Commercial insurance & the duty to defend 

Worker waits to access the work site while an
insurance issue is resolved 

In advising many local business owners about how best to protect their businesses from loss I find that I encounter the same issues over and over again. One such issue that crops up frequently is a misunderstanding about a particular clause contained within every commercial general liability policy, known as the "duty to defend."

So what is the duty to defend? In short, it obligates an insurance company, to "defend" a policy holder against a "suit" (understood to mean lawsuit or civil proceeding), should one be brought against the insured during the policy term. The duty to defend is in some ways the essence of the policy, given that its from this language that an insured finds coverage if they're sued. 

For the most part, business owners are pretty happy with this provision of their policy, except when they aren't. In fact, most often they've never even heard about it until I give them some sour news, here's how it plays out.

A local contractor, my client, wins a bid to work with a much a larger contractor, supplying them with, heck it could be anything - but we'll say kitchen and bath fixtures, and the labor to install them. The larger contractor demands that the smaller contractor supply a certificate of insurance, and typically with higher limits of liability currently carried, sometimes as much $5 million.

My client asks me to produce a certificate of insurance (COI) reflecting the limits in accordance with the contract they've just won. In order to produce such a document, an actual policy with  such limits must also be obtained -- and that's what gets us to the "duty to defend," -- here's why.

The insurance company that is being asked to increase its limits will look very closely at what it is that the larger contractor is actually building and what the possibility or "risk" that a lawsuit might result from that activity. Its a belief, and not an inaccurate one, that if a project is going to be sued, even if only one element, supplier, or contractor is at fault, all the parties -- including our smaller contractor, will be named in that lawsuit. That's the rub for our smaller contractor, and why I sometimes must relay sour news about the duty to defend provision of their insurance policy to them.

As with most things in the world of commercial insurance, there is a kernel of good news, and a way out for our small contractor. The good news is this; as a result of their growth, and shift in business focus they've outgrown their current insurance company, which happens, and it is better to learn during a paperwork issue then during a claim! The way out, and onto that work site -- a different insurance company, a company more specifically geared to address the needs of a growing contracting business, and willing to embrace their duty to defend! 

Workers Compensation and Independent Contractors

Recently I did some work for a local small contracting company. Like many small contractors, they rely on 1099 or independent contractors as a mainstay for their labor requirements. This new client was surprised when he received a letter in the mail from the Virginia Workers Compensation Commission informing him, that pursuant to section 65.2-902 of the Virginia code, he was subject to a fine of up to $5,000 if he failed to comply with law, and secure a Workers Compensation policy.

Now, scary language aside, what to do? More often than not employers enter into 1099 arrangements to avoid engagements, like work comp, so it would follow that this regulation seems onerous. But let’s not be too hasty with that judgment, perhaps there is more to this?

What does a Workers Compensation policy afford a business owner? Like all insurance policies, it transfers risk. But, Ian – these are independent contractors, don’t they work at their own risk? Of course that’s the nub of the question, right; and the answer is sometimes. Yes, they are working at their own risk when they could be doing work for you, or someone else, at any given time and place, for example a software developer, to whom you give a task, and ask only that they return your order by a date certain. If however, your 1099 is told by you to report to a specific place, at a given time, and work only on your task, than you do have a workers compensation exposure, that contractor isn't truly independent, at least not at that time, and should they get hurt, your business could find itself paying bills it never budgeted for. In this instance a Workers Compensation Policy is very useful.

Of course all of that is only the dry and rather boring insurance detention stuff. This whole aspect of 1099’s becomes far more complex when one actually goes to the market in an effort to secure a policy. Workers Compensation carriers as a matter of course ask for threes prior loss runs, as part of their application, fail to provide them, and most likely you’ll be declined. Rather a frustrating thing for many contractors, since they don’t have an existing workers compensation policy, with three years prior loss runs, they are brand new to the market. This often comes to ahead when a smaller contractor earns an opportunity to work for a larger contractor as a sub. The larger contractor will ask their new sub for a certificate of insurance, the sub, lacking a working compensation policy, is left scrambling.

This issue tends to set off a time consuming and aggravating experience of calling insurance agents and 800’s numbers in search of a work comp policy for their company. The business owners seeking a worker’s Compensation policy find themselves at a crossroads in the insurance industry, caught between their need to buy an insurance policy they need in order to manage their business, and insurance sales people who tend to shy away from difficult challenges without clearly defined commissions. Business owners will hear a range of response, but the bottom line tends to be, sorry but  can’t help ya.

Sturdevant Agency is much different; helping to resolve these challenges affords us an excellent opportunity to better understand our clients, their needs, and their business.  Yes, these are more difficult cases, it is a challenge to find a carrier willing to work with a new enterprise, but we’re willing to do the work to earn our clients trust, respect and business. Workers Compensation doesn't pay huge commissions, but frankly, commission growth is an endpoint of client satisfaction, and its client satisfaction not commission growth that is our primary motivation.

If you are seeking a Workers Compensation policy for your business, please give us shout, we’re always happy to meet new clients, and help new friends.

Sturdevant Agency
"Protecting that which you cherish most"

(703) 822 7505