Construction and Insurance: Major Unexpected Changes?

By Harlan E. Jones

Everyone involved in the construction industry in Oregon (whether as an owner, prime, sub, or design professional) is accustomed to having insurance and to assuming that the others involved also have insurance. All participants have, over time, developed understandings about what problems and what parties insurance covers, and what problems and what parties it does not cover. But recent Oregon court decisions suggest that some construction participants may be surprised to find that in some situations they have less insurance that they thought, or even no insurance at all. Obviously, a change in the insurance situation for any one participant in a construction project can end up having consequences for all participants, depending on who makes what claims and whether those claims turn out to be insured.

In light of these recent court decisions, you should talk to your insurance and legal professionals now about your insurance situation. It is important that you make sure that those who advise you about such issues are fully aware of these decisions and are actively analyzing the best course of action for you, even if that course of action may not be clear for some time yet.

We will not attempt in this brief article to offer technical, legal explanations of the recent court decisions. Rather, we will offer a couple of basic, common sense examples that will help to illuminate how the construction insurance world in Oregon may be changing.

Imagine that you are a prime contractor for a building you built five years ago. You have insurance under a policy that was issued at that time. The building leaked shortly after you finished construction. You quickly had the responsible sub repair the minor construction error that caused the leak, but you are now being sued by the owner for damage to the building interior and for the costs of investigating and remediating a resulting mold problem. You ask your insurance company to defend the lawsuit against you and pay any damages. Until recently, your insurance carrier would probably have done as you asked. Under the new court decisions, however, your insurance carrier may tell you that the claim is not insured. Defense and judgment costs are yours.

Whatever your insurance company says, you demand that the subcontractor who caused the leak protect you in the owner's lawsuit against you. The subcontractor turns to its insurance company. Again, under the new court decisions, the insurance company may tell the subcontractor the claim is not insured. You get whatever the sub is able to give you.

In fact, one recent Oregon court decision has been interpreted by some to mean that insurers will in the future completely refuse to include primes and owners as additional insureds in policies issued to subs, and may even refuse to defend owners and primes under existing policies that already name them as additional insureds. Others think the consequences of the decision are less dramatic, but you will want to be sure that your legal and insurance professionals are on top of this now. You do not want to find out the hard way that you have a claim against an uninsured entity, or that you have no insurance protection as to a claim made against you.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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