Understanding Insurance

Written By: Patricia McHugh Lambert, Esquire

I overheard a conversation between a lawyer and a client the other day.   The lawyer told the client to make sure that the contractor that he was using had a general liability policy.  The lawyer advised that insurance was necessary because if the house at issue was not built correctly, the client could “go after the insurance company.”

Even though I calmly counted to ten, I wanted to scream “you must be kidding!”  I even considered going over to the lawyer to tell him that he should make sure that he knew something about insurance before giving advice.  I wanted to tell him that an insurance policy does not provide a guarantee that work will be performed correctly.  If I had known the lawyer or his client, I might have actually said something.  But feeling that my advice was unsolicited and probably unwanted, I merely shook my head knowing that someday someone would be suing someone. 

In situations where there is a misunderstanding about coverage, I always worry about the insurance producer.  Although an insured has an obligation to read and understand their own policy, they generally rely on the producer to tell them about coverage. 

Where a commercial insured is seeking information about what is and is not covered, an insurance producer should make sure that the insured knows that a general liability policy is not the same thing as a performance bond.  Indeed, as the United States District Court in Mutual Benefit Group v. Wise M. Bolt Co. indicated, that an insurer’s obligation to defend is triggered because of an “occurrence;” and in order for there to be an occurrence something “unexpected and unforeseen” occurs.  As the court noted, “it should not be unexpected and unforeseen” if a building does not meet contractual requirements.

But insureds and the people they work for do not seem to understand this simple concept that an insurance policy does not provide a guarantee for work performance.  Certainly, they do not understand the “your work” and “your product” exclusions.  They do not understand that the exclusion for “your product” excludes damages to the property that was built by the insured.  They do not understand that the “your work” exclusion expressly excludes coverage for an insured’s faulty workmanship.  See, e.g. Mutual Benefit Group v. Wise M Bolt Co., 227 F. Supp. 2d 469, 477 (D. Md. 2002).

As a result of this lack of understanding, insurance producers are being brought in as defendants in cases where the “your work” or “your product” exclusions are  used by an insurer to deny coverage.  Insureds exclaim that they didn’t know that they did not have coverage.   The persons who receive accord certificates sometime shout “fraud!” because they feel like they checked to make sure that there was coverage—which they understood to mean that the contractual performance was guaranteed.  Each believes that the insurance producer should be liable if there is no coverage due to the application of exclusions.

All of this means that an insurance producer should be careful in his/her description of coverages.  An insurance producer should make clear that an insurance policy does not guarantee work performance.  And we can all hope that lawyers start understanding insurance coverage issues. 


* This article originally appeared in the September 2011 issue of the Insurance & Financial Advisor. Ms. Lambert is a prominent member of PK Law’s Litigation Group and is a regular columnist for the publication. For more information, or to have Ms. Lambert write an article on a topic for your publication, please email plambert@pklaw.com