By: Daniel S. Reynolds, Litigation Attorney
Every insurance policy contains obligations with which an insurer must comply to receive coverage of a claim. Increasingly, however, insurance policies contain special “conditions precedent” for construction contractors to receive coverage for any claim based on a subcontractor’s work. These conditions can include a requirement that the insured contractor (1) receives an indemnity agreement from any subcontractor; (2) receives certificates of insurance from any subcontractor; and (3) maintains records evidencing compliance with these obligations. Failure to comply with a condition precedent can preclude coverage.
For example, in ProBuilders Specialty Insurance Company, RRG v. Phoenix Contracting, Inc., 743 F App’x 876 (9th Cir 2018), the appellate court enforced a “Contractors Special Conditions” endorsement to bar coverage of defect claims under a CGL policy. In that case, the defendant had performed work as a general contractor, supervising several subcontractors. Years later, the owner brought a construction defects lawsuit against the general contractor. The general contractor tendered defense and indemnity to its insurer. While the lawsuit was underway, the insurer sought a declaratory judgment that it had no duty to defend or indemnify the general contractor because the contractor did not comply with the conditions precedent of the policy.
The court agreed with the insurer. The court reasoned that when a general contractor fails to meet the conditions precedent to coverage under an insurance policy, the insurer does not have a duty to defend or a duty to indemnify the insured. So long as an insurance policy does not require a subcontractor to indemnify or defend a general contractor for the general contractor’s own liability, the policy does not violate Oregon’s anti-indemnity statute. Accordingly, the court enforced the endorsement and precluded coverage. In fact, the trial court suggested that the insurer may be entitled to claw back defense dollars spent defending the claim.
This case is part of a growing trend where courts have determined that an insured’s failure to comply with conditions precedent preclude coverage under the policy. These cases highlight the importance of understanding all policy conditions and coverage. A contractor should carefully confirm that its subcontractor agreements comply with any conditions imposed by an applicable insurance policy. If a policy contains special conditions precedent, the contractor should take care to follow the conditions, while also maintaining records showing compliance for the entire 10-year ultimate repose period. Failure to do so creates a serious risk to the contractor of losing coverage for defects claims that may arise years after the project.
Daniel Reynolds is an associate in the Litigation practice group and a member of the firm’s Construction Industry Team. The information in this article is not intended to provide legal advice. For professional consultation, please contact Daniel Reynolds at Saalfeld Griggs PC. 503.399.1070. dreynolds@sglaw.com © 2019 Saalfeld Griggs PC