Contractors Alert: Your Liability Carrier May Start Playing Rough

If you are a General Contractor (GC), you most assuredly carry Comprehensive General Liability insurance for your business. If you’ve spent any time reading your policy (fat chance), you may remember that the terms and conditions of the policy require you to protect yourself and your insurer.

Specifically, when you hire sub-contractors, you are supposed to require that the “sub” execute a Hold Harmless agreement as part of the contract, in which the sub agrees to protect the general contractor from liability for acts of which the sub is found legally liable. Further, the sub is supposed to name the general contactor as an Additional Named Insured, which provides a legal defense to the GC. At that point, the GC’s policy becomes excess over the sub’s coverage.

I used to be a General Contractor, and I know GCs pretty well. They, being a somewhat independent bunch, frequently do business with subs on little more than a handshake or a phone call. These subs are people they’ve used repeatedly, and a high level of trust is in place. The idea of getting all that contract paperwork executed before the first hammer is lifted or spade turned is just a pain in the backside. So, it regularly gets ignored.

Unfortunately for GCs, the insurance companies have been taking it in the wallet as they have absorbed liability for the GCs when they fail to get that Hold Harmless in place. So, the risk management efforts that the GCs are supposed to do aren’t getting done. And that has the affect of transferring the risk to the insurance companies.

They get to pay when the GC’s contract fails to contain a Hold Harmless Clause.

They get to pay when the GC doesn’t require his subs to maintain their own insurance.

They get to pay when the GC doesn’t get himself listed as an Additional Named Insured on the sub’s policy.

So, the insurance companies have begun to issue policy endorsements that deny coverage when there is a loss due to the sub’s operations and the GC did not get the Hold Harmless Clause into his contract and proof that the sub named the GC as an Additional Insured. The insurers are figuring that the only way to get the attention of the General Contractors is to put some of the GCs’ assets on the table.

On August 4, 2009, the California Court of Appeals issued the ruling in North American Capacity Ins. Co. v. Claremont Liability Insurance Company. The ruling upheld this Contractors Warranty Endorsement, and stated that the insurance company could take an excess position even if the subcontractor had no insurance, simply because it was their duty to have insurance. Therefore, the endorsement and coverage could proceed AS THOUGH the subcontractor had the coverage in place.

To quote the ruling:

“We find the “clear and explicit” meaning of the contractors warranty endorsements, as used in their “ordinary and popular sense” by a layperson establishes a precondition of coverage as to work done by subcontractors for whom (the GC) failed to secure both a written hold harmless agreement and a certificate of insurance. The trial court therefore did not err in finding the contractors warranty endorsement enforceable under the facts of this case.”

Now that the insurance companies have a favorable court decision in their back pockets, you should expect your insurance carrier to play for keeps. A potential liability claim denial will bring a new discipline to the business life of the General Contractor.

Directors and Officers Liability: Bleak Days For Directors and Officers

These are bleak days for corporate directors and officers.

In a June 18th webinar sponsored by Zurich Financial Services in London, a forum was held to discuss Director and Officer Liability exposures.

In 2008 there were over 150,000 insolvencies in Western Europe alone. In the first quarter of 2009, the United States had over 5,000 corporate insolvencies. Mario Vitale, CEO of Zurich's Global Corporate Division, predicts over 62,000 American corporate insolvencies for 2009, an increase of over 56% from the previous year. And the bankruptcies are not limited to the financial sector. They are widely spread over every type of business.

Vitale asserts that there is a direct relationship between corporate insolvencies and lawsuits filed against corporate directors and officers. In one American court jurisdiction alone, considering all the public company bankruptcies filed in 2008, 77% had a class action lawsuit filed against them.

One of the other daunting challenges to today's corporate officer or director is the massive change that has occurred in securities law. The Securities and Exchange Commission is holding officers criminally responsible for what they say regarding the financial health of their companies, including the information in their annual reports, financial statements and 10Ks.

Today's economic uncertainties are dangerous for corporations. They must consider:

-whether their line of credit is secure now and in the future
-whether their bank, who issues the line of credit, is financially healthy
-the financial health of the companies in their supply chain
-the financial health of their customers. Can they pay their invoices?

So, for public corporations seeking investors, what can they tell prospective investors about the financial health of their company when the future cannot be accurately forecasted in any substantive way?

What you can be absolutely certain about is when there is a corporate insolvency, the shareholders, hedge funds and the "vulture funds" will be picking the bones of the company's financial documents to find the slightest half-truth for their basis for lawsuits.

Francis Kean, attorney at partner at the UK firm Barlow Lyde & Gilbert, boldly stated that the worst event "by a country mile" that could happen to a director or officer is the insolvency of the company upon whose board they serve. A director's responsibility is to the company he serves and helps to control. However, in a bankruptcy, the Court takes control. It must not only settle financial claims against the company, but analyze the reasons for the insolvency, including whether or not directors can be found liable.

The other wild card is that the potential claim can be "sold" to the highest litigating bidder because the claim can be perceived as an asset against the directors.

German corporate securities law stipulates that once a company's directors decide that the company should be liquidated, the directors only have 21 calendar days to place the company into insolvency. Failure to meet this deadline can result in criminal charges against the directors with a maximum jail term of three years.

Anything like that here in the United States? Are you sure?

Why would anyone choose to be a corporate director in this sort of business and regulatory climate?

So, how do directors and officers of corporations protect their own assets in this hostile business environment? The corporate director or officer cannot be certain that the company they serve will be there to defend and indemnify them in case of insolvency and subsequent legal challenges.

Can the director simply resign from the board? Not really. The director must eventually prove that he did everything humanly possible to minimize the losses for the creditors. Anything short of that effort could be considered a claim against the director.

The director must plan ahead, and prepare for the worst.

First, know your liabilities. Know who might be a plaintiff and the reasons they might file a lawsuit against you.

Second, buy a Directors and Officers (D&O) Liability insurance policy at the time you are either a director or officer. But buy the coverage while your company is still solvent. Buy from an insurance company that also has a strong balance sheet, and is going to be there when you need the protection.

Here is a new complication for directors, though. Some insurers are coming out with Insolvency Exclusions. Some are broadly worded, some narrowly worded. Be very careful of the wording of your policy.

Also be aware that most of these policies are "Claims Made" policies, which means that the trigger event must have happened within the policy period. But, is the bankruptcy the triggering event, or is the claim date the trigger? The claim may be made months after the bankruptcy filing and by that time, the policy may have expired. This question will be determined in the courts.

I recommend carrying your D&O policy for a couple years after you leave the Board of any company. I also recommend high policy limits.

Protect your assets with Directors and Officers Liability insurance.

Dog Bite Attacks: Six Warning Signs of a Dog Attack

Any person who owns a dog is potentially liable for damages if their dog bites another person. Your homeowners liability or business owners liability insurance will defend you from lawsuits attributable to dog bites in some cases.

If you have a dog that has already bitten or injured another person or animal, your insurance company may exclude coverage for subsequent incidents. I’ve even seen insurers cancel or refuse to renew policyholders with dangerous dogs.

This follows the old “First-Bite Rule.” That means that if your dog has never caused injury before, you as the owner are not deemed to be the owner of a dangerous dog. However, after the first bite, you can’t say that anymore.

But what if you don’t own a dog? You must know the common sense issues about dogs and how they behave. That is crucial whether you own a dog or not.

So let me share with you six danger signs that should warn you that a dog attack may be about to occur. If you commit these to memory, you will have a better chance of protecting yourself and your children.

1. A new dog in the house. New adult dogs can be dangerous for the first 60 days or so. In the same manner, a person who is new to a household where a dog lives is in danger of attack for about the first 60 days. Statistics show that 20% of fatal dog attacks involved a new person or a new dog in the same household for two months or less. (new husband, new wife, new step-kids, new girlfriend/boyfriend, new baby)

2. Gender of the dog. Un-neutered male dogs are the most dangerous of all. But any male dog is far more dangerous than a female dog.

3. Breed. The Pit Bull, Chow, Akita and Rottweiler breeds are the most dangerous. Pitt Bulls have the most fatal attacks of any breed.

4. The Pack. The more dogs in the pack, the greater the danger of attack. Dogs that are normally calm and docile can become violent when they are in a pack. The pack mentality is strong in dogs. Statistics show that 39% of the dog attacks in 2008 were by multiple dogs.

5. Dog is his own yard, with no owner present. Dogs are protective and territorial. Don’t go in his yard. Warn your children of the danger of going into a yard where a dog...or multiple dogs...are alone.

6. Dog on a tether or chain. Chaining up a dog is cruelty, and over time, it changes the dog’s personality. Chained dogs committed 9% of fatal attacks in 2008.

Any one of these factors alone is a danger signal. The more factors that exist at the same time, the higher the danger of a dog attack. All of the factors should be avoided at all costs.