July 2017

When a contractor works on several parts of a structure, and a mistake they make on one part causes damage to other parts they worked on, does their Liability insurance cover all of the damage, some of it, or none of it? This is the question a Texas court answered in a 2009 decision interpreting the Commercial General Liability policy’s “that particular part” clause. This phrase has been the subject of many court cases because, to some extent, its meaning is in the eye of the beholder.

In the Texas case, the contractor worked on a condominium project. They performed the water-sealing on exterior finishes and retaining walls improperly, permitting large quantities of water to enter the structure through multiple points, including ceilings and walls and under doors. The water damaged other areas of the project on which the contractor had worked, including stud framing and interior drywall. The contractor notified their insurance company, but the company denied the claim because of two policy provisions that exclude coverage.

First, the policy said that the insurance did not apply to “property damage to … that particular part of real property on which (the insured contractor) or any contractors or subcontractors working directly or indirectly on the (insured contractor’s) behalf are performing operations, if the property damage arises out of those operations.”

A second exclusion stated that the insurance did not apply to “property damage to … that particular part of any property that must be restored, repaired or replaced because (the contractor’s) work was incorrectly performed on it.” The insurance company’s intention was to not insure a contractor’s own shoddy workmanship. The contractor sued the company for breach of contract.

The court found that the first exclusion did not apply to this loss because the contractor was not working actively on the project at the time. The contractor had finished the exterior work, and the owner had suspended interior work on most of the condominium units while their sales were pending. The court noted that the exclusion eliminates coverage for damage to property on which the contractor is performing operations. Since the contractor was not performing operations at the time of the water damage, the exclusion did not apply.

The court also found that the second exclusion applied only to the contractor’s exterior work and not to the parts of the interior that suffered damage. It arrived at this conclusion by breaking the exclusion into its components:

No coverage for damage to:

1. Property;
2. that must be restored, repaired or replaced;
3. because the contractors performed work on it incorrectly.

According to the court, this wording differentiates between property on which the contractor performed work incorrectly, and other property on which the contractor did not perform work incorrectly. Since the owner did not claim that the contractor performed faulty work on the interior components, the court said that the exclusion did not apply to damage to those areas.

According to the opinion, the exclusion “ … bars coverage only for property damage to parts of a property that were themselves the subjects of defective work, and not for damage to part of a property that were the subjects of only non-defective work by the insured … ”

Courts have interpreted these exclusions in various ways, depending on the circumstances of the individual cases. Contractors should be aware that, when they have liability for property damage, their insurance coverage might not be clear-cut. Our insurance agents can give you an idea of how companies providing coverage have handled similar claims in the past.

All mortgage lenders require home owners to buy adequate homeowners’ insurance. If the home owners’ policy lapses or is otherwise insufficient, though, the bank will implement a lender placed property insurance on the home. Understand this insurance product as you protect your home.

Why Is Property Insurance Important?

When a bank loans you money for your mortgage, they assume a risk. If your home is damaged or destroyed by weather, fire, vandalism or another peril and you do not have insurance, they are responsible for expensive repairs.

Homeowners’ insurance is important for you, too. With it, you can repair or replace your home.

When do you Need Lender Placed Property Insurance?

You’ll only need lender placed property insurance if your homeowners’ insurance policy lapses. This could happen for several reasons.

• The policy is cancelled.
• Your existing insurer goes out of business or stops offering homeowners’ insurance.
• You forget to pay the premiums.

In any of these cases, you can purchase a replacement policy. But if you don’t, your bank will protect its interests with lender placed property insurance.

How do you get Lender Placed Property Insurance?

Your mortgage holder will notify you before they put a lender placed property insurance policy in place. They only put this policy in place after you’ve received several past-due or cancellation notices from your insurance company and they’re sure your homeowners’ insurance policy has been cancelled.

How Much Does Lender Placed Property Insurance Cost?

Lender placed property insurance can cost up to twice the amount of a regular homeowners’ insurance policy. While you’re responsible to cover the cost of the policy, you do not choose the company that issues it or the amount of coverage you receive. The lender has total authority over these decisions.

The increased cost is partially because a lender placed property insurance policy is usually put in place sight-unseen. The company doesn’t consider the home’s current condition, recent losses, occupancy or other details that could potentially decrease the policy’s cost.

What Does Lender Placed Property Insurance Cover?

A typical lender placed insurance policy has limited coverage. It may not pay liability claims if someone is injured on your property. It also may not cover personal items if they’re stolen, lost or damaged.

How to Avoid a Lender Placed Property Insurance Policy

To avoid paying for a lender placed property insurance policy, maintain the homeowners’ insurance policy of your choice. Pay your premiums on time and carefully examine and keep copies of all the paperwork your insurance company sends you.

A lender placed property insurance policy protects your mortgage lender and you. Know what it is as you protect your home.

A Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners provides a wealth of valuable information for any company.

According to the report: 

Organizations with fewer than 100 employees have a higher rate of fraud exposure to billing, check tampering, skimming, expense reimbursement, cash on hand, payroll, and larceny than their counterparts do.

Conversely, employers with more than 100 employees have a greater exposure to corruption and non-cash theft. The most common anti-fraud controls include audits, codes of conduct, management review, hotlines, and training.

Companies with 100 or more employees are almost twice as likely as smaller organizations to employ anti-fraud controls.

It generally takes some time to detect fraud. Financial statement fraud had a median duration of 27 months. Check-tampering, expense reimbursement, billing, and payroll scams 24 months; corruption, cash on hand, skimming, and larceny 18 months.

The list of fraud examples is instructive:

1. Skimming a small percentage of cash payments or assets.
2. Accepting payment from a customer, failing to record the sale and instead pocketing the money.
3. Stealing cash and checks from daily receipts before they can be deposited into the bank.
4. Creating a shell company and billing employer for services not actually rendered.
5. Purchasing personal items and submitting invoices to employer for payment.
6. Filing fraudulent expense reports for personal travel, nonexistent meals, etc.
7. Stealing blank company checks, and making them out to themselves or an accomplice.
8. Stealing outgoing checks to a vendor and depositing them into their own account.
9. Claiming overtime for hours not worked.
10. Adding ghost employees to the payroll.
11. Fraudulently voiding a cash register sale and stealing the cash.
12. Stealing inventory from a warehouse or storeroom.
13. Stealing or misusing confidential customer financial information.

Nearly one in five frauds were exposed by tips from fellow workers. Many organizations provide employee-tip hotlines. Perhaps you should too.