Are You Still Insured? Understanding Contractor’s Liability Insurance

What happens when a contractor (or subcontractor) decides to quit that business altogether or stops buying liability insurance?  Does uninsured liability still loom?  Must the contractor maintain insurance forever? Or is the fact that he had insurance when he was conducting his business enough to protect him?  As with most answers in things legal… it depends.  To illustrate, we’ll look at the case of a cabinetmaker who ceased business, cancelled his insurance, only to be sued a year later for damage arising from a fire that arguably began in the cabinet he built.

FACTS

X was in the business of making custom wooden cabinetry.  X’s business was a small operation and he did not think it necessary to incorporate and operated as a sole proprietorship.  X did, however, have insurance coverage for all of his business activities.  

One day O requested that X build for him a barbecue cabinet.  X agreed, and O chose the materials and provided the specifications.  Within a few months of delivery of the cabinet X decided to get out of the cabinet making business.  X contacted his insurance broker, B, to inquire about canceling his liability insurance coverage policy.  B told X that it would be no problem to cancel.  

Within six months of X canceling his policy, a fire occurred at O’s home causing extensive damage.  The fire was traced to the barbecue and the barbecue cabinet.  O’s insurance company paid for the damage and sought to recover all it had paid out, and brought suit against X (and others) for negligence in connection with the construction of the cabinet.  X contacted B to inquire about making a claim under his insurance that was in place at the time.  B eventually informed X that his policy would not provide coverage because the fire occurred after the policy was cancelled.  

Unfortunately for X, his insurer did not have any duty to fund his defence, or make payment with respect to any final judgment or settlement of the matter, as the policy had been cancelled before the fire occurred.  X was stuck with funding his own defence, and the risk of a judgment or a settlement agreement.  

X’s policy (as with normal liability insurance) was an “occurrence based” policy, meaning that X only had coverage for physical injury to or destruction of property that occurred during the policy period.  These parties are currently in litigation.

LESSONS LEARNED

  1. When purchasing a policy:
  • Read and understand your insurance policy.  Terms vary depending on the type of policy.
  • Ask your insurance broker questions if you do not understand something.  
  • If your insurance broker does not seem knowledgeable, go to someone else.
  1. When ceasing business, consider maintaining liability coverage for a period of time (get advice from a professional).  
  2. Carefully consider the effect of canceling your policy and take notes of any advice received.  In construction, negligence today may result in damage tomorrow, and no insurance when you need it.

This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.