The Border War: Insuring Others for Their Own Mistakes
When you purchase insurance, you do so to protect your assets in the event you make a mistake and cause an accident. One of the most publicly-debated but misunderstood issues in the construction industry is the practice of contractually shifting the damages caused by one’s own mistakes to another. Among state legislatures, this risk shifting is either wholly supported, wholly disallowed, or something in between. In 2004, the Kansas legislature made these so-called “broad form indemnity” clauses in construction contracts void, unenforceable and against public policy. Missouri had already made them unenforceable in public and private construction contracts in 1999.
Kansas went a step further in the Fairness in Private Construction Contract Act (2005) and Fairness in Public Construction Contract Act (2007) and made construction contract provisions which waived or extinguished insurance subrogation rights void and unenforceable. Therefore, in Kansas, insurance carriers which pay a claim are free to seek reimbursement for paid claims from the party or parties whose negligence caused the damages. Missouri has not yet followed suit and still allows parties to waive such insurance subrogation rights.
Despite efforts to limit risk shifting, it is still a common practice to require, for instance, subs to name general contractors (GCs) as “additional insureds” on their insurance coverages (or GCs to name owners and architects). Under this practice, if the GC makes a mistake, and it causes personal injury, death or property damage, the GC can make a claim on the sub’s insurance policy. If the liability insurer pays that claim, the limits of the sub’s coverage are reduced by the same amount. In 2009, the Kansas legislature joined just seven other states in closing this loophole by expressly voiding any provision in a construction contract in which a party is required to provide liability coverage as an “additional insured” for another. Missouri, on the other hand, still allows a construction contractor to name another as an “additional insured” on its insurance coverage.
Put this in perspective. You are a GC and you have ten separate projects. On each of those projects, you are asked to name the owner and its architect as an “additional insured” on your liability insurance. A design defect causes a building to collapse and one or more people are hurt or killed. When claims are made against the owner or architect, they make claims on your insurance. If you have a limit of $1 million and claims for $600,000 are paid, your limit is now $400,000. Such a small limit may leave your assets exposed in the event the limit is completely exhausted by another claim. If you’ve paid attention at all, you know that one bad accident can easily eat up the full $1 million in coverage. Needless to say, if you are able to renew that insurance, your premium will be substantially higher. Or, if you need bigger limits to accommodate the increased claims potential, you will pay more in premium.
So, Jayhawk vs. Tiger aside, would you rather be in Kansas or Missouri?