The Function and Mechanics of Insurance

The function of insurance is to transfer, in exchange for the payment of a premium, the risk of a financial loss occurring on the project. Insurance covers losses that are predictable but also unexpected (or fortuitous) and unintentional. Construction projects as a general rule engender two types of insurable risks: bodily injury (including death) and property damage. Only bodily injury coverage will be discussed.

Insurance coverage, otherwise applicable, will be denied if the insured failed to provide the insurer with timely notice. Notice should be provided twice: once when the accident occurs and then again when a lawsuit is filed against the insured. Notice must be provided as soon as practicable. The insurer then evaluates whether to provide coverage. In deciding whether it has a "duty to defend," the insurer must examine the complaint and the surrounding circumstances to see whether any potential covered loss is included therein (regardless of what the insurer views as the ultimate merits of the claim).

If the insurer concludes that the claim is covered, it will assume the insured's defense. If it has doubts as to coverage, it may assume the insured's defense but reserve the right to contest coverage at a later date. Finally, the insurer may refuse to defend against the lawsuit on the ground that the claim does not allege a covered loss. At this point, the insured will sue the insurer for breach of contract and seek a "declaratory judgment" from the court that the lawsuit is, in fact, within the insurer's duty to defend. Alternatively, the insurer may be the one seeking a declaration of its duty under the policy.