By Geoffrey Norman, Esq. & Charles Cobb
Project developers and managers, along with general and subcontractors, are finding that construction insurers are rejecting COVID-19 claims against policies written pre-pandemic. Insurers also are opposing any legislative effort to broaden the scope of already written coverage. Notwithstanding, the construction industry needs lawsuit protection from liability exposure and depends on insurers to stand behind those policies. There are four main areas of concern for owners and those in the construction industry: Workers Compensation, Subcontractor Default, Surety and Performance Bonds, and General Liability.
Workers Compensation for Worker Exposure
This insurance, mandatory for all employers, pays for work related claims to W2 employees on a no-fault basis. Medical bills are paid by the insurer and a percentage of wage replacement is paid during periods of disability. Many General Contractors and Construction Managers select subcontractors with specific attention to their workers comp EMR (Experience Modification Rating) or historic claims propensity.
For a claim to be covered by workers compensation, it must arise “in and out of the employment” conditions. Contracting a society-wide virus is generally not compensable under Workers Compensation. Workers who are deemed essential, however, and who have to work through the pandemic may be in a better position to claim workers compensation benefits than non-essential workers who get sick from the virus. Workers compensation claims are heard by a state administrative agency (Department of Industrial Accidents in Massachusetts) whose judges tend to favor claims brought by employees. Some states are pushing to have COVID-19 claims to be presumed work-related for people who were required to work through the pandemic.
Subcontractor Default Insurance
Subcontractor default insurance (SDI) is first party coverage triggered by subcontractor default. Construction managers covered by subcontractor default insurance work only with established and financially sound subcontractors who historically go to great lengths to honor their subcontracts. Thorough prequalification was the pre-virus risk management tool. For years these policies had few or no claims. At this stage of the pandemic, subcontractor default still seems to be a rare occurrence, but this may change soon. Many of the ENR 400 largest US contractors have SDI coverage with enormous deductibles.
The current fear is that many subcontractors will not survive the economic downturn triggered by the pandemic. Subcontractor default is a costly exercise and typically costs several times the original subcontract amount, which presents tremendous pressure on a general contractor under a fixed price or guaranteed maximum price contract. Construction owners who have been charged by construction managers for the cost of their SDI premiums will clearly expect the benefit of those policies when triggered by subcontractor default.
Surety and Performance Bonds
Many contractors have their contract performance supported by surety bonds. Surety bonding companies are charged with standing behind their principal’s promise to perform according to the contract. A significant concern now is the ongoing viability of subcontractors who are engaged to provide labor and procure materials. The virus has disrupted material supply chains, labor reliability, and caused havoc with construction schedules. If there are multiple subcontractor failures, contractors will not be able to meet their obligations to owners and defaults will be declared, triggering surety bond claims.
General Liability Business (CGL) Coverage for Personal Injury
As construction work resumes with jobsite COVID-19 modifications, workers who contract the virus at work could bring claims for personal injury, as could others who allege that they were physically harmed by work exposure. The claims likely will be styled as negligence or tort actions.
All parties in construction typically carry large general liability coverage. But whether that coverage applies to COVID-19 related claims will depend on a careful analysis of the policy and on how the courts, Congress and state legislatures respond to the press of such claims. Historically courts and legislatures have allowed juries to decide whether the accused party’s conduct meets an evolving sense of “reasonable care.” Over time, serious injury incidence rate has fallen on jobs run by large national and regional contractors due to the attention to safety, so the present liability compensation structure did not envision the potential onslaught of cases brought on by the coronavirus.
Another significant issue under CGL coverage is whether or not the virus will be deemed to be “pollution” which will either be covered under a sublimit of the CGL policy or may be excluded altogether. When environmental laws were enacted they generally made all landowners and pollution contributors completely, jointly and severally liable for all remediation. As a result, general liability insurers rewrote their policies to exclude all cover for any claims of such kind. Gradually limited pollution insurance tied to general liability coverage reemerged. In addition, when "toxic mold" claims were being asserted under property and liability policies, the definition of "pollutant” had to be expanded with far-reaching exclusions for fungi and bacteria. Many CGL policies issued after the SARS outbreak of 2003 contain an exclusion for any property damage or loss caused directly or indirectly by “[a]ny virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” Explicit exclusions mentioning “virus” may well defeat coverage, but many policies are a pastiche of coverage grants, endorsements and exclusions. A very careful reading of the coverage and exclusion language likely will be required to sort out claims.
Construction owners, managers and general contractors have greater vulnerability to general liability negligence claims from subcontractors’ employees than do owners in other industries. A manufacturer whose W2 workers get the virus at work will be immune from suit since workers compensation is the exclusive remedy for employee claims against employers. Construction projects, on the other hand, typically are multi-employer work sites, and claims by subcontractor employees can be directed at anyone onsite other than their direct employer, since the direct employer is protected from suit under the workers compensation rules. Indemnity agreements among the parties in the incorporated contracts will usually determine how or whose insurance responds to these types of claims. Parties who have strong indemnity language in their contracts will be in better position to shift the risks than those who did not pay close attention to those terms.
The Construction industry, like many others, faces significant impacts from the COVID-19 pandemic. If a construction owner, manager or general contractor is experiencing or can foresee difficulty with a contract, particularly with respect to their subcontractors, it is important to carefully review their construction insurance and contracts to fully understand their rights. Close examination of specific terms by experienced insurance adjusters or claims lawyers may expose gaps or openings (depending on each party’s perspective) that could avoid major unwanted impacts.
Geoffrey Norman is a Real Estate Partner at Tarlow, Breed, Hart & Rodgers, P.C. with deep experience in construction projects and financing.
Charles W. Cobb is a construction attorney who served as in-house counsel for Suffolk Construction and other major Boston construction companies now represents construction owners, managers and contractors.
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