The problem: Bill, a subcontractor's employee, is injured on the job and (inevitably) sues the property owner and general contractor.

The subcontractor, Bill's employer, was contractually obligated to obtain insurance for such claims, but because the bid and money were tight, they did not.

However, the owner and general contractor have other CGL (comprehensive general liability) insurance, and they turn Bill's claim over to their own insurance carriers for defense and indemnity.

They sue the subcontractor successfully for breach of contract for failure to obtain insurance, but they are awarded virtually no damages - and no costs of defense, nor the cost to settle Bill's personal-injury claim.

The law

In Kinney v. Lisk, 76 N.Y.2d 215 (1990), the general contractor hired a subcontractor to perform work on a building project owned by Lisk. The general contractor was granted summary judgment on its third-party action asserting that the subcontractor failed to procure insurance coverage as required by the subcontract.

The Court of Appeals held that "because the (subcontractor) breached its agreement to procure liability insurance covering (the general contractor), it is liable for the resulting damages, including the (general contractor)'s liability to the (personal injury) plaintiff." The court affirmed a trial court's judgment awarding the general contractor $125,000 plus attorneys' fees.

In very similar circumstances, the Court of Appeals 10 years later decided Inchaustegui v. 666 5th Ave. Ltd. Partnership, 96 N.Y.2d 111, 725 N.Y.S.2d 627 (2001), where a tenant agreed to maintain CGL insurance on the premises and name the landlord as an additional insured.

The tenant took out a policy, but failed to name the landlord as an additional insured. One of the tenant's employees suffered personal injuries and brought suit against the landlord, which then brought an action against the tenant for breach of the lease.

However, the court, noting that the landlord had its own liability insurance, limited the landlord's damages to the cost of "maintaining and securing" its insurance policy for the year that included the date of the accident.

This was small solace to the landlord and its insurance carrier, who were forced to defend the case and pay the claim.

Recommendations

What should one do, then, to insure a contractor's or subcontractor's procurement of insurance?

The best defense is diligent contract administration:

• Know who is providing what type of insurance coverage on the project (builder's risk, CGL, property, workers' compensation) and to cover whom (owner, general contractor, construction manager, architect).

• Know who is to be listed as an "additional insured" on other parties' liability policies, and insist on unconditional additional-insured endorsements.

• Prior to commencement of work, require copies of all actual insurance policies, additional-insured endorsements and certificates of insurance. Check for details such as correct named insured, type of coverage, amount of coverage, policy period, adequacy of endorsements and correct certificates of insurance. Remember that legally, a mere certificate of insurance does not itself bind insurance coverage.

• If necessary, review the contract provisions and presented insurance documents with counsel for completeness and compliance. A few hours of counsel time spent avoiding a problem may pale in consideration to the cost of defending and paying a catastrophic job-site injury claim.

• Do not allow a contractor or subcontractor on site to commence work if it has not provided required insurance documentation.

• If a loss occurs, immediately put all potential carriers on notice - or the third party's carrier, who may be providing coverage, and one's own liability or property insurance carrier. If there is a denial and disclaimer of coverage, immediately contact counsel to investigate and protect potential coverage in a timely manner.

Earl Cantwell is a member of Hurwitz & Fine PC and practices in the Buffalo law firm's business litigation, construction defect/labor law, and employment practices and workplace liability groups. He can be reached at ekc@hurwitzfine.com.