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Carefully Consider Coverage for Liability

Originally published: 01.01.10 by Mike Coyne

Don't put your company at risk with problematic 'terms and conditions'.

Recently, a reader requested advice concerning problems his company is facing in quoting jobs due to onerous “terms and conditions.” Here is his example: His company installs an hvac unit on a roof that somehow leaks, causing water to seep. The seepage damages a computer sitting on the desk of one of the tenant’s employees. The contractor will, of course, cover the damage and make the necessary repairs. But while he is making the repairs, the tenant sends the employee home. On the way home, te employee is involved in an automobile accident and severely hurt. Under the terms and conditions, the installer is being asked to pay for the employee’s injuries. Our reader laments: “The lawyers are making it so difficult that many times our insurance will not cover every aspect, thus preventing us from bidding on the job.”

As a lawyer who represents small businesses, I find these types of provisions equally troubling. Too often, customers (whether homeowners or contractors) do not appreciate that such demands for protection against damages cannot be accommodated without exceptional costs that translate into significantly higher prices for services.

There are many parties responsible for this growing problem. Certainly both the courts and the insurance industry bear some responsibility. But to understand this problem, you need to understand the difference between “direct” and “consequential” damages. Direct damages are those damages that both parties would have foreseen as being the result of a breach at the time they entered into the contract. These types of damages are more easily recoverable and are typically covered by commercial general-liability insurance policies. Consequential damages are different. They are not as foreseeable and are typically incurred by the nonbreaching party in its dealings, often with third parties (such as the tenant and the employee of the tenant in the example above). Because these types of damages are not as foreseeable, the courts frequently subject claims to limitations and require a high level of proof before granting an award.

A lawyer representing a general contractor or a homebuilder will want to write terms and conditions that make a subcontractor responsible for any damages that could be recovered against his clients by third parties. He accomplishes this by writing very specific terms and conditions, frequently describing every conceivable type of damage that could arise from defective workmanship — in a sense, attempting to turn possible consequential damages into direct damages. Thus, the terms and conditions clauses become like those that concern our reader. Now, let’s turn to the insurance industry. James Duffy O’Connor, a construction lawyer and past chairman of the American Bar Association’s Forum on the Construction Industry, describes the insurance industry’s complicity in this problem:

“For the past 50 years, the insurance industry has endeavored to eliminate property damage coverage for defective construction from its commercial general liability (CGL) policies . . . One would think that after 50 years, the insurance industry would figure out how to ‘write out’ property damage coverage for defective construction — if it were serious about the matter . . . The demand in the construction industry for broad property damage coverages — and the premiums collected as a consequence of that demand — drives the insurance industry to offer with one hand what it tries to take away with the other.”

The insurance industry is constantly modifying its policy language, denying coverage, and asserting exclusions in order to limit its financial exposure.

The problem is that the contractor is caught in the middle. Customers demand high levels of protection against any consequences of faulty performance, while insurers try to avoid providing coverage for such faulty performance.

Unfortunately, this is a problem for which we have no good solution. As an industry, hvacr contractors need to pressure the insurance industry through their trade associations. In the meantime, to the extent that you are asked to bid on a job for which your insurance will not provide protection, you need to walk away.

Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: or call 440-835-0600.

About Mike Coyne

Mike Coyne

Michael P. Coyne is a founding partner of the law firm Waldheger Coyne, located in Cleveland, OH. For more information of the firm, visit: or call 440.835.0600.

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