Coverage Denied

Long Island-based Madden Construction Company is the type of remodeling firm that gives the industry a good name. With an unblemished record and many commendations, the firm stands behind its work. In the rare case where the company makes a mistake or an error, the company finds a solution to make the customer happy. But there are also times when nothing can bring the relationship back to center. Such is the case with one Madden job last fall that went wrong on a number of different levels.

A freak, late-summer storm tore through a tarp covering a temporary ridge erected after the original rafters were demolished. Water poured through a split into the tarp’s seam and onto the floor deck and into the first floor, which was to remain untouched during the remodel. Despite some quick action by Madden to mitigate the damage, the elderly couple who lived in the home were forced to temporarily move out.

The client’s homeowner’s policy covered initial repair expenses, but those costs were expected to be passed onto Madden’s liability insurance carrier. And they, in turn, would pass the losses onto the framing contractor’s general liability insurance. But the framing contractor’s coverage was denied. And because Madden did not ensure that its contractors were covered, Madden’s own insurance carrier denied the claim after it was put back in their court.

Qualified Remodeler magazine spoke with longtime remodeler Bob Lippman, an adviser to Madden Construction, who is helping the company deal with both the situation and its general liability insurance coverage.

QR: When did the incident occur?
Lippman: The incident occurred in August. Our responsibility was to gut the existing second floor, two bedrooms and convert it to three bedrooms, a kitchen and a living area. They wanted to install siding on the whole house and change windows. They wanted to change the service. And that was pretty much it.

QR: Then at some point your framing contractor was on the scene and that is when this storm came up?
Lippman: Yes. And here is one of the things that we learned. We had scheduled the job to demo on Monday, which is a normal procedure for us in this type of job because we first have to rip off the roof rafters on the existing house. Our first day with this type of job is spent ripping off the existing roof and filling in the plywood subfloor behind the two knee-walls and start our framing. We do that on Monday. That is pretty standard for us.

However, the homeowner started pushing and pushing for us to start sooner. And we acquiesced to the homeowner’s requests because we said, “Short of a monsoon, what can happen?” So we started the project on Thursday and we worked Thursday and Friday.

By Friday afternoon, the roof had been ripped. The plywood had been filled in. And the walls and partitions were starting to be framed. But they were laying down on the deck. They had not raised the walls yet. At the end of the day they built a temporary ridge to lay the tarp on, so any rain would run off of the roof.

The framing crew that we subcontracted, was someone whom we had worked with for quite some time. We had copies of their up-to-date workman’s compensation and liability policies. We had a letter of indemnification. And we had our standard subcontractor agreement showing they are independent and they have their own tools and time frames etc. All of that was in our file.

So we tarped it over on Friday, and on Sunday afternoon, we had a severe squall come through. It literally dumped about an inch of rain in about an hour period of time. Then it went down to a normal rain.

QR: What happened next?
Lippman: I received a call, personally, because I had been in contact with these people, helping them with the design. So I received a call around 7 p.m. They said they were getting water on their first floor. I asked how much water was coming through. They told me that it seemed like there was a lot of water coming in.

Within one hour we had four men over at the jobsite. And what had happened was that the tarp had split right through the seam in the middle of the tarp. And once the seam broke it created a funnel and the water went onto our plywood deck and down through the plaster ceilings onto the first floor that we were not working on. And the water proceeded to flood the first floor. The water in turn leaked down into the basement. And the basement was finished with carpet and paneling. They had a suspended ceiling with fluorescent lights.

QR: Sounds like a lot of damage.
Lippman: Yes. We retarped the entire project that Sunday night. In the morning the entire two crews, the company crew and the subcontractor crew were on the job bright and early. The homeowner’s insurance carrier had been contacted. And the insurance company had already sent someone over with large fans and de-humidifiers to put in the basement, because that is where the water had collected, obviously at the lowest point.

The homeowners were beside themselves. The owner of the construction company and I explained to them that they would have some options on how to handle the loss for the first floor and the basement. Generally they will send an adjuster out and they will do a structural estimate, very detailed and itemized. They will also send somebody else out to do all of the contents. The option for the homeowner is to accept the amount that is finalized, whether it has been altered or not and the insurance company can hire a contractor. Or, after negotiations, they can get a check from the insurance company, less their deductable and hire their own contractor.

The homeowner, after pausing very little to think about it, wanted us to complete all of the repair work on the first floor and the basement because they had total confidence in our ability. They saw that we were organized. They saw that we had a full staff. They saw that we were there on Sunday night helping them. So they had the confidence we would do what was right for them.

QR: Did you draw up a separate contract for the repair work right then or did you just start working?
Lippman: We went right to work. We got a big container delivered on our expense — just on a word and a handshake — and we started clearing out the house and doing what was necessary to prevent further damage. With plaster ceilings and plaster walls, sometimes the longer you wait, the more damage that can occur. There was also strip-oak flooring on the first floor, so it was imperative that we had the dehumidifiers going as soon as possible.

Over the next several days we got as much as we possibly could get done so we could actually start the repair work. A company came to take out the furniture for refinishing. There were many items that were discarded: the ceiling tiles in the basement, the carpeting and the trim. They had blown insulation in the ceilings from years ago. We basically cleaned up the entire first floor and basement to get ready for the renovation work. We were still operating without a contract, but we were progressing along on the dormer upstairs.

QR: What was happening with the insurance companies at this time?
Lippman: The homeowner’s insurance was paying for a place for them to stay and sent dehumidifiers. Having lots experience in the remodeling business and having had made some insurance claims, I knew that at some point the homeowner’s insurance carrier would want to find out how it happened and would determine that the tarp had split. They would say, good, we have someone we can go to for the money, which would be us, the general contractor. We, in turn, anticipated this and immediately contacted the framer, who anticipated the phone call.

“That is why we have insurance,” was the framing contractor’s comment. However, much to his chagrin, his insurance broker informed him he was not covered because they were not classified as a framing contractor. I am not sure, but I think they were classified as a wallboard contractor. The broker had known him for more than six years, knew what kind of work the framer did, so there was a misclassification.

OK. So they were not going to cover the framer. When our insurance found out that his insurance was not going to cover him, our insurance company went directly to the policy and highlighted and sent us a letter showing that we were required to hire subcontractors with proper coverages or we were not covered. Our comment back was that we can appreciate that, however, we had a sub contractor who had all of his certificates in order. We had a subcontractor agreement. We had a general indemnification notorized. We had everything you asked us to have in order to be protected. That is what we do. We are very careful. But regardless, he was not insured, so we are not insured.

QR: You say you contacted state authorities?
Lippman: The company owners asked me to put together a letter to the New York State Insurance Board, which I did. And I was very specific in all of the contacts and the dates of the phone calls. Their response back was, ‘we can’t help you because we only get involved when it is a case of fraud.’

Now we have three people: We have the subcontractors insurance company, our insurance company and the New York State Insurance Board all saying, ‘You are on your own.’ And here I was, reading your magazine, which I have done for more years than I care to remember and here were two articles on liability insurance. And low and behold, here I am, doing everything that is asked of me and we were not getting it done.

In the remodeling business you have to be a jack of all trades. You have to know how to market, and how to sell and how to handle complaints, and how to order and estimate and design, and be a psychologist with the homeowner, and everything else that goes along with it. Never in my wildest imagination could we have expected to check the coverages of all of our insurance subcontractors. That is beyond our privy. It is not indicated anywhere on the required insurance certificates that we had on file. So we were at a total loss. And we are still at a loss, because the job is still pending and we have not received a final payment from the homeowner. Their insurance company has not contacted our carrier. So right now it is kind of a balloon floating up there, and we are wondering if we should put a reserve of money aside. Because even though we know the approximate structural damage amount, approximately $45,000, we have no idea what the contents were.

QR: What are the lessons learned for your company to date.
Lippman: I have 40 years in the business; the first mistake happened when we listened to the homeowner. We’re the general contractors. They’re the homeowners. Their comment about a monsoon, should have struck a chord, because that is what we ran into. We had a squall come through and we all are now suffering for it. So don’t do something that your gut tells you not to do. Your gut instinct, based on experience, should determine your course of action. Starting the job early would not have had any consequences had we not had a variety of circumstances come together, the rain, the tarp splitting. That is the first thing. If you have a procedure, stick to your procedure. It probably is that way because you made a mistake somewhere in your history.

The second thing is the insurance company that we had for our liability coverage is no longer writing liability insurance in New York State. New York State has a tremendous problem with home improvement contractors and general contractors for liability insurance coverage. We are paying $35,000 per year in insurance premiums for just the liability.

The new insurance carrier, the only other one that the broker could find that would insure us, literally used the same contract and wording. They whited out the original insurance company, typed in their own at the top of the page, copied it and sent it to us with the same clauses: “If your subcontractor is not insured, we are not covering you.”

We asked ourselves, what is going on here. We can’t sign this. This is the problem we just ran into. How can you expect us to go to another company that has the identical terminology? Does this mean that we have to go out of state to get a policy? Does this mean that we have to self-insure?

It puts us in a position of not knowing who to ask assistance from and where we would get correct information. How in the world is the average contractor supposed to protect himself under these types of circumstances?

QR: And what are your conclusions about the state of liability insurance coverage?
Lippman: My conclusion is that insurance companies are legally defrauding contractors. My first reaction is that the framing contractors’ broker should have errors-and-omissions insurance so that he can protect his client.

How does the smaller contractor doing less than $500,000 protect themselves against a situation like this? They hire electricians and plumbers and roofers and siders and tilemen. How in the world do you protect yourself when you do everything that your insurance company asked of you, and when you need them, after paying $35,000 per year, they find a clause and a way that they just leave you high and dry.

QR: And how is your relationship with the client?
Lippman: They are upset about the entire situation. It got worse. The wife had advanced terminal cancer. While she was out of the house and living down the block in an apartment, she passed away. It was stressful on everybody. We were doing everything humanly possible to be the best that we could possibly be. We have an unblemished record with every agency here on Long Island: The Better Business Bureau, Dunn and Bradstreet, Consumer Affairs. We have never had a complaint and we have letters of commendation. We have done work for building inspectors and plans examiners.

This client is upset about things that occurred afterward in displacing the mother and father. The mother passed away a week before the house was able to be re-occupied. So the whole situation is nobody’s fault, but the fault lies on our shoulders regardless.

And it can be worse. We are looking at only a loss of $60,000, $70,000 or $80,000. God forbid the framer is working upstairs and he drops a 2x10, it shakes the ceiling, and a $10,000 chandelier drops down on the table and a piece of glass goes in a kid’s eye and an electrical box starts a fire. We could be looking at a $2 million loss. What if, God forbid, one of the framers fell off the roof? So although this is a big financial responsibility, this could destroy several people’s lives in a scenario half of what I just described to you. The circumstances for us are bad, but the company will live through it. The question is, is this set of circumstances for the whole entire industry unacceptable?

I hope this article helps people because nobody knows that it is out there. And boy o boy, when it hits you, it can really hurt.