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Drafting tip: Check the other side’s insurance policy for exclusions

Suppose that in a contract for services, the contract includes a requirement that the provider maintain insurance. The customer should seriously consider:

  • requiring the provider to furnish a copy of the policy itself — or better yet, requiring the provider to get the insurance carrier to furnish a copy of the policy (along with a certificate of insurance, perhaps with additional-insured-status); and
  • verifying that the policy doesn’t exclude the type of claim that the customer might bring.

Not doing so appears to have cost husband-and-wife homeowners hundreds of thousands of dollars in home-repair bills. In Crownover v. Mid-Continent Cas. Co., No. 11-10166 (5th Cir. June 27, 2014):

  • The homeowners’ building contractor botched the construction of their home; the necessary repair work cost the homeowners hundreds of thousands of dollars.
  • The homeowners brought an arbitration proceeding against the builder, and won.
  • The builder subsequently filed for bankruptcy protection; the bankruptcy judge limited the homeowners’ claim to the amount covered by the builder’s insurance policy.
  • The insurance carrier refused to pay the homeowners, on grounds that the policy excluded the type of claim brought by the homeowners (failure to repair). The homeowners sued the carrier.
  • The courts held that the homeowners’ claim against the insurance carrier was barred by an exclusion in the insurance policy for contractually-assumed liabilities.

Another lesson: A customer should think twice before agreeing to exclusion of implied warranties, because that might disqualify the customer from getting paid by the insurance company. In the Crownover case:

  • The builder’s insurance policy did cover liabilities to which the insured would have been subject anyway, even in the absence of a contract — such as implied warranties.
  • But, under applicable state law, the express warranty contained in the construction contract superseded the corresponding implied warranty that otherwise would have applied by law.
  • Therefore, the builder was not liable for breach of that implied warranty; consequently, the builder’s insurance policy did not cover the homeowners’ claim.
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