By Kirk Retz
Along with the rise in construction comes the rise in construction-related litigation. One particular area of growth in the past few years has been construction defect litigation. These days, if you are involved in construction, you can anticipate being served with a lawsuit at some point in your career. Being served with a lawsuit can cause a moment of panic and confusion, but it doesn’t have to. In our construction law practice, we have found that the answers to some frequently asked questions can provide a “game plan” in the unfortunate event that the process server comes knocking on your door. Below, we have set forth those questions and some general answers based upon our experience.
1) What do I do if I get sued?
There are three things you should do immediately if you are served with a lawsuit: 1) contact your lawyer; 2) contact your insurance company; and 3) find your job file. These three steps are critical to your protection.
Contact Your Lawyer
If you don’t have a lawyer, you should get one. You have a short window of time to answer a lawsuit once it is served. If you do not answer in time, the plaintiff can get a judgment against you even if you did nothing wrong. If you have a judgment against you, some states will suspend your contractor’s license until the judgment is paid off. You could end up having to pay for something you did not do and lose your ability to earn money to pay it off. A lawyer skilled in construction law can help you avoid this terrible result.
Contact Your Insurance Company
Many times, your insurance company will hire a lawyer for you (or pay for yours) and pay to settle the suit, if necessary. However, it does not have to do anything until it receives notification of the claim. A good way to do this is through your insurance broker, since he or she will have information such as the policy number, type, exclusions and effective policy period. Often as a subcontractor, you are also required to name the general contractor as an additional insured under your policy. If the person who sued you asks for this additional insured information, your broker should have that too.
An important point here is the distinction between informing your insurance broker about a claim and informing your insurance company. Many insurance brokers are not employed by insurance companies. This means that giving your broker notice of the claim may not provide the necessary notice to your insurance company. One way you can ensure that the company is notified is to ask the insurance broker to send you a copy of the letters sent on your behalf. This will give you peace of mind and a written record of when your insurance companies were first notified. Another way to make sure your insurance companies know about the suit is to send the letters yourself. You do not need to follow any special form. Just tell them you have been sued, explain that you are asking them to defend you, and include copies of the complaint.
Find Your Job File
This will be the best source of information about what happened on the job as it happened. You will be asked many questions about what you did, why you did it, and why you did not do something else. Most lawsuits are not filed until long after the job is completed. No one can remember all of the details of a job that was completed 100 jobs ago. The best source of this information will be contracts, blueprints, requests for information, inspection reports and other letters written when you were working on the job. You can be sure that your lawyer and your insurance carrier, as well as the lawyer on the other side, will ask for this information.
2) Which of my insurance carriers might provide me coverage?
The answer to this question depends on the laws of each state and the language of each policy. For example, in California, all insurance carriers who issued policies that are “on the risk” might be obligated to defend you. “On the risk” means those policies that were in effect at any time between the date you began work on the project and the present, subject to the statute of limitations. In California, contractors can be sued for latent defects (e.g., those hidden inside walls or underground) for 10 years after construction is completed. That time frame can be extended for an additional three years if the plaintiff files suit on time but the general contractor delays filing suit against the subcontractors. Under these circumstances, it is possible that 13 years of insurance policies may be “on the risk.” In Nevada, contractors can be sued as long as 12 years after the project is completed. You should contact your lawyer to find out how long the exposure lasts in your state.
Be advised though that the fact an insurance policy is “on the risk” does not mean the carrier will be obligated to defend you against a lawsuit. There are numerous types of insurance policies and countless types of exclusions within each of those policy types. Addressing these policy types and exclusions is beyond the scope of this article. The important part is for you to know that they exist.
If your insurance company denies your claim, you should contact your lawyer because sometimes insurance companies deny claims for improper reasons. In that case, a lawyer is needed to protect your interests. A lawyer skilled in construction law can fight for your rights and make sure that you receive the protection you paid for when you bought the policy.
Keep copies of your insurance policies for as long as you have potential exposure. Insurance companies sometimes lose records. If you keep a copy of your policy, you do not have to depend on the insurance company to find it for you.
3) If each of my insurance carriers requires a deductible, should I notify them all?
The short answer is “yes.” If you are sued, you should tell each of the insurance companies that issued you a policy at any time between the date you signed your construction contract and the present. Generally speaking, an insurance company has no responsibility to pay for a claim it does not know about. If you choose to notify only one insurance carrier, and for some reason that carrier fails to cover the claim, the other carriers have no responsibility until they are notified.
4) If I have 10 insurance companies providing a defense and each has a $5,000 deductible, does the first $50,000 come out of my pocket?
The answer depends on your state’s laws. In California, insurance companies are not allowed “stack” deductibles. A contractor can make an “Armstrong Election” (Armstrong World Industries, Inc. v. Aetna Casualty and Surety Company (1996) 45 Cal.App.4th 1).
With Armstrong, if there are multiple insurance policies that could cover a certain claim, the contractor can choose which one of those policies he or she wants to defend the suit. This means only one deductible must be paid. You should check with your own lawyer to find out if your state has a similar law.
5) Is there anything I can do during construction to help me defend myself against a future lawsuit?
Yes! Keep good records. Since most construction lawsuits happen long after the projects are completed, the papers that remain from the job speak the loudest about what happened. For example, in a recent matter, an underground electrical contractor (“UEC”) who installed utilities for a school district was sued. The school district and its architect claimed that UEC installed the utilities in the wrong location. The general contractor sued UEC asking for nearly $400,000. Fortunately, UEC had kept two sets of blueprints used for takeoffs that clearly showed the conduits were installed in the right location, as well as a memo from the architect confirming this fact. In light of those documents, the school district chose not to pursue UEC at all and sued the architect instead. Without the documents, the UEC would have had a much more difficult and expensive defense.
The most important information to keep is: 1) your contract and any change orders; 2) your insurance policy; 3) any requests for information; 4) any variation of blueprints drafted by the architect or anyone else; 5) copies of inspection cards; (6) any notes you wrote about the job as it was happening; and 7) if you hired subcontractors, any additional insured endorsement written in your favor. If you are named as an additional insured under anyone else’s insurance policy, the endorsement may provide you with more protection. This is a pretty short checklist, but it can make a world of difference if you are sued.
In addition to refreshing your memory, these records will provide evidence you can use in court. The contract and change orders define your scope of work. The requests for information and blueprints will show the specific changes to that scope. The inspection cards will show what the governmental inspectors requested. Your job notes will fill in any blanks. Many times, lawyers have tried to define a contractor’s scope of work based on the progress payments from the construction lender since they were the only remaining documents. These records are rarely accurate and generally do not reflect what happened on the job. Don’t let this happen to you.
Let’s face it, you know what happens on your job sites better than any lawyer ever will. After the job is finished, if you take a few minutes to organize your file, you may save yourself tremendous headaches years down the road. Following the “game plan” outlined above can help protect your company from the expenses of a lawsuit, or at the very least reduce them.