Learning a Lesson the Hard Way -- Why paying attention to the paperwork and contract terms matters

Many people in business are not big on paperwork, and some get down right annoyed with lawyers who want to direct their attention to every little detail. Often I have to ask a client the same question several times and in many different ways in order to pry out of him or her the information I need in sufficient detail to complete my task.  That lack of attention to certain details and not appreciating their importance can get a company into trouble.

Below is an example of a 'hot mess' waiting to happen.....

Certain commercial property is owned by a company. The principals of that company will often have a separately owned company that provides property management services to the commercial property. While these two company are owned by the same person , by law, each company and the owner all have separate legal identities and each will carry their own insurance coverage with typical exclusions and notice requirements.

Property owner, through its management company, retains a general contractor to provide construction services on the property.  The general contractor is owned by an affiliate of the property owner, or is otherwise a longtime business associate. Standard contracts are signed as may be required by lenders, but no one is reading them very closely, because they are all related or are long time friends who trust each other. Certificates of insurance would also be provided. Again, never really looked at that closely. General contractor then contracts with certain subcontractors for parts of the construction work. This work should also be subject to contracts with specific requirements for insurance coverage that adds the general contractor and property owner as additional insureds on the subcontractor's insurance. The certificates of insurance are obtained and tossed in a file without any real review. After all, general contractor and the subcontractor have worked together on many jobs over the years without a problem. 

During the construction, an employee of one of the subcontractors injures himself. He's rushed to the hospital and recovers fully. At the time of the accident, property owner, contractor and subcontractor all fail to notify their respective insurance carriers of the accident. While no claim has been filed (yet), it's a potential claim and statutes of limitation can run 1-2 years.  Insurance policies typically have requirements that the insured notify the insurance company within a specified period of time after the event or risk losing coverage.

11 months pass by and the employee files a lawsuit. He names everyone, including the property owner, property management company, general contractor and subcontractor. Property owner and property management company each notify their insurer, who first threaten to not cover the lawsuit due to failure to timely notify them. They also look to the general contractor's insurance.  The general contractor's insurance refuses to cover it due to failure to timely notify it and other exclusions. It directs general contractor to look to the subcontractor's insurance. Subcontractor failed to add general contractor and property owner as additional insureds so its insurance company washes its hands of the mess. No one bothered to review the certificates of insurance  to verify that they were complete and now it is too late. Insurers for property owner and property management company turn on the general contractor and counter sue his company. They do not care about the long working relationship or other affiliation between the companies.  First lesson to be learned -- never underestimate how low an insurer will stoop to get out of covering a messy claim.

The general contractor is left exposed with no coverage at all and having to sue the subcontractor for reimbursement of potential losses. Business relationships are strained to the limited.

Worse, no one will be reimbursing general contractor for the massive legal fees he incurs to protect his interests. If the case goes all the way to trial, the fees could run into six figures.  That is what I call a rather expensive lesson to learn that the paperwork is important, to read and follow contracts and to keep the insurance agent on speed dial.  
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