Requiring contractors, such as construction contractors and design consultants, to carry insurance is one of the ways public entities can protect themselves from financial harm resulting from the errors and omissions of those contractors. In the event a contractor should become liable to the public entity for an insured incident, it is critical that a public entity be able to rely on that insurance to cover the damages.
Unfortunately, it is not uncommon for contractors to evade contractual insurance requirements through a variety of stratagems. For instance, some contractors have limitation-on-liability clauses in their proposals, limiting a public entity’s recovery to a fraction of the insurance coverage. Others have surreptitiously carried policies that, unbeknownst to the public entity, have significant self-insured retentions which can represent over half the coverage amount. These large, self-insured retentions can make it hard for public entities to reach a settlement with a contractor, even when insured, because the contractor must agree to pay the self-insured retention amount before the insurance company is required to pay.
Carefully-crafted contractual insurance provisions are therefore crucial for public entities to ensure they will have access to the insurance they bargained for. The provisions must be drafted to prohibit contractors from evading insurance requirements with hidden contractual provisions, self-insured retentions, or other artifices.
It is far better to proactively draft contracts that preclude such tactics than to discover, often in the middle of litigation, that a contractor has found a way to evade insurance requirements. However, if a public entity finds itself in that situation, there are often innovative ways to recover from the contractor.
Public entities are entitled to the benefit of the insurance they require contractors to carry. We encourage public entities to contact counsel to make sure the insurance provisions in their contracts give them the required protection, and in the event there is a dispute over the availability of insurance, to maximize their chances of recovering.