Orignally published in ABC Houston’s Build Houston Magazine

Construction companies spend countless hours drafting agreements requiring indemnification and insurance for their projects. These obligations are prevalent for all tiers of construction industry members— from subcontractors and suppliers, to project owners. The purpose of this article is to address some considerations in anticipation of a claim being made after an incident on a construction project.

The Starting Point

When a claim is made against you, or an incident occurs that is likely to generate a claim, you should immediately review the insurance and indemnity provisions in both your upstream and downstream construction contracts. As soon as possible, you must determine to whom you agreed to provide indemnity and/or insurance coverage, and conversely, who owes you indemnity and/or insurance coverage for such claims. For example, a general contractor often—if not always—will have agreed to indemnify the owner of the project for claims and to include them as an additional insured on the general contractor’s policy. Likewise, a subcontractor likely will have agreed to indemnify the general contractor and make it an additional insured on the subcontractor’s policy.

Putting All Parties on Notice

If a claim is made against you—that is, you receive a demand letter or are named in a lawsuit based on an incident occurring on your project—immediately notify both your carrier and any parties who may owe you defense and indemnity. In the notice letter to parties who owe you indemnity, you should demand a defense and refer to the provisions in the construction contract that require the other party to provide defense and indemnity. You should also include in the letter a specific reference to any insurance that the party may have and request that the party immediately put its insurance carrier on notice and provide you with a copy of the policy or contact information for its insurance carrier.

Sending a timely notice of the claim to your carrier is particularly important if your insurance policy is “claims-made”—meaning there is only coverage for incidents that happen during the policy period and are reported to the insurance carrier during the policy period (or a stated time after the policy period). Failing to put your carrier on notice may mean you lose coverage for that claim.

Conversely, if a claim (demand or lawsuit) is made against someone else—e.g., upstream contracting party—who demands indemnity from you, you should likewise place your carrier on notice. Your commercial general liability policy may cover the indemnity claim against you as an exception to the Contractual Liability Exclusion. The claim for indemnity is an indirect route to coverage for your indemnitee (that is, the person you agreed to indemnify) under your policy, separate and apart from that party’s own potential claim as an additional insured on your policy.

Coverage for an Additional Insured

Whether you are trying to get coverage as an additional insured on another’s policy, or another party is trying to get coverage as an additional insured on your policy, there are two differences in additional insured endorsements that may change an insurer’s coverage analysis. For example, one standard version of an additional insured endorsement provides that an additional insured is only covered “with respect to liability arising out” of the named insured’s work. Another version of an additional insured endorsement provides that an additional insured is only insured where the damage is “caused, in whole or in part, by [the named insured’s] acts or omissions.” Courts interpret the language of each differently, which should be considered when drafting contractual insurance requirements and when procuring coverage.

The “arising out of” coverage language is broad. Typically, any claim resulting from an injury to the named insured’s employee is said to “arise out of” the named insured’s work if the employee was present on the jobsite by virtue of the named insured’s work on the project, whether or not the named insured’s work proximately caused the injury. On the other hand, the “caused…by” language requires that the named insured’s work proximately caused the injury. These differences often affect whether an insurer will undertake the duty to defend or ultimately provide any coverage.

Who’s Paying Defense Costs?

Insurers are generally obligated to defend their insureds in a lawsuit by paying for legal counsel. However, insurers usually only have the duty to do so when the allegations in the lawsuit fit within a basis for coverage under the policy. And, as discussed above, the specific policy language will determine when that duty arises. This is Texas’s so called “Eight-Corners Rule.” It requires the insurer to provide a defense based on the policy language and the facts stated in the lawsuit, regardless of whether such facts are true and without looking at outside evidence or facts.

Which facts are alleged can have serious impacts on the coverage provided. In a recent Texas Supreme Court case, Monroe v. BITCO, the Court expanded the “Eight-Corners Rule” and held that Texas courts may consider outside evidence, “if the underlying petition states a claim that could trigger the duty to defend, and the application of the ‘Egiht-Corners Rule’, sure to a gap in the plaintiff’s pleading, is not determinative of whether coverage exists,…provided the evidence (1) ‘goes solely to an issue of coverage and does not overlap with the merits of liability, (2) does not contradict facts alleged in the pleading, and (3) conclusively establishes the coverage fact to be proved.’” 640 S.W.3d 195 (Tex. Feb. 11, 2022). In theory, the Monroe Exception may be used to both create or avoid the insurer’s duty to pay for its insured’s legal defense where the underlying pleadings lack key coverage facts.

Remember, if the carrier does not pick up defense costs- whoever owes that party indemnity may have to pay those costs as part of their indemnity obligations.

Why it Matters: Expanding the Available Funds

Insurance policies have limits. If a general contractor and owner are both sued for $2 million, as a result of an incident during construction, and both make claims on the general contractor’s policy with a limit of $1 million, either or both parties may not be covered for the full value of their potential liability if the policy has a limit “per occurrence.” If the general contractor also owes the owner indemnity for that claim, the general contractor is then at risk to pay out of pocket for both its and the owner’s liability over policy limits. However, if the general contractor has coverage available to it under another policy— such as a subcontractor’s—then the general contractor does not necessarily have to expend its own funds or insurance coverage, and can utilize a separate bucket of available funds. It is important to spread the loss across policies where exposure is high.

If the general contractor also owes the owner indemnity for that claim, the general contractor is then at risk to pay out of pocket for both its and the owner’s liability over policy limits.

In summary, there are many moving pieces to determine who has what financial responsibility for a claim following an incident. It is important to keep these notions in mind during both contract negotiations and after a claim arises.