The Benefits of Risk Management
Consider this: you arrive at your company office one morning, and an otherwise friendly stranger is there waiting for you. He asks you to confirm your name and whether you are the owner of the company. Thinking that he might be interested in hiring you, you comply. Then, you sign something, and he hands you a stack of documents. Your company has just been served in what could be a very costly lawsuit.
After scanning the papers you just received, you find that a general contractor, with whom you have worked for years, and a property owner, who just a year ago raved about your work, are now claiming that your company is liable for millions of dollars in damages. This lawsuit claims that the building your company helped build is falling down and it is entirely your fault. To make matters worse, the damages claimed exceed $1 million, not to mention the cost of defending the action.
You are very proud of the company you single-handedly built, and you have every right to be. You worked hard, created this business, and made it a success. It might even be growing, hiring more employees, and accepting more projects. Right now, you may be working 12- to 15-hour days, probably every day, and the last thing you need is to worry about whether a lawsuit will bankrupt you.
Are you prepared for such an event? Construction defect lawsuits have become commonplace. The bigger, and more successful, your company becomes, the more likely it is to be sued ? and I can't stress it enough ? for millions of dollars. Unless you have considered the "what-ifs" of such a lawsuit, you are jeopardizing what you worked so hard to create. For small business owners, being sued can be one of the most stressful and costly situations imaginable. Is it any wonder that some are inclined to ignore a lawsuit and hope it simply goes away? Of course, that is the last thing you should do.
Even before this scenario takes place, you should consider whether your company has a good risk management program in place and, if not, you should consider developing one. The following are some suggestions to get you, and your advising attorney, started.
Use an Insurance Broker
If you aren't already using the services of an insurance broker, you should consider doing so. An insurance broker can help you manage and negotiate the high cost of insurance. More importantly, a broker who understands your trade will help your company get the type and amount of coverage it needs.
Let's presume that your company installs brick veneer or synthetic stone. A rising concern among insurers is water penetration, and coverage for claims arising out of failure of certain exterior finishes can be costly. Sometimes, an insurer may try to exclude coverage for damages or conditions caused by water penetration (such as mold) from a policy. If your company is sued for damages relating to water penetration or mold and your policy does not provide coverage, then it will be of no value to you.
An insurance broker can help you seek to avoid such potential problems by negotiating on your behalf to find the best prices and tailor insurance coverage to your company's needs. In some instances, if you engage in a highly specialized trade, an insurance broker can negotiate a policy that is written specifically for your company. In addition, an insurance broker can help you determine the various types of coverage your company needs, including commercial general liability (CGL) coverage, worker's compensation coverage, auto liability, pollution liability, sureties and bonds, errors and omissions coverage, as well as excess and umbrella coverage.
Maintaining adequate coverage is the foundation of any good risk management program, and an insurance broker's services can help you obtain the right coverage, so that if and when your company is sued, you are financially equipped to weather it.
Hire General Counsel
General counsel is beneficial in making sure that the contracts you sign, and the contracts you want others to sign, are legally binding and do not obligate your company for more than you bargain. Counsel can also advise on how to address contractual requirements when a problem arises; advise you on insurance coverage disputes; explain reservation of rights letters; draft or assist in drafting company policies and manuals; answer lawsuits on your behalf; and assist other defense counsel retained by your insurer to defend you.
Use Training and Employment Manuals
An inventive plaintiff's lawyer will all but throw the kitchen sink into a construction defect lawsuit. An emerging trend has been to include a claim that a construction contractor engaged in "negligent hiring and retention," which alleges that your employees have no business engaging in their trade, are untrained or generally incompetent, and that you are negligent for hiring them in the first place. You know your employees are highly skilled, but you may need to prove it.
Maintaining ? and adhering to ? hiring guidelines (such as reference checks, background checks and licensing requirements), following product manufacturer guidelines, and requiring up-to-date licensing and trade certificate renewals can help to limit your company's liability for "negligent hiring" claims. Showing a judge or jury that you train your employees and hold them to industry standards can be a very effective defense tool.
Besides training and licensing, other types of guidelines can help insulate your company from suits and should be made part of your overall risk management program. Just as maintaining and adhering to written codes of conduct and sexual harassment policies can help reduce your company's liability exposure for employment-related suits, carefully adhering to OSHA guidelines and making sure that copies of safety manuals are accessible and understood by your employees can help reduce your company's liability exposure for workplace and job site accidents. Having an office employee whose job it is to administer these materials, arrange for necessary testing, and even periodically arrange for in-office seminars should be an integral part of every company's approach to overall risk management. The costs of maintaining and adhering to company policies is minimal when compared to the benefits your company could receive from reduced exposure to liability.
Follow Standard Internal Procedures
Generally, if you are sued, you will likely know that it will happen beforehand. Being proactive as soon as you learn of a potential claim can save your company time and money, as well as provide your lawyer with valuable information at the beginning of a defense.
Having and following risk management guidelines for reporting potential claims to your insurance company, determining who was involved in the construction project (owners, general contractors, subcontractors, specific employees, architects, engineers), and estimating the potential exposure for damages early on can go far in limiting exposure and potentially shift liability to other at-fault parties.
If a property owner calls or writes you demanding that you fix a problem, you may avoid (or at least reduce your chances of) being sued by providing repair or warranty services. Of course, it is imperative that you involve your attorney as soon as possible, as there is the potential of a lawsuit. And, if you intend to seek coverage from your insurance company, make sure that you notify your insurer right away and clear any remediation work with it beforehand. Voluntarily assuming expenses (such as remediation) that may be covered under a policy without first notifying the insurer can void that policy or otherwise make coverage unavailable. Some insurance policies require that you be sued before they will pay any claims, so always check your policy and seek advice from your lawyer before beginning any repair work for which you want to seek coverage.
If the potential claim involves personal injury, again, notify your attorney and insurers as soon as possible, and get as much information as you can from potential witnesses and the injured party. It may be difficult or impossible to find necessary witnesses if you wait the months or years it often takes to go to trial. If you obtain names, addresses and phone numbers in addition to fact statements, necessary witnesses may be easier to find down the road and it may save you on attorney's fees.
Next, read the OSHA reports as soon as possible. If the OSHA reports allege another company caused an accident, then it is best to know this right away. Further, if the injured person reports a minor injury the day after the accident, maintaining copies of statements and reports can help rebut a claim of catastrophic injury by the time suit is filed.
Finally, if you are sued, having internal procedures for who to call and where to send the complaint can keep you from missing important deadlines. An answer usually must be filed within 20 or 30 days, depending on where the case is filed. Make sure that your insurers and your lawyer get copies of all documents immediately. Not acting quickly could result in your company having to pay damages even if it is not liable.
Finally if you are concerned with the work of another subcontractor, the architect or engineer, do not let it go unnoticed by the owner; say something. Not doing so could result in your company being subjected to a lawsuit that you or your employees could have otherwise prevented.
If you are the general contractor and the work performed by a subcontractor is substandard, you could be liable for that subcontractor's poor workmanship. If you are a subcontractor and you notice that another subcontractor is installing materials improperly, let the general contractor, and possibly the owner, know about it. If the poor workmanship of another subcontractor causes damage to your work or makes it appear that your work was otherwise faulty, your company could be sued for that other company's mistake. Further, if the architect or engineer provides plans and specifications that fail to follow standards, building codes or regulations, you could be named in a lawsuit for not meeting those same standards.
You should be aware of other potential problem areas besides the work your company performs. The poor workmanship of another subcontractor could hurt your company, and the best means to avoid being subjected to unnecessary risks caused by others is to speak up.
These are just a few suggestions to get you started. They are just that ? suggestions ? and may not consider every aspect of your company's needs. It is important, therefore, to sit down with an attorney to discuss which strategies will work best for you.
About the Author
Tammy L. Tomblin is an Associate with the law firm Jackson & Campbell, P.C., in Washington, D.C. She specializes in insurance coverage related to construction, toxic tort and environmental contamination.
This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.