Insuring against Independent Contractor Exposure

The hiring of an independent contractor carries with it unique risks of legal liability. If the contractor's employee is injured on the job, he or she is entitled to workers' compensation from the contractor but may also bring a common law claim against the principal (the party who hired the contractor). This claim against the principal may be premised on three theories: The principal itself was at fault; the contractor's fault implicates the principal's liability (the principal is vicariously liable); or the principal is strictly liable under a safe workplace statute.

A fault-based theory of liability may include allegations that the principal directed the contractor to perform work in a certain manner, with disastrous results. However, much of the principal's exposure arising out of its employment of the contractor is vicarious in the broad sense based on a theory of inherently dangerous work or violation of a safe workplace statute. Many times the distinction between fault-based and vicarious liability is fuzzy at best, as in claims of negligent hiring or negligent supervision.

While these exposures are covered by general liability insurance, the principal would rather not deplete its own liability coverage for risks ultimately premised on the contractor's own negligence. The principal may attempt to shift the cost of these risks back onto the contractor through use of broad indemnity or hold harmless agreements. These agreements have two fundamental weaknesses: (1) The contractor may become bankrupt or otherwise lack the financial means to pay, and (2) enforcement of the agreement may be limited by statute or judicial decision.

Accordingly, the principal may wish to back up the promises contained in the indemnity agreement with insurance coverage. The principal has a variety of ways to shift the insurance coverage for independent contractor exposure from itself to the contractor.

Structure of Commercial General Liability CGL Policy

The general structure of a CGL policy is that it begins with a broad grant of coverage in a clause called the "insuring agreement." The insuring agreement lists the types of losses covered by the policy and may define those losses.

The insuring agreement is immediately followed by a list of exclusions. Exclusions negate coverage otherwise granted under the insuring agreement. There are two reasons for exclusions. First, the loss may not be insurable because coverage would be either contrary to the principles of insurance, illegal, or in violation of public policy. All three objections would apply to providing insurance coverage for an insured murderer. Similarly, a simple breach of contract action by a subcontractor seeking to get paid for work it had performed may not be the type of claim for which a contractor may expect coverage (unless the breach of contract action arose out of property damage or bodily injury).

Second, and of more importance, exclusions preclude the CGL policya general liability form of insurancefrom providing coverage for types of losses that are covered by other, narrower forms of insurance policies. This second purpose of exclusions, then, is to preclude redundant coverage and to compel the insured to purchase the type of policy intended to cover the specific kind of loss.

Some exclusions contain exceptions. The purpose of exceptions is to return coverage to a subset of losses otherwise excluded by the exclusion. One must remember, however, that an exception, in and of itself, does not create coverage unless that coverage would otherwise first exist by means of the insuring agreement.

An important point to understand about exceptions and the coverage they generate relates to the concept of "ambiguity." The function of an exception is to narrow the scope of an exclusion. Exceptions are read seriatim and do not modify any other exclusion. Thus, an exception in one exclusion may not be read together with another exclusion to generate an ambiguity in the contract.

The analysis of a coverage issue, then, follows the following format:

Is the type of loss included within the insuring agreement? If yes,

Is the type of loss covered by an exclusion? If yes,
Does that exclusion contain an applicable exception?

If the answer to the final question is "yes," then there is coverage for that type of loss.

Note that this three-step analysis determines only whether the type of loss is covered. All sorts of "generic" reasons may exist for denying coverage, even if there is coverage for the type of loss; for example, the claimant is not an "insured," or the insured failed to give timely notice of the claim to the insurance company. As a general rule, these generic reasons for denial of coverage apply to any insurance claim and do not raise questions unique to the issue of insurance of construction worksite personal injury claims. Accordingly, these generic reasons for denial of coverage will not be discussed in this book.

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.

Interaction between Insurance and Law

Insurance developed and spread as a result of society’s needs and demands. For example, marine insurance was followed by life insurance and shortly afterwards in the seventeenth century by fire insurance. Since then, human progress has been marked by developments in the insurance field and a variety of branches in the following classes of insurance sprang up, each forming a subject of its own: property insurance, machinery, loss of profits, engineering, motor, liability, aviation, credit, electronic equipment, off-shore structures and, most recently, space equipment. Each of these branches of insurance represents a milestone in the history of mankind.

However, the fact that insurance was itself available has influenced developments in other facets of society, forming dialogue between insurance and, for example, law or finance. This can be seen very clearly in the development of the law of negligence. The following extract, concluding a chapter on negligence, from The Discipline of Law by the great jurist and writer of the twentieth century Lord Denning, illustrates this point:

During this discussion I have tried to show you how much the law of negligence has been extended; especially in regard to the negligence of professional men. This extension would have been intolerable for all concerned—had it not been for insurance. The only way in which professional men can safeguard themselves—against ruinous liability—is by insurance…. The policy behind it all is that, when severe loss is suffered by any one singly, it should be borne, not by him alone, but be spread throughout the community at large. Nevertheless, the moral element does come in. The sufferer will not recover any damages from anyone except when it is that person’s fault. It is only by retaining that moral element that society can be kept solvent.

It is doubtful if developments in the laws of contract and negligence would have occurred in this complicated and intensely commercial world of ours without the help of insurance, which has truly shaped some of the relationships in society.

In contrast, it is important to note that there is the view that insurance against tortious liability should be considered unacceptable because it permits the individual to escape from the financial responsibility of negligent acts.