Complex Cases: When Construction Insurance Claims Take a Turn for the Worse

Commercial construction is a high-stake endeavor involving multiple parties, pressing deadlines, and, in many cases, multimillion-dollar investments. With so much on the line, commercial insurance is a guaranteed safety net, right? Unfortunately, that isn’t always the case. When something goes wrong, the fallout can lead to equally complex disputes, including:

1. An injured party (plaintiff) filing lawsuits against all potentially liable parties.
2. An insurance company initiating a Declaratory Judgment Action (Dec Action).
3. All involved parties pursuing legal claims against one another for indemnification or to shift financial responsibility.

Let’s discuss these construction insurance disputes in detail.

1. The injured party filing lawsuits against everyone

In many cases, a worker, visitor, third party, or any person who gets injured on a construction site sues everyone involved in the project, including the property owners, general contractors, subcontractors, architects, engineers, and equipment suppliers. The injured party’s goal is to cast a wide net to ensure they can recover damages from whoever is liable.

Why Does This Happen?

The injured party may press charges against everyone when it’s unclear who is at fault. For example, if an employee falls from scaffolding, the injury could be due to:

• The general contractor’s failure to maintain OSHA’s site safety guidelines.
• The subcontractor’s inability to properly train the worker.
• The scaffolding manufacturer’s defective product.
• The property owner’s disregard for safety compliance.

Suing everyone increases the injured party’s chances of recovering compensation, even if the court dismisses some parties from the lawsuit later on.

The Ripple Effect

This “sue everyone” approach creates a ripple effect:

• The general contractor’s insurance company may step in to defend the lawsuit.
• The subcontractor’s insurance company may also get involved, especially if it implicates the subcontractor’s work.
• The property owner might file a claim under their own insurance policy.

Each party’s insurer will scrutinize the claim to determine whether it’s covered under their policy. If there’s any ambiguity, the insurer might deny coverage, leading to further disputes.

Real-World Example

Let’s say a worker sustains traumatic injuries when a piece of equipment malfunctions. The worker pursues legal action against the (1) general contractor, the (2) subcontractor who provided the equipment, and the (3) equipment manufacturer. The general contractor’s insurer agrees to defend the lawsuit but later files a Dec Action (more information on “Dec Action” below) to determine whether the policy covers the claim. Meanwhile, the subcontractor’s insurer denies coverage, arguing that their policy excludes equipment malfunctions. This coverage gap exposes the subcontractor, and they may sue the equipment manufacturer for indemnity (more information on “indemnity” below).

2. An Insurance Company Filing a “Dec Action”

Both policyholders and insurance providers can file a declaratory judgment action (Dec Action) to settle disputes. This legal process involves asking a court to clarify the scope of an insurance policy. In commercial construction disagreements, insurers often file Dec Actions when uncertainty exists about claim coverage.

Why Do Insurers File Dec Actions?

Insurance policies are contracts. Like all contracts, they can be open to interpretation. When someone files a claim, the insurer reviews the policy to determine whether it covers the claim. If there’s any ambiguity, such as whether the incident qualifies as an “occurrence” or falls under an exclusion, the insurer might file a Dec Action to get a court’s ruling.

Some common issues in Dec Actions include:

• Duty to defend vs. duty to indemnify: The insurer might argue that it has no duty to defend the policyholder in the lawsuit, even if it ultimately has to indemnify them for damages.
• Policy exclusions: The insurer might argue that the policy excludes the claim, such as those involving faulty workmanship or intentional acts.
• Additional insured status: The insurer might dispute whether a party (e.g., a subcontractor) qualifies as an additional insured under the policy.

Is It ‘Bad Faith’ for an Insurance Company to Use a Declaratory Action?

What if the insurer is not acting in the policyholder’s best interest? What if they’re denying claims without good reason, dragging their feet on payouts, or skipping proper investigations? Sadly, bad faith practices are common in the industry. Click here to recognize more red flags and know how to push back.

Impact on the Parties

A Dec Action can significantly affect the parties involved. For example:

• The policyholder (e.g., the contractor or subcontractor) might have no defense while the Dec Action is pending.
• The injured party’s lawsuit might face delays, prolonging case resolution.
• Other parties might file their own lawsuits for indemnity or contribution, which further complicates the dispute.

Real-World Example

A subcontractor accidentally causes a fire that damages part of a building. The property owner sues the subcontractor, who files a claim under their general liability policy. The insurer filed a Declaratory Action, arguing that the policy excludes fires related to faulty workmanship. The court must then decide whether the exclusion applies, leaving the subcontractor in limbo until the case ends.

3. All Parties Sue Each Other for Indemnity or Risk Shifting

In commercial construction disputes, it’s common for all parties to sue each other for indemnity or risk shifting. Construction contracts typically include indemnity clauses, which let one party transfer liability to another. These clauses drive much of the litigation in complicated disputes.

What Is Indemnity?

Indemnity refers to a party agreeing to compensate another for losses or damages. In construction contracts, parties use indemnity clauses to allocate risk. For example:

• A general contractor might require a subcontractor to indemnify them for claims arising from the subcontractor’s work.
• A property owner might require the general contractor to indemnify them for claims tied to the construction project.

Why Do Parties Sue for Indemnity?

When a claim arises, a party may attempt to shift liability to someone else. For instance:

• The general contractor sues the subcontractor for indemnity, claiming the subcontractor is responsible for the injury or damage.
• The subcontractor sues the equipment manufacturer, arguing the injury or damage resulted from a defective product.
• The property owner sues the general contractor, alleging they failed to properly supervise the project.

Real-World Example of the Domino Effect

Indemnity claims tend to trigger a domino effect, with each party blaming the others. Here’s an example:

A worker sustains multiple injuries, including skeletal fractures, when a ladder collapses. The worker sues the general contractor, who then sues the subcontractor for indemnity, claiming the subcontractor provided the defective ladder. The subcontractor sues the ladder manufacturer, arguing the ladder was defective. The ladder manufacturer’s insurer files a Dec Action, claiming the policy excludes the claim. Meanwhile, the injured worker’s lawsuit stalls, and all parties fight over who should pay.

The Verdict

Commercial construction insurance disputes are complex, to say the least, especially when they involve an injured person suing multiple parties, an insurance company filing a Dec Action, and all parties suing one another for indemnity or risk shifting. These scenarios create a tangled web of lawsuits, claims, and counterclaims, delaying resolution and increasing legal costs for everyone.

Work with Some of the Best Construction Lawyers in Phoenix, AZ

If you’re caught in a construction-related lawsuit, hire the legal and insurance professionals at FR Law Group. With decades of combined experience and multiple awards to back our expertise, you’ll benefit from dispute resolution strategies tailored to your case, clear and consistent communication, and a relentless commitment to achieving favorable outcomes. Contact us to take the burden off your shoulders and resolve your dispute. If you’re worried about how to prepare for your appointment, we’ve also put together a guide on what questions to ask and topics to discuss during our meeting here.