Understanding Action Over Exclusion in Construction Insurance

The construction industry faces significant challenges in managing risk and liability, particularly with the increasing prevalence of action over exclusion clauses in general liability insurance policies. These exclusions have far-reaching implications for general contractors, subcontractors, and other construction professionals.

In this article we explore what these exclusions mean, why their use has increased, the impacts on construction businesses, especially in high-risk jurisdictions like New York, and actionable steps contractors can take to help minimize exposure and safeguard operations.

What are action over exclusions?

Remediation for workplace injuries is typically addressed through workers' compensation insurance, which serves as the exclusive remedy for employees, in most cases, prohibiting them from suing their employers directly.

Action over exclusions are clauses in general liability insurance policies that deny coverage for claims when a third party is sued by an injured employee of the insured. For example, if a subcontractor's employee is injured on a jobsite, the injured party would likely receive workers' compensation benefits from their employer and then choose to sue the general contractor or property owner for negligence.

Typically, a general contractor would have hold harmless agreements in place with their subcontractors, allowing them to pass the liability back to the subcontractor. However, if the subcontractor has an action over exclusions clause in their general liability insurance policy, the coverage would be denied even if the hold harmless agreement was in place to make them contractually responsible for the claim.

Action over claims

Injured employees may still pursue third-party negligence claims against other entities, such as property owners or general contractors, whose actions or oversights may have contributed to the injury. In these cases, the third party often tenders the claim back to the employer under liability agreements outlined in the contract. These tendered claims are referred to as "action over claims."

Action over claims is particularly common in the construction industry, where downstream subcontractors are often contractually obligated to indemnify and defend general contractors for third-party claims arising out of their scope of work. In addition, contracts frequently require subcontractors and their insurers to waive subrogation rights against upstream parties, further shaping liability dynamics.

Why are insurers adding action over exclusions?

In recent years, insurers have increasingly added action over exclusions to general liability policies as a way to limit their exposure to costly claims. This trend is especially pronounced in high-risk states like New York, where stringent labor laws make the construction industry particularly susceptible to worker injury lawsuits.

The impact of New York labor laws on action over claims

New York labor laws, namely Labor Law Sections 200, 240, and 241, have compounded the risks associated with action over exclusions:

• Labor Law 200: Mandates that property owners and general contractors provide safe workplaces and protect workers from dangerous conditions or methods.
• Labor Law 240 (Scaffold Law): Mandates that property owners and general contractors are responsible for maintaining fall protection devices and proper scaffolding, ladders, and hoists to help protect workers against falling from a height or from falling objects.
• Labor Law 241: Mandates that property owners and general contractors take reasonable precautions to prevent injuries occurring on construction, excavation, and demolition sites.

While these laws were designed to protect workers' safety, they've often been manipulated in litigation. Fraudulent or exaggerated claims have become common, and lawsuits frequently result in multi-million-dollar settlements, even for cases with minimal merit. For insurers, such cases create major financial exposure, prompting the widespread attachment of action over exclusions clauses to their policies to avoid having to pay costly claims. This can, however, create a significant coverage gap for insured parties operating in New York's construction industry, as well as create a balance sheet risk for the insured.

The risks of action over exclusions in construction

For general contractors and subcontractors alike, action over exclusions dramatically increase liability exposure by eliminating coverage for lawsuits involving third-party negligence claims. Risks can include:

• High legal costs: Defending negligence claims can result in protracted litigation, often requiring substantial financial resources.
• Costly settlements or judgments: Lawsuits influenced by labor laws often result in staggering multi-million-dollar payouts.
• Project disruption: Uncovered claims can compromise cash flow, hinder project timelines, and put businesses at risk of financial instability.
• Reputational damage: Prolonged or unresolved lawsuits may tarnish a company's reputation, reducing its ability to win future contracts or collaborate with partners.

For general contractors, hiring subcontractors whose insurance policies contain action over exclusions further exacerbates financial risk. Liability left uncovered by the subcontractor's insurer often falls back on the general contractor, creating potentially catastrophic exposure.

Proactive steps contractors can take to mitigate action over exclusions

Fortunately, there are several proactive measures that contractors can take to protect their business against the risks posed by action over exclusions:

1. Review insurance policies for action over exclusions: Whether you're a general contractor or subcontractor, prioritize the review of your own general liability insurance policies. Ensure that your policy does not contain action over exclusions. If it does, consult your insurance company or advisor to explore alternative coverage options tailored to construction risk management.
2. Vet subcontractor coverage thoroughly: Review subcontractors' certificates of insurance (COIs) before hiring them to confirm their general liability policies are free from action over exclusions. By ensuring that downstream parties have adequate coverage, general contractors can reduce their financial exposure if claims arise.
3. Enforce contractual insurance requirements: General contractors should include requirements in their contracts mandating that subcontractors carry insurance policies without action over exclusions, specifically those operating in New York.
4. Invest in jobsite safety and risk mitigation: Reduce the likelihood of workplace injuries by strengthening safety protocols, equipment checks, and employee training. By minimizing on-site hazards, contractors can help decrease the frequency of negligence-based claims and legal disputes.
5. Partner with experienced construction insurance advisors: Collaborate with insurance professionals specializing in construction risk management to navigate potential coverage gaps. They can help you identify deficiencies in coverage, negotiate favorable policy terms, and develop solutions tailored to construction-specific liabilities.

Why proactivity is essential

Insurers' use of action over exclusions, combined with the high stakes imposed by labor laws, can leave your business vulnerable to devastating lawsuits and financial losses. By maintaining oversight of subcontractor coverage, vetting contracts properly, and partnering with trusted advisors, construction professionals can help mitigate gaps in coverage and reduce liability exposure.

Conclusion

Action over exclusions are becoming an increasingly common challenge in the construction insurance landscape, making it essential to prioritize proactive risk management strategies. With proper vigilance, these exclusions can help protect your business, along with your ability to manage risk and sustain operations. Take action now to help safeguard your construction operations and keep your projects running smoothly.