Nearly every contract for construction financing, construction work, purchasing of materials, or equipment rentals has a clause in it that requires that one or both of the parties obtain insurance for a defined amount to guard against casualty loss or injury. Many times the parties sign the contract and ignore the specifics of what the insurance clauses actually require. 99.9% of the time there is no claim on insurance and the construction project goes smoothly. But in those instances where a party is injured or a construction defect turns into a catastrophe, the insurance premium is the best money a construction company will ever spend.
So what happens when a company fails to obtain the proper insurance and the owner of the property, or the lender, gets hit with a judgment? In New York, the Court of Appeals (the highest court in NY) reasoned that where a party intended to be insured by its contractor has its own insurance nonetheless, the measure of damages is limited to out-of-pocket expenses such as premiums and any additional costs incurred, including deductibles, co-payments and rate increases in the party’s insurance. (Inchaustegui v. 666 Fifth Avenue Limited Partnership, 96 N.Y.2d 111, 725 N.Y.S.2d 627 (2001)). The decision also stated that where the party was left uninsured, it could recover “the full amount of the underlying tort liability and defense costs.” (Id. at 114).
In an extension of this decision, the New York Courts in Manhattan recently decided a case where the contracting party, Citibank, required its contractor to obtain insurance, but the bank failed to do so. (See Spector v. Cushman & Wakefield, 2012 N.Y. Misc. LEXIS 2794; 2012 NY Slip Op 3155U (Sup. Ct. N.Y. Co.)). Citibank’s case was unique because it is self insured. As such, Citibank asked the court to enter summary judgment is its favor for all expenses incurred in connection with an underlying personal injury action, i.e., the amount of any settlement or judgment and reasonable attorneys’ fees. Finding that Citibank had no insurance because it was self insured, the court granted Citibank’s motion for a judgment of liability for costs incurred in defending the action.
The lesson here is that when a contract requires insurance, get it: the lesson will be harder than any you’ve had before if you don’t.