All in Agreement: No Excuses for Insurance Ignorance
April 25, 2007
One of the earliest authenticated insurance contracts was a policy assuring the safe delivery of goods on the ship Santa Clara. The policy was written in the Italian language and was dated 1347. As well, it is believed that insurance
agreements were written prior to 1347 revolving around the safe passage of caravans through the deserts of the Middle East.
We know for a fact that insurance has been around since 1347, or 660 years, and we also know the insurance industry has blossomed into an industry touching every aspect of our personal and professional lives.
In March, I was invited to attend an audit review of a financial institution in which the auditors were not happy about the institution’s failure to fill out a form correctly. After the results of the audit were presented, one of the managers of the institution said, “You, as well as many other auditors, have been auditing us for 10 years and this issue has never come up before.” The auditors and the managers went back and forth as to the reasons why, but in the end the auditor said, “Why it was missed in previous audits means nothing.”
I thought about the auditor’s comment for a minute and realized there was no excuse for the error. In fact, the error was a rookie mistake, but one of the managers insisted on placing blame on the auditors.
Once the manager realized he was getting nowhere he decided to change his tactics and said, “We didn’t know we were filling the form out wrong.” I knew it was coming when the auditor said, “Not knowing is not an excuse!”
Not knowing the speed limit or unwittingly parking your car in a red zone is no excuse for breaking the law. Not knowing is not an excuse! I’m sure you or I have told our kids that not knowing is not a good enough excuse. That’s why they get creative and come up with better excuses.
Not knowing that your sub-subcontractor has little or no liability insurance is not an excuse. As well, not knowing that your material supplier delivering to your jobs has little or no insurance is no excuse. As well, not knowing your lien rights is no excuse.
You Are ResponsibleIf you hire a sub-subcontractor who has little or no insurance and an issue arises, you may find yourself and your insurance company defending a claim that should have been defended by your sub-subcontractor.
If you hire a sub-subcontractor to caulk your EIFS or stucco work and the caulking fails and the building leaks, who will be sued? You!
If your supplier delivers 400 sheets of drywall on a boom truck and while stocking the job the truck flips over and destroys the building and injures several people, who will be sued? You!
If you are not paid for the work you performed on a job and you don’t know how or why you should be filing a lien, who will suffer the financial loss? You!
If you allow another subcontractor the use of your scaffold and someone falls and is injured or killed, who will be sued? You!
In every one of the above cases, “not knowing” is not a defense. “I didn’t know the sub-subcontractor or the supplier didn’t have insurance. I didn’t know the company that used my scaffold didn’t have insurance. I didn’t know that filing a lien is the basic first step in protecting my payment rights. I didn’t know that I’d be responsible.”
How Can You KnowIn the Seattle area we are very fortunate to have professional and knowledgeable suppliers, sub-contractors and other vendors who understand the importance of being properly insured. The way we find out if a sub-subcontractor, supplier or vendor is properly insured is to ask them to provide us with a certificate of insurance naming us additionally insured. Our request has never been refused.
What is nice about getting a certificate of insurance and being named as additionally insured is the fact that the insurance company is obligated to inform the additionally insured party of a lapse in coverage or cancellation. The insurance certificate also spells out clearly how much coverage the vendor has and it always includes our name at the bottom of the certificate as additionally insured.
There is a big difference between being only additionally insured and being listed on the certificate as primary additionally insured. “Primary” simply means that the vendor’s insurance will kick in before your own insurance. There is also a difference between primary and primary non-contributory.
Primary and non-contributory is the Cadillac of insurance endorsements. If a vendor provides you with a certificate of insurance naming your company as additionally insured-primary and non-contributory you have top-of-the-line insurance protection because in the event of a lawsuit your vendor’s insurance has to pay to defend the lawsuit while you and your insurance company sit back and wait for the outcome.
It’s important that you understand the difference between “additionally insured,” “primary additionally insured” and “additionally insured-primary and non-contributory.” If you don’t know the difference, you should sit down with your insurance agent and have them explain the difference. Why should you do this? Again, “not knowing is not an excuse.”
Your InsuranceMost general contractors require their subcontractors to provide them with a Cadillac insurance endorsement, “additionally insured-primary-non-contributory.” Again, what this means is that your insurance will pay to defend a legal action brought against the GC and the GC and his insurance company get to sit back and wait for the outcome. In other words, you’re insuring the general contractor.
Keep in mind there are huge differences between general contractors. Some GCs run great jobs and work very hard to properly manage their work and the work of their subcontractors in order to turn over a high-quality project. There are other GCs who manage their jobs from the job trailer and let the subs run wild and it shows in the quality of the final product. Poorly managed jobs usually result in low quality and low quality may result in legal action as a result of the owner’s dissatisfaction.
It is important to understand that a GC who runs a poorly organized job and a GC who runs a highly organized job require the same insurance endorsements from their subcontractors. Both GCs perform very little of the work and both are protected from lawsuits by their subcontractors’ insurance. The subcontractors’ insurance is protecting both the organized and unorganized GC. As you know, most likely your chance of having to defend a GC in a lawsuit will be in benefit of the poorly organized GC.
Your ability to provide additionally insured-primary and non-contributory insurance endorsements should not be taken lightly. If you have a choice, would you rather provide Cadillac insurance to a highly organized GC who is interested in doing quality work or a poorly organized GC who really doesn’t care? In other words, would you rather insure the organized or unorganized GC?
Your Lien RightsI made a terrible mistake several months ago. I allowed our corporate office to file a lien without talking to our client about it first. To make matters worse I didn’t talk to my project manager about the lien, so as to give him a chance to work it out with the client. The phone started ringing and I couldn’t think of any argument for not letting our PM and the client know we were filing a lien. Big mistake!
Liens cause a lot of problems if you don’t approach the issue properly. I made the clients look bad in the owner’s eyes and could have solved the whole issue if I would have just told our corporate office to stand down while I called the client.
Although I handled this particular situation terribly I firmly believe lien rights are a subcontractor’s best protection under the law. Yet, there are many subcontractors who don’t know how to file a lien, as well as think filing a lien doesn’t help them collect the money owed.
I don’t believe there is an attorney on the planet that would advise you against filing a lien if your client owes you money. My attorney has said, “Pete, don’t call me if you let your lien rights expire.’”
The best suggestion I can offer is to talk to an attorney about liens and what they can do for you and how you file a lien. If a client owes you money and refuses to pay for any reason, the lien law can be your best friend.
Not knowing the lien law in your state or not knowing what a lien can do for you and not knowing that a lien is the best legal option for subcontractors to collect their money is not an excuse. If you are owed money, not filing a lien before your right to lien expires is foolishness.
The old saying, “what you don’t know won’t hurt you,” is a lie. What you don’t know about insurance and lien rights will hurt you. Not knowing is not a good excuse.
Remember, teamwork begins with a fair contract!