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There’s an ancient proverb that people learn only from their own mistakes. Otto von Bismarck said it better: “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” As the construction industry collectively moves past the age of the novel coronavirus into what will hopefully be a new normal, in the aftermath there are lessons to be learned about how insurance programs operate, about unexpected gaps in coverage and about how huge risks that come out of left field can leave companies vulnerable. 

Even if a company did not fall into one or more of the coverage gaps revealed by COVID-19, business leaders can and should try to incorporate the lessons learned in the experiences of others whose businesses faced unexpected challenges over the past 18 months. 

Some construction jobs shut down for months, others slowed down substantially due to COVID-19 restrictions and some completed projects with limited ability to open new retail or restaurant spaces, or to occupy new offices or residential units. This left many participants in the construction industry facing massive (and hopefully temporary) declines in revenues even if the projects were completed. 

For companies who had the forethought to obtain insurance for disease or contamination, event cancellation or similar coverage, some have successfully recovered business interruption losses from their insurers because of their foresight. Under most standard insurance programs (typically in property insurance policies or builders risk policies), coverage for business income losses from the pandemic depends on a showing of “direct physical loss of or damage” to the insured property. Whether COVID-19 and its related government orders fall within that category of loss is an issue that will continue to be litigated over the next few years. 

While the court decisions are still rolling in on this front, many businesses have been surprised to learn that their insurers do not consider a complete or near shutdown of business due to COVID-19 to be a covered event. While there are certainly arguments to the contrary, generally speaking, the clients who had the forethought to obtain special risk coverage in the form of sublimit or separate coverage have had an easier path to recovery than those who simply renewed existing coverage. 

As a whole, the construction industry also learned about how some limitations in “typical” policies might not exist in more custom-crafted policies, such as disease/contamination sublimits, event coverage and other “non-traditional” coverage that a company may not have purchased. Renewals are sometimes reflexive in nature, in that companies seek renewal or replacement policies for what they already have; one of the lessons learned from COVID-19 is that it is always worth the effort to think outside the box of a company’s current program, for other possible coverages.

Dig the Well Before You’re Thirsty

Whether or not directly attributable to virus or disease exclusions in policies, some of the most important lessons to be learned are to assess up front, before there’s a problem, whether insurance programs address lurking threats, and not to just rely on an annual renewal of previous coverage programs. Gaps in coverage can occur (and may already exist) throughout an insurance portfolio. If there is one critical lesson to be learned from the mistakes of others here, it would be to make sure to conduct a critical review of a company’s insurance program and to make sure it will not lead to falling into a gap of coverage that could be covered by commercially available alternatives. Drawing from lessons learned throughout the pandemic, insurance programs can be better constructed to avoid financial and legal fallout from lurking threats. This requires company leaders to sift through their insurance programs to identify potentially costly gaps in coverage and conduct due diligence before disaster strikes, not after. 

Coronavirus losses should also teach construction companies to critically review changes to policies upon renewal—for example, as has happened in thousands of policies, did the insurer slip the words “virus” and “bacteria” into a pollution exclusion, and what does that mean? Should a CPL policy be considered to cover for pollution related losses that have not been covered elsewhere? Are there other obscure exclusions or definitions in the policy that impact the business?

Particularly in the construction field, there are numerous areas where the “lessons of others” should serve as a reminder that there are lurking threats that justify the effort of significant upfront thought in the development of insurance programs to identify gaps in coverage, even if a company has renewed the coverage purchased last year and the year before. Among non-COVID-19 examples:

  • Many companies have purchased new kinds of insurance coverage over the past years, whether for cyber losses or for crisis events. When these new forms of coverage are purchased, often they come not only with strict timelines for claim reporting, but also restrictive provisions requiring the use of certain vendors and procedures for the handling of the claim. Lesson learned: Know what policies require so if there’s an emergency, the company is not caught flat-footed. 
  • Even simple liability coverage is not so simple, and policy forms have been evolving over the years, usually not in the insured’s favor. Often, the proposed policy forms are inconsistent with companies’ business and risks, and there may be success to be found in negotiating additional provisions to customize an “off the rack” policy for imminent risks. Lesson learned: A “standard” policy isn’t always the right thing; know what is being bought and don’t be afraid to negotiate it.
  • In one recent case, the owner-controlled insurance program (OCIP) had patently inadequate limits compared to the loss. Further, the limits were eroded (i.e., were reduced) by the attorneys and expert fees spent to defend the claim. This left the OCIP participants facing millions of dollars of loss above and beyond the OCIP limits. Lesson learned: Not only should limits of the OCIP policy that is being purchased be closely examined, but a company has involvement in OCIP projects, it should price out and consider purchasing “excess of wrap” coverage to protect itself should the OCIP prove inadequate.
  • In another recent case, professional negligence exclusions in typical construction projects leave owners, developers and general contractors at risk when there are claims that arise out of architectural, engineering or design-build work. Typically design professionals have smaller limits that for larger projects may be inadequate, particularly if there is the potential for a substantial problem that stems from design work. Lesson learned: Limits are important; consider whether it is worth the project expense to contribute to the design professionals obtaining excess coverage, or whether “excess of design E&O” coverage can be obtained. 
  • In yet another recent case, a professional entity faced a claim that it failed to conduct proper inspections and that this contributed to poor construction that was the subject of a large claim. Unfortunately, not only do most CGL policies exclude losses from the provision of professional services, but many E&O policies do not apply to property damage claims. Lesson learned: Make sure policies cover the types of loss that are a natural consequence of the work being done. 

Ultimately, the lesson learned from COVID-19 is that construction industry players need to be more aware of what is in the insurance programs being purchased, and to think critically about those programs instead of renewing reflexively. Remember that not every policy is the same, and not every transaction fits the “standard” bid. Attorney review of insurance policies at renewal, or in connection with large transactions, can be invaluable. 

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