the defense,鈥� and to seek reimbursement.

We are increasingly seeing insurers include in their 鈥渞eservation of rights鈥� letters that the insurer intends to demand reimbursement of defense costs if it turns out there is no coverage for damages 鈥� even when the policy does not carry a 鈥淒efense Costs鈥� endorsement. This is an attempt to change the insurance contract after the fact, and should be rejected. But if your policy has a 鈥淒efense Costs鈥� endorsement, your options are more limited. This endorsement will incentivize insurance companies to wait to clarify coverage issues until the end and then spring a giant 鈥渟urprise鈥� defense costs bill on the policyholder. The relationship between insurance companies and their insureds is frequently fraught already 鈥� this will make it even more contentious.

These are just two examples of endorsements that we are seeing more and more frequently added to standard-form CGL policies that significantly weaken coverage. Because they are tucked away at the back of long and dense legal documents, they may go unnoticed. Besides, who wants to think about a lawsuit coming out of the woodwork when there is work to be done? But the reality is that lawsuits are a part of being in the construction industry. So make sure you are getting what you think you鈥檝e paid for, and when you renew your liability insurance this year, watch out for sneaky endorsements.

Carrie Mount is an attorney with Miller Nash LLP who advocates for commercial policyholders in insurance coverage disputes and assists construction clients with contract, tort, and post-judgment disputes. She can be reached at [email protected].

Seth Row is a partner with Miller Nash LLP and chairs the firm鈥檚 insurance recovery practice. His litigation practice focuses on insurance coverage disputes 鈥� exclusively for policyholders. Seth can be reached at [email protected].