Insurance Coverage in Construction Cases
by: Sam K. Abdulaziz

Many contractors do not understand that their liability might be different than the liability of their insurance carrier. Just because you are insured, the damages that are alleged against you may not be covered. A clear example of that is that many policies exclude work done on condominiums or dealing with hazardous substances. Although the contractor may be liable for those damages, the contractor's insurance company would not pay those damages. One particular case dealt with a bankrupt contractor and the liability of the bankrupt contractor?s insurance company.

F & H Construction was the prime contractor who was hired to build a pumping plant. F & H entered into a sub contract with L. O?Reilly and Son to supply certain pile cap extensions to be welded onto steel piles. The caps were to be made of grade A-50 steel. However, the sub contractor provided caps made out of grade A-36 steel, which is weaker. By the time the prime contractor discovered that the caps were defective, they had already been welded. The prime contractor modified the caps so they would provide the needed strength.

After the project was completed, the prime contractor sued the subcontractor?s insurer. The prime contractor could not sue the subcontractors because subcontractor had filed for bankruptcy.
The insurance agreement was to cover property damage. Property damage in the insuring agreement was defined as ?physical injury to tangible property.? Property damage did not include the failure of the defective product to perform for its intended use. The only damage alleged by the prime was the cost of modifying the pile cap extensions and forfeiture of an early completion bonus. The court held that these were intangible economic damages, not property damage. This highlights the fact that the subcontractor would have been liable for these damages (absent the filing of the bankruptcy) but the insurance company would not have to indemnify the prime contractor.

As an additional matter, if a complaint or claim alleges some damages that are covered by the insuring agreement and some damages that are not covered by the insuring agreement then the insurance company will have to defend the entire action and not just those covered by the insuring agreement. This is because of California?s law that states that the insurance company?s duty to defend is greater than the insurance company?s duty to indemnify. We all know what the word defend means. That means that the insurance company would have to defend the entire action. However, if it turns out that the insuring agreement does not cover a portion of the award, then the insurance company will not have to indemnify (pay for) the damages caused by their insured that are not covered by the insurance policy. This becomes very important in settlement discussion, because the insurance company is looking at total dollars spent in defense regardless of whether it is spent on covered matters or uncovered matters.

Further, if the insurance company thinks that some of the damages may not be covered, you may expect to get a rather lengthy letter essentially saying that the insurance company is agreeing to defend you, but that some of the damages may not be covered and therefore they do not agree to indemnify you for those damages. Indeed, they will also probably state that we are going to look to you for the defense costs of the uncovered damages.

Attorney Sam Abdulaziz of Abdulaziz & Grossbart has been practicing construction law for 30 years. He has written a book called ?California Construction Law? which is updated annually. He represents numerous construction trade associations and contractors. He appears at Contractors State License Board meetings and has argued a number of cases before tappellate courts, including the California Supreme Court dealing with the "Pay-If-Paid Clause." Abdulaziz & Grossbart provides this information as a service to its friends & clients. The documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents. Sam Abdulaziz can be reached at Abdulaziz & Grossbart, P.O. Box 15458, North Hollywood, CA 91615-5458; (818) 760-2000, Facsimile (818) 760-3908; or by E-Mail at info@aglaw.net. On the Internet, visit our Website at www.aglaw.net

Weiner vs. South Coast Childcare Centers, CA Supreme Court, No S116358, May 6 2004 by Chin; Moreno, separately concurring