Mar 5, 2018

Danger in the surplus-lines zone

PIANJ has heard from members about a disturbing development with general liability policies written in the surplus-lines market. They are seeing third-party over exclusion endorsements routinely added on property owner policies written by surplus-lines insurers. This has significant implications for property owners when they are sued by a worker who is injured on their premises.

Suppose a landlord or property owner hires a contractor to paint the building. The contractor’s employee falls off a ladder provided by the property owner and injures himself. The employee files a lawsuit against the property owner alleging negligence in providing a defective ladder. As a provision of the painting contract, the contractor agreed to indemnify the property owner against liabilities that may arise from the performance of the work and name the property owner as additional insured. In this way, the property owner is attempting to shift potential liability onto the contractor.

However, it frequently turns out the contractor has a third-party over exclusion on his commercial liability policy; that is, there is no coverage for workers injured at the premises. Consequently, the additional insured property owner has no coverage and the indemnification of the property owner is not funded by the contractor’s policy. And, in the case of casual transactions, there typically is no service contract with an indemnification agreement or an obligation to provide additional insured status.

That’s bad enough, but since surplus-lines insurers are adding these restrictive endorsements to the property owner’s commercial liability policy, there is no coverage in the property owner’s policy to back up the contractor’s failed coverage. The result is that the property owner must rely on the contractor’s other financial and tangible assets to fulfill the agreement to indemnify, if there even is a service contract to fall back on.

Since these restrictive endorsements are being added to surplus-lines policies, they are going to be nonstandard forms. This requires careful review of the endorsements to understand the impact on coverage. To avoid errors-and-omissions problems, be sure to document your disclosure to the property owner. Of course, the first line of defense is the contractor, so the property owner should attempt to hire contractors by written agreement and try to avoid these exclusions in their policies.