In the complex landscape of multi-party construction defect litigation, tendering to all applicable insurers is a must, and the Additional Insured tender pick-up is the most desired outcome. Like any coveted commodity, accessibility is generally restricted. No matter the odds, once a claim is asserted against a contractor, insurance defense counsel all too often forge ahead and shotgun tender to all policies with even a remote chance of picking up coverage. But exercise caution. Such an approach to tendering can lead to unnecessarily incurred costs and fees—and sometimes less than desirable results.
As most know, any one (person or entity) who works for compensation in any construction activity involving improvements to real property needs a license (See ORS 701). Contractors must carry the proper endorsement for the type of structures they work on – commercial, residential, or both. Oregon law requires all contractors to carry general liability insurance. Liability insurance is a contract between a contractor and an insurance company to reimburse a third party for property damage or personal injury loss caused by the contractor. This insurance must be carried throughout the licensing period. The minimum amount of the policy is determined by the license endorsement. An additional insured endorsement may extend insurance coverage beyond that of the named insured (typically a subcontractor) to include another entity or individual (typically the general contractor).
There are two categories of multi-party construction defect claims – the typical claim and then everything else. For the typical claim, a property owner who has one or more legitimate issues will retain an expert to call out every single defect possible regarding the construction (or repairs) of the property. The property owner will then file a claim against their general contractor (“GC”) for every single observed defect regardless of how minor it may be. Once the claim is initiated, there are generally two types of defense strategies: 1) Tender to all insurance carriers of every single subcontractor who touched the property; or 2) Tender to only those subs whose scope of work is actually implicated in the claim. The benefits of executing a more focused approach to tenders is a follows:
1) The Oregon construction defect bar is small. Creating unnecessary and tedious work is shortsighted and expensive.
2) Based on discussions with carriers, when a shotgun tender is received, even one clearly lacking merit, the adjuster still must complete a thorough evaluation. This requires a minimum of 10 hours of work. If a meritless shotgun tender is received which also seeks AI, then there is an additional ten hours to evaluate the AI claim. Twenty hours (TWENTY HOURS) of work for a likely meritless claim seems like a colossal waste of time for the adjuster. It also may be a potential risk for the tender drafter, especially if it is a routine practice.
3) Lastly, and arguably most importantly, is the toll taken on the insureds.
Like car accidents, the impact on insurance rates of a construction defect claim typically happens upon submission. When a tender is submitted, it initiates a claim. When an AI tender is submitted, it generally initiates a secondary claim. Two claims – two dings, two marks on the record, two files for analysis, etc. It can be unfair, costly, and, for lack of a better word, “scary” for a minor contractor whose work is really not implicated in the dispute. As attorneys, we become desensitized to litigation; but for your average sole proprietor or small business owner, litigation can be traumatic. Not only do they have to deal with lawyers picking apart their every move in past projects, but it takes time, money, and energy away from their current projects. It can difficult for a shotgun tendered contractor to understand why they are being sued if their work is not really implicated in the dispute. More difficult still is when their attorney/carriers pay out on their behalf to settle them out of a lawsuit when they arguably did nothing wrong. While for us jaded attorneys settling disputes based on a cost benefit analysis is sensible; for a shotgun tendered contractor, it can be a very difficult pill to swallow when their work is really not at issue.
*”Shotgun tenders” are tenders either submitted in bulk to every insurance policy on record or sent in hopes that there is an obligation to provide coverage as an additional insured. One scatter shoots the tenders rather than thoughtfully submitting discreate, well-reasoned and documented ones.