U.S. Supreme Court Strengthens Employers’ Hand Against Age Discrimination Claims

The American workforce is growing older and the economy is struggling. These two factors indicate that, as companies lay off workers to cope with a slow economy, older workers who lose their jobs may increasingly take their former employers to court for alleged age discrimination. However, a recent decision of the U.S. Supreme Court may make it harder for workers to win those lawsuits.

Jack Gross, a 54 year-old claims administration director for a financial services firm, was reassigned in 2003 to the position of claims project coordinator; some of his duties were transferred to a person in her forties whom he formerly supervised. Because he lost some of his duties, he considered the move a demotion and sued his employer a year later, claiming a violation of the Age Discrimination in Employment Act of 1967. At trial, the judge instructed the jury that it must find in Gross’s favor if he proved that he had been demoted and that age played a part in the employer’s decision. The jury did return a verdict in his favor and awarded him lost wages. An appeals court reversed the ruling, saying that the judge’s instructions were incorrect, and Gross appealed to the U.S. Supreme Court.

On June 18, 2009, a divided court ruled against Gross. Writing for the majority, Justice Clarence Thomas said that a person suing for a violation of the ADEA must prove that the employer would not have taken the action if not for the person’s advanced age. The employer does not have the burden of proving that it would have taken the action regardless of the employee’s age, even when the employee has evidence that age was one factor in the decision. He also wrote that the ADEA requires the employee to show that age was the primary reason for a demotion, not just one of multiple reasons. He noted that Congress had the opportunity to prohibit considering age among other factors and neglected to do so.

Justice John Paul Stevens denounced the majority’s interpretation of the ADEA as “an unabashed display of judicial lawmaking.” Noting that the court had interpreted other anti-discrimination laws to prohibit discriminatory actions based partly on a protected characteristic, he said it was inconsistent and arbitrary for the court to apply a different standard to ADEA violations. He pointed to a previous decision where the court held that an action was illegal if discrimination against a protected characteristic was “a motivating factor” in the decision. Justice Stephen Breyer added that to apply the majority’s standard “is to engage in a hypothetical inquiry about what would have happened if the employer’s thoughts and other circumstances had been different.” The answer, he wrote, will often be far from obvious.

This decision should be good news for employers and their insurance companies. Employment Practices Liability Insurance policies normally cover employment terminations, demotions, decisions not to hire or promote, and denials of employment benefits based on factors such as age, sex, race, religion, sexual orientation, and others. This decision should result in fewer successful lawsuits against employers for alleged age discrimination, with a corresponding drop in payments under EPLI policies for these actions. While insurance companies will still incur the cost of legal defense, they are less likely to pay for judgments against employers.

Because the court based its reasoning on Congress’s failure to clearly prohibit actions based even in part on age, members of Congress may seek to change the law. Employers should continue to avoid any actions that older workers could perceive as unfairly discriminatory. If that proves to be unworkable, they should work with their attorneys and insurance agents to ensure that their practices are legal and their insurance coverages adequate.

When It Comes to Insuring Losses, Contractors Have Options

The commercial insurance market can often be a difficult place for contractors. The insurance industry goes through market cycles; companies that are eager to insure contractors today may have no desire to do so when their losses mount and the market tightens. Because of this uncertainty, larger contractors often consider alternative markets for financing their risks of loss. One alternative is a captive insurance company, which is created and owned by one or more non-insurance companies to insure the owners’ loss exposures. Other options include self-insurance (paying losses out of pocket) and insurance options such as dividend plans, large deductible plans, retrospective rating plans, risk retention groups and purchasing groups.

According to Business Insurance magazine, there were more than 5,200 captive insurance companies operating in 2008, falling into several types. Single parent captives are owned by one company. Group and association captives are owned by multiple entities. For example, groups of contractors could form captives to insure themselves and others. Businesses that cannot afford the capital requirements of a captive can “rent” one from an insurance company or reinsurer, allowing them to share in the risks and the profits. Captives often use what is called a “fronting” mechanism, where an insurance company or reinsurer issues and administers the policies and handles the claims, and the insured businesses pay for the losses. Captives may insure the risks of their major owners only, or they may also insure other organizations.

Large companies may choose to self-insure; groups of companies in particular industries may band together to self-insure the risks of the group. For example, in some states groups of contractors have formed trusts to self-insure for workers’ compensation losses. Companies may also choose to partially self-insure by purchasing a large deductible program (one with a deductible of $100,000 or greater per occurrence) for workers’ compensation. Retrospective rating plans, while still insurance policies, are closer to self-insurance in that the final premium includes the amount of the business’ losses during the policy term, subject to a minimum and maximum. Dividend plans are types of insurance policies that typically offer the business the chance of receiving a portion of the premium back via a dividend should losses fall below a specified level. Risk retention groups are groups of businesses in the same industry that have created an insurance company for liability coverage. Purchasing groups are groups in the same industry who band together to buy liability insurance from one insurance company.

Each alternative has advantages and disadvantages. Captives may offer tax advantages, they cut out the portion of the premium spent on insurance company overhead and profit, and they give the owners control over risk management. However, they must meet large capital requirements to comply with state laws, and fronting arrangements still require insurance company involvement. Self-insurance, large deductible and retrospective plans reduce premium costs, give businesses some control over their loss costs, and provide incentives for safe operations, but they can also be a drain on cash flow and their ultimate costs may be hard to predict. Contractors that can predict their future losses with reasonable accuracy may find these plans advantageous.

Since all of these options require contractors to finance at least some losses themselves, they should have access to significant financial resources before using any of them. Also, the options can be complex; a contractor should consult with a professional insurance agent to investigate each option’s implications for the business. Traditional insurance is no longer the only financial protection option available to contractors, but it would be unwise to jump into an alternative without learning the facts.

Same-Sex Sexual Harassment in the Workplace

Over the past few decades, employers have become increasingly aware of the dangers of tolerating sexual harassment in the workplace. Many businesses now have formal policies on the subject. Insurance companies have made employment practices liability insurance available to protect businesses from the financial consequences of alleged harassment claims. When people imagine a sexual harassment situation, they may think of a male employee harassing a female one. However, that is not the only possible scenario. As society has grown more accepting of gay and lesbian lifestyles, such employees have become more comfortable revealing this aspect of themselves. One consequence of this is the potential for same-sex sexual harassment claims.

The U.S. Supreme Court dealt with the matter of same-sex sexual harassment in a 1998 decision, Oncale v. Sundowner Offshore Services, Inc. Joseph Oncale worked on an offshore oil platform as part of an eight-man crew. Three members of the crew forcibly subjected him to sex-related, humiliating actions in front of the other crewmen; two of them sexually assaulted him and one threatened him with rape. His complaints to company supervisors produced no improvement in the situation; in fact, the supervisor verbally abused him. He eventually quit due to the harassment and verbal abuse. He sued the company, but the trial and appellate courts ruled that, as a male employee, he had no cause of action under the federal Civil Rights Act of 1964 because the alleged harassers were also male. The Supreme Court, however, disagreed.

Writing for a unanimous court, Justice Antonin Scalia said that there was no justification in the law for excluding same-sex harassment claims from its requirements. The prohibition of sexual harassment, he wrote, forbids behavior “so objectively offensive as to alter the ‘conditions’ of the victim’s employment.” However, he cautioned that the social context in which behavior occurs weighs on whether it is harassment. “A professional football player’s working environment is not severely or pervasively abusive, for example, if the coach smacks him on the buttocks as he heads onto the field-even if the same behavior would reasonably be experienced as abusive by the coach’s secretary (male or female) back at the office…Common sense, and an appropriate sensitivity to social context, will enable courts and juries to distinguish between simple teasing or roughhousing among members of the same sex, and conduct which a reasonable person in the plaintiff’s position would find severely hostile or abusive.”

This implies that, for an employee to win a same-sex sexual harassment claim, the employee must suffer some kind of negative consequence in addition to the sexual nature of the behavior. If suggestive remarks are made in the person’s presence but he suffers no resulting harm (such as denial of promotions or salary increases) and management responds to his complaints, a court will probably not find this to be harassment. Conversely, if his work conditions deteriorate because he will not “play along” with his harassers, the court will be more likely to rule in his favor.

Employers should be aware that same-sex sexual harassment is legally equivalent to heterosexual harassment, and they should not permit it to occur in their workplaces. They need not ban all suggestive talk from the workplace, but they cannot allow unfair treatment against those who object. Finally, unwanted physical contact such as sexual assault is never excusable or permissible.

Employers should make sure their sexual harassment policies include statements about same-sex harassment, and they should educate supervisors and employees about the policy. All allegations of harassment should be promptly investigated. Finally, they should check with their insurance agents to make certain that they have the proper coverage for those claims that turn into lawsuits.

Keep the Lid on Workers’ Comp Costs During a Layoff

Between December 2007 and July 2009, the U.S. economy lost almost seven million jobs. In times of economic uncertainty, employees worried about their jobs may look toward the workers’ compensation system for supplemental income. Workers who have ignored aches and pains over the years and haven’t reported them might decide that the time is right to make a claim. Others who may have been healthy and who suffer an injury that they might have previously ignored may now decide they have nothing to lose by reporting it. Employers facing the possibility of having to lay off employees must be aware that their workers’ compensation costs may rise. However, there are steps they can take to keep a lid on costs.

Once a risk manager learns that a workforce reduction is coming, she can prepare in a number of ways. She should become familiar with the unemployment insurance laws in each affected state, including the levels and durations of benefits and how they affect workers’ compensation benefits. She should investigate other state programs available to employees that may offset workers’ compensation costs. She also might want to meet with the firm’s insurance broker to review pending claims and identify those that might become problems.

Another priority is claims documentation. The firm should backup employee records and store both in secure locations. Claim records should be updated with the latest available information. The risk manager might want to create a video record of conditions in the building prior to the layoff so that she can demonstrate to a court what the work environment was like. Finally, exit interviews that include written questionnaires completed by the employees can serve as evidence as to the employees’ physical condition at the time of termination.

When the layoffs occur, the company should handle them as sensitively as possible. Losing a job is a traumatic experience for anyone; clumsy communications from the employer can inspire a worker to seek retribution. To the extent that the employer can help affected employees, it should do so. For example, it may want to offer resume preparation or outplacement services or employee assistance programs for those who need emotional support. Also, if the company can afford them, it may want to offer severance payments to the employees in return for their written agreement to forego any future claims against the company. Finally, though it may seem unlikely, the company should have contingency plans in place should any of the employees become violent, either at the time of the layoff or later.

To defend against exaggerated or fraudulent claims, the risk manager should ask the broker and the insurance company to coordinate claims handling through one office and one senior claims adjuster. She should also request that the insurer assign the defense of all cases to one law firm. To assist in the defense, she should make relevant records, such as videos, employee files, job descriptions, and exit questionnaires, easily accessible to the attorneys and any medical specialists the firm may hire. Finally, she should identify key personnel who may be available to testify as to job requirements and conditions, and she should make a list of their names and contact information available to the attorneys.

Cutting jobs is one of the most difficult things any organization must do. The goal of a workforce reduction is to lower the firm’s costs; uncontrolled workers’ compensation expenses resulting from the action may wipe out any benefits from it. Careful planning and handling of the action and its aftermath can go a long way toward ensuring that the company’s pain will not be for nothing.

Keep a Time Limit on Workers’ Comp Claims and Hold Down Costs

Workers’ compensation claims are a major cost of doing business, and the length of time a claim remains open has a large effect. Claims that stay open for long periods of time are more likely to involve attorneys, high medical bills, and significant payments for lost wages. According to the Insurance Information Institute, between 2002 and 2007 the medical cost per lost-time claim (claims where the injured employee is unable to work) rose 50 percent faster than the annual rate of medical inflation for the economy as a whole. The institute estimates that attorney fees increase claim costs by 12 to 15 percent with no net gain in benefits to the worker. Most states index the maximum payment for lost wages to the state’s average weekly wage, a figure that generally rises each year.

Limiting the duration of workers’ compensation claims is an important strategy in the effort to hold down costs. To do this, employers have several options at their disposal:

  • Prompt notice of claims to the insurance company hastens the onset of medical treatment, speeds up the injured worker’s recovery and return to work, and reduces the likelihood that he will hire an attorney. Therefore, requiring workers to immediately report all injuries, however minor, and promptly reporting them to the insurance company can have a huge impact on the duration of a claim.
  • A prompt and thorough investigation of the incident is just as important. Interviews with the injured worker and witnesses, photographs, and other information gathered as soon as possible will help the insurance company to properly adjust the claim.
  • If the employee will be out of work for an extended length of time, the employer should keep in regular contact. An injured worker who gets the sense that his employer does not care will become a receptive audience for plaintiff attorneys. Employers may want to call the worker periodically to check on his condition, offer assistance with completing the paperwork, and generally to check on his emotional state.
  • The employer should have a good understanding of the state law pertaining to the waiting period for benefits covering lost wages. This is especially true if the employer operates in several states, as their laws may vary widely. Understanding how the law applies to the worker’s situation will help the employer set expectations properly. This reduces the chance of misunderstandings that can lead to problems down the road.
  • Building relationships with the physicians treating the employee will keep the employer better informed as to his condition, treatments, medications, and expected duration of disability. This should eliminate surprises and help the employer get the employee back to work sooner.
  • Return to work programs can shorten claim duration and reduce costs significantly. These programs permit an injured employee to return to work in some capacity before he has recovered to the point where he can resume his previous duties. They reduce payments for lost wages, meet the worker’s need to feel productive again, and remove incentives for the worker to hire an attorney.
  • Employers should review loss reports with their insurance agents and claim adjusters and ask questions about losses that do not appear to be progressing toward closure. They should also look for patterns in the loss reports to identify correctible factors that raise the cost of lost-time injuries.

Employers owe it to their workers to provide a safe workplace and benefits to help them should they get hurt. With some extra care and attention, employers can meet those obligations and keep costs in check.

Get the Injured Worker Back on the Job the Right Way

Workers’ compensation premiums represent a major personnel expense for most organizations. Injuries that cause employees to miss work are especially costly, in terms of both lost wage compensation and lost productivity. Also, the longer a worker is disabled and unable to work, the more his future earning power decreases and the more likely it becomes that he will hire an attorney. For these reasons, it is advantageous to both employer and employee to get the injured worker back on the job as soon as possible. As a result, many employers have implemented return to work programs.

Under a return to work program, the injured employee performs a different job while receiving his prior level of pay. The new job should be matched to his current physical capability, reflecting his state of recovery from the injury. To succeed, this requires a good working relationship between the employer and treating physician. The employer needs accurate information as to the tasks the worker can safely perform; otherwise, the result may be a second, more severe injury. If the worker’s physician will not cooperate or provide a realistic estimate, the employer or insurance company may have to require a physical examination by an independent physician.

A return to work program should be one piece of a comprehensive and coordinated loss management program. The elements of the program should include:

* Immediate reporting and investigation of accidents

* Arrangement of primary medical care

* Return to work program

* Regular communications with the injured worker

To assist in the arrangement of primary care, the employer should provide the treating physician with job descriptions that explain each job’s physical tasks in detail. Meetings with the physician to explain the nature of the employer’s operation will help match a job to the worker’s capabilities. Communications between the physician and the employer are vitally important. The employer may want to arrange for direct reports from the physician or regular reports delivered by the employee. The ideal situation is one where the employee can assume light duties without missing any time. Barring that, limiting lost time to a week or two will still keep the claim’s cost down, resulting in premium savings for the employer. The experience modification formula, which adjusts the premium based on loss history, gives the most weight to losses of $5,000 or less. Getting the injured worker back on the job quickly will help keep the loss well under that limit. Since losses remain in the calculation for three years, the effect of holding down claim costs is long lasting.

Of course, return to work programs have pros and cons. The pros include:

* Limiting or eliminating lost work time

* Keeping the worker involved in the work environment

* Eliminating the need to locate, hire and train a replacement

* Increasing the chances of success should the worker refuse the new duties and sue for lost wage benefits, since the employer can show that it made a reasonable job offer

Among the cons are:

* The employer will pay the employee’s full wage for reduced productivity

* An employee with a bad attitude about his alternative duties could lower morale among the other employees

* If the alternative arrangement does not work out, returning the employee to lost wage benefits will wipe out any cost savings

While individual cases might not produce the desired results, employers should realize long-term savings by implementing return to work programs. Beyond the verifiable dollar savings, return to work programs can give the employer a more stable, happier workforce and a good reputation with potential employees.

Toxic Torts Can Poison Your Business

In the 1800’s, manufacturers and builders started using a natural resource that vastly improved the quality of their products. It added strength to materials, resisted heat, electrical and chemical damage, and absorbed sound. When mixed with cement and used in building construction, it enhanced fire safety. By the middle of the 1900’s, manufacturers were using it in insulation, automobile brake pads, drywall, lawn furniture, fireplace cement, gaskets, and a host of other products. Unfortunately, this material, asbestos, can cause serious lung disease and even death in those who inhale its fibers. Builders and manufacturers who used it have endured hundreds of thousands of lawsuits from the victims or their survivors.

Claims resulting from exposure to asbestos fall into the category of what is known as “toxic torts” — injury and damage lawsuits stemming from exposure to substances proven to cause illness or injury in people. Other substances that lead to toxic torts include lead paint, toxigenic mold, industrial chemicals, pesticides, and toxic landfill waste. These lawsuits can ravage a company’s balance sheet, ruin a good reputation that took years to build, and divert resources and attention away from normal operations and toward legal defense.

Asbestos has been associated with instances of cancer affecting the protective lining that covers most of the body’s internal organs. This form of cancer was killing 3,000 Americans a year by the late 1990s. Most of the victims had long-term occupational exposure to asbestos; a Rand Corporation study estimated that 27.5 million people in the U.S. were exposed to asbestos in their workplaces between 1940 and 1979. Consequently, by 2002 more than 730,000 people had sued more than 8,400 firms for illnesses caused by the fiber. The cost of asbestos-related litigation in the U.S. has exceeded $250 billion.

Toxigenic molds produce a chemical that can be dangerous to people exposed to large amounts of it over a long period of time. Normally, the mold is not present in large enough quantities to be harmful. However, concern has grown over the last several years about the possible effects of long-term exposure to these molds. Newer energy efficient homes have become air tight, preventing moisture from escaping and creating an environment where mold can grow. A Texas woman who sued her insurance company over its refusal to pay for cleaning up mold that allegedly made her home unlivable won a multi-million dollar damage award; a court later reduced the amount. While health experts have not reached a consensus about the actual harm mold can cause, the increased attention to it makes future litigation likely.

The standard commercial general liability insurance policy does not cover most losses resulting from pollutants. However, alternatives exist — pollution legal liability insurance policies. These policies cover damage to the organization’s own property; injuries or damages that others suffer as a result of a toxic incident for which the organization is liable; and associated cleanup costs. Depending on its terms, such a policy might also cover new injury claims, cleanup, and the discovery of new toxic substances after the organization implements a pollution remediation plan. A professional insurance agent can help locate the appropriate coverage at a reasonable cost.

Toxic torts are likely to remain a financial threat to all organizations for the foreseeable future. Controls to prevent injuries or to make existing ones less severe, coupled with the right insurance company, can help ensure that your organization will survive this threat.

Employers Vulnerable to Associational Discrimination Claims

Most employers are aware of the employee protections found in Title VII of the Civil Rights Act of 1964. Employers may not discriminate against employees on the basis of race, color, religion, sex or national origin. Also, they may not retaliate against employees who have protested against an illegal employment practice or who participated in an investigation or other activities against the employer for an illegal practice.

Further, recent court decisions have applied Title VII’s protections to an employee’s association with another person whose characteristics fall under those protections. The U.S. Supreme Court held in 2006 that employers cannot discriminate against someone closely related to or associated with a person who is exercising protections under Title VII. Two federal courts earlier this year ruled that employers violated the law by discriminating based on association. One allegedly fired a white basketball coach because his wife was African-American; the other allegedly fired an employee whose coworker’s fiancé filed a complaint with the Equal Employment Opportunity Commission.

All employers are vulnerable to these types of accusations, even those who strive to obey the law. Employment practices liability insurance (EPLI) policies cover many types of losses resulting from employee claims. How will they respond to association discrimination claims?

EPLI policies vary somewhat from one insurance company to another, but most provide coverage for acts such as discrimination, wrongful termination, harassment, retaliation, and inappropriate employment conduct. A typical policy covers discrimination against an employee for termination of the employment relationship, demotion, failure to promote, denial of an employment benefit or other adverse action based on a number of characteristics such as color, race, sex, ethnicity, age and religion. It also covers retaliation claims if the employee engaged in a protected activity, the employee suffered an adverse action, and the protected activity caused the adverse action. Because they specifically apply to employees who have these characteristics or who perform protected activities, these policy provisions do not appear to cover actions against employees because of their association with others.

However, the policies usually also cover “inappropriate employment conduct.” Among the acts that may fall within this category are coercion, wrongful demotion, wrongful discipline, retaliatory treatment, and others. The definition of “inappropriate employment conduct” will be different from one policy to another. One insurance company may cover association discrimination while another may not. As such, employers should discuss specific terms of coverage with their insurance agent.

The policies might cover the employer, but not the employee alleged to have committed the act, if a court determines the employee deliberately acted illegally or with intent to harm the other employee. For example, if a court ruled that a supervisor was acting maliciously when he fired an employee for marrying someone of a different race, the insurance might pay for the employer’s defense and liability but not for that of the supervisor.

In this era where job cuts and lawsuits are common, employers face a real exposure to actions against them for the decisions they make. Lawsuits can be costly even if they are groundless; the costs of defending them can mount rapidly. EPLI provided by a financially solid company is an important part of every employer’s risk management program.

EPLI, coupled with a well-executed loss prevention program, will help any employer survive employee accusations.

Tips for Evaluating Contractor’s All Risk Policies

Construction is a high risk industry. Personal injuries and property damage occur frequently, and these events ultimately cost the contractor money. Many times such claims could be covered under a Contractor’s All Risk (CAR) policy.

CAR policies, commonly referred to as Course of Construction or Builder’s Risk policies, insure against physical loss or property damage to works, plant, equipment and materials during the course of construction. Such policies can be complicated so contractors should take care to ensure that any coverage adequately covers the risks of the construction project to be undertaken. Many contractors can be caught short by failing to evaluate their potential liability risks in relation to the policy they are considering.

Here are some important rules to evaluate CAR policies:

* Conduct an insurance audit with a risk manager or broker to determine potential liability and any risk not covered by your current policy.
* Consult with your broker because many insurers can customize the coverage to match the needs of the project. The insurer needs time to do this effectively, so don’t wait till the last minute.
* Take note of exclusions because while most are expressly stated, others can be implied and can radically limit your protection. One frequently implied exclusion is consequential loss relating to loss of profits and expenses as an indirect result of the cause of the claim. Naturally occurring events such as deterioration due to mildew, rust, or obsolescence may also be deemed as implied exclusions.
* Confirm there are no unusual limitations on the measure of damages. The method in which your insurance carrier determines damages can significantly affect your bottom line.
* Carefully consider the period of coverage as it normally only extends to when the contractor is on site and ceases when the client takes possession. Ensure there is extended coverage should problems develop later on.
* Technological changes using business information technology opens many contactors to new risks if they incorporate design management in the construction project. Additionally, construction companies which use BIM also have to consider potential losses due to hacking or data corruption that would not likely be covered under a CAR policy.
* Review the excesses and deductibles to be applied by your insurer to determine if they are reasonable.
* Fully document your damages with the aid of an experienced consultant, as CAR carriers will strive to reduce the cost of damages. Costs stemming from prolongation of the claim may be restricted to maximum excess limitations.
* Use a legal consultant especially when preparing a major claim. They can guide you through any potential red tape and aid in negotiating a proper settlement.

Do You Have Coverage If You Damage a Customer’s Property?

A plumbing contractor’s employee is soldering two lengths of pipe together when a fellow employee asks him to assist with another task for a moment. The first employee lays the soldering torch on a ceiling joist, forgetting that it is still hot. While he is away, the joist begins to smolder, then small licks of flame form and ignite combustible material in the ceiling. By the time someone notices, fire is consuming the ceiling. Firefighters’ efforts to extinguish the blaze cause water damage to portions of the building and walls near the fire’s starting point suffer smoke damage.

The building owner will most likely hold the contractor responsible for the cost of repairing the damage. In turn, the contractor will look to his general liability insurance policy to cover that cost. Will the insurance company pay for the repairs?

The Insurance Services Office’s Commercial General Liability Coverage Form states, “This insurance does not apply to…’property damage’ to…(t)hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations…” What does this mean, and how does it apply to an incident like this one? What does the form mean by the phrase, “that particular part”? Several courts have weighed in on this question.

A Tennessee court in 1975 ruled against an electrical contractor whose employee, while installing circuit breakers in a switchboard, caused a short circuit that destroyed the entire switchboard. The court said that the employee was performing operations on the switchboard, not just the individual circuit, and therefore liability coverage did not apply. Similarly, a Massachusetts court ruled against a cleaning contractor in 1989. The contractor was cleaning the bottom of an underground oil storage tank when an explosion occurred, destroying the entire tank. The contractor argued that the insurance should cover all of the damage except that to the bottom of the tank, but the court ruled that the entire tank was “that particular part” on which the contractor was performing operations.

Conversely, a Minnesota court granted coverage for a contractor that had been hired to clear trees and brush from a construction site but that also cut down trees on an adjoining property. The court said that, while the liability policy would not cover damage to property the contractor had been hired to work on, it did cover damage to the property of a third party. A New York court ruled in 1974 that a liability policy covered damage that occurred after the contractor had completed operations.

The courts have not established firm rules about what constitutes “that particular part” of property on which a contractor is performing operations. Case law will vary from one state to another. Because of this, contractors should discuss the exposure with their insurance agents. To reduce the chances of an uninsured loss occurring, an agent may recommend the purchase of a builders risk or installation floater policy. These policies cover property that the contractor is installing on a construction site while it’s in storage, in transit, on the job site and during installation. They also usually cover property of others for which the contractor may be liable. Unlike the general liability policy, there are no standard versions of these policies, so contractors must review them carefully and ask their agents questions about anything that is unclear.

The law of averages suggests that most contractors will accidentally damage a customer’s property at some point. Now is the time to make sure that there will be no insurance surprises when it happens.