Liability When Going Out Of Business

 
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Old 06-20-2013, 07:23 PM   #1
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Liability When Going Out Of Business


If a contractor goes completely out of business, meaning that he cancels his insurance, turns in his license, closes his office, etc., is he liable for any damages that he may cause while doing warranty work that he does in "good faith" for his former clients?

I thought about this question the other day when I called the iron welding contractor who fabricated a driveway swing gate for one of my clients. (I installed the gate opener.) When he installed the gate 3 years ago, he promised a 5 year warranty. When I called him to let him know that a couple of the welds broke, he told me that he was no longer in business but would still come out to fix it.

Rather than coming in his F550 with the big welder, he drove up in a Toyota with a mini buzz box, fixed the issue, and he was on his way. This made me wonder what would happen if he set something on fire or someone got hurt. Would he have been liable? Or should he have told me "tough luck" in the first place to protect himself?
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Old 06-20-2013, 07:54 PM   #2
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Re: Liability When Going Out Of Business


"the guaranty is only as good as the guarantor".

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Old 06-20-2013, 08:03 PM   #3
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Re: Liability When Going Out Of Business


I wish Astrix was still around, but... from talkling to people that were in the insurance business at one time, liability insurance should cover any project that was done while the liability insurance was paid for. It's kind of like if you own a car and get in an accident. After the accident you can't afford the car or the insurance so cancel both. If the person you got in the accident with tries to claim after the insurance has been cancelled the ins company still has to pay.

However. If you do ANY work without liability insurance the HOMEOWNER is liable, not the person doing the work.
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Old 06-22-2013, 11:34 PM   #4
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Re: Liability When Going Out Of Business


I disagree. If a roof is on, it leaks 10 years later- it is not on the IC, it is on the Contractor.
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Old 06-22-2013, 11:58 PM   #5
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by Roofcheck View Post
I disagree. If a roof is on, it leaks 10 years later- it is not on the IC, it is on the Contractor.
Thus, the legal fees start to stack up. And depending upon the how the contractor set himself up, he can just walk....or do some repairs...or lose some....or lose a lot. Insurance companies are set up to collect money and be very sticky when giving it out. They do cost/benefit analysis, and playing with them is like playing open poker, where they go all in, knowing their adversary (client/you) may not have the resources to pony up.

So in drama like this, the homeowner is left with nothing but a mess and no one is responsible. So how much of a deal was it in the first place again?
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Old 06-23-2013, 12:25 AM   #6
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Re: Liability When Going Out Of Business


I believe it has to do with per occurrence. If its per occurrence then you are insured when it occurs not when it was installed. I remember asking my insurance guy if I were to retire and a house I built fell to the ground killed eight people and their dog and I canceled my policy would it be retroactive because I owned the policy when it was built.

He said not if I have a per occurrence policy I would need to buy an umbrella policy to cover me after the fact. The nice thing about a per occurrence policy is if I change insurance then jobs I did in the past are covered by the new policy as long as its per occurrence. Now this is how I interpreted it and I could be way off the mark so please check this out with your broker. And if I'm wrong I will accept you coming back and telling me I'm full of chit.
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Old 06-23-2013, 12:48 AM   #7
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by Californiadecks View Post
He said not if I have a per occurrence policy I would need to buy an umbrella policy to cover me after the fact.
"the guaranty is only as good as the guarantor".
Speaking for me and my experiences....never ever ever trust an insurance/financial salesperson......nor whoever speculative financial group they are selling plans for. Brokers (the guys/gals you talk to) are just salespeople working off residual income (monthly cuts from your payments).

Your pure commission salesperson may be the best intentioned person in the world, but they're just a salesperson, selling you a promise that will be defined in the later mailed packet of 108 pages of legal gobbledegook. Study that booklet of definitions, then go back to your insurance salesman and ask them a pointed question. It probably won't match up or they'll get back with you.

This is right up there with "we has a verbal contract".

Quote:
Now this is how I interpreted it and I could be way off the mark so please check this out with your broker.
"the guaranty is only as good as the guarantor".

I've always been amazed at how dumb big box store salespeople are. They don't really know much when you get into details and sometimes they'll just wing it, hoping you buy their policy...I mean tool.
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Old 06-23-2013, 01:02 AM   #8
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Re: Liability When Going Out Of Business


Why have insurance then if its not worth the paper it's written on? My policy is written. All the exclusions and all the inclusions it's pretty clear. I ask my insurance broker to back up his verbal explanation by showing me on my policy where it is. Another words I asked him am I insured for water damage if I open up a wall to flash a deck and I screw up and the wall leaks. He said you are insured for this. I asked him to show me this on my policy, which he did. It says I'm insured for a complete room addition but I can't take on a specific job of waterproofing. But if the room addition includes waterproofing like roofing wrapping walls or lathing for stucco then I'm covered.

Also I can't take on a job for just roofing by itself. Doesn't matter because as a general contractor in California I'm not legally able to take on just a roofing job without it including another trade.

Edit: I can take on a roofing job by itself as long as I sub to a licensed roofing contractor or hold the appropriate specialty license but then I would have to get my insurance policy changed to reflect this.

I can roof it in house if I am doing at least one more trade on the project.
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Old 06-23-2013, 06:32 AM   #9
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by Californiadecks View Post
I remember asking my insurance guy if I were to retire and a house I built fell to the ground killed eight people and their dog and I canceled my policy would it be retroactive because I owned the policy when it was built.
Good point. But if the defunct contractor came back 3 years after the house was built to replace a broken attic fan and in the process he breaks a sprinkler pipe causing the master bedroom to get flooded, would the HO's policy cover it?
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Old 06-23-2013, 07:54 AM   #10
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by tedanderson View Post
Good point. But if the defunct contractor came back 3 years after the house was built to replace a broken attic fan and in the process he breaks a sprinkler pipe causing the master bedroom to get flooded, would the HO's policy cover it?
It should, but the HO's ins company would fight it I'm sure. If someone is doing work at your house and has no liability ins the liability falls to the homeowner. Whether their company will pay out is another matter.

At least that is how it works in Ontario
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Old 06-23-2013, 07:56 AM   #11
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by Roofcheck View Post
I disagree. If a roof is on, it leaks 10 years later- it is not on the IC, it is on the Contractor.
What is on the contractor? repairing the roof? Yes

repairing the drywall and insulation and whatever else was water damamged? No, (unless that is spelled out in their warranty) but many contractors will do the repairs anyway because they don't want their premiums to increase. But again as someone else mentioned many/most ins companies will fight it.
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Old 06-23-2013, 09:06 AM   #12
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Re: Liability When Going Out Of Business


In my experience, the homeowners policy will cover any defects or issues that arise from bad construction or errors on the part of the (sub) or contractor.

The homeowners insurance carrier will then either go after the contractor or the contractors liability insurance policy to recoup their money. Alot depends on the attitude of the homeowner and what direction and who they want to get involved.

It's an ugly process, that takes close to a year to sort out, but if the fix is immediate, you'll just have to do the work and figure the money out later. Also, takes a lawyer on part of the homeowner as well as many lawyers from the insurance companies. Alot of finger pointing, documentation, and all around nastiness. Two plus years after being involved in the repair replacement end of a project gone bad I'm still dealing with paper work from the projects lawyers and insurance people.
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Old 06-23-2013, 10:25 AM   #13
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Re: Liability When Going Out Of Business


Y'all are discussing two totally separate and distinct issues here.

One is doing uninsured work, and the other is a HO's loss due to poor workmanship, both after closing the business.
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Old 06-23-2013, 10:31 AM   #14
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Re: Liability When Going Out Of Business


If the guy showed up and did warranty work after the business was closed he did so out of the kindness of his heart, nothing wrong with that except if he did start a fire he would be probably be bankrupt
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Old 06-23-2013, 02:14 PM   #15
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by tedanderson

Good point. But if the defunct contractor came back 3 years after the house was built to replace a broken attic fan and in the process he breaks a sprinkler pipe causing the master bedroom to get flooded, would the HO's policy cover it?
Yes, the HO's ins. would pay, and the HO's insurance would then go after the defunct contractor. Remember its rare that the HO sues a contractor for a major issue. What usually happens is the HO calls the contractor the contractor pushes back or denies its his fault completely, then the HO has no other avenue but to make a call to their insurance company. Their insurance will then go after the contractor. It's almost always the HO's insurance that sues the contractor because they have the resources. Also I might add the insurance will handle it with a business approach. They will way the the amount of cost to collect vs. cost to replace and forget.
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Old 06-23-2013, 02:42 PM   #16
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Re: Liability When Going Out Of Business


Quote:
Originally Posted by Chris Johnson
If the guy showed up and did warranty work after the business was closed he did so out of the kindness of his heart, nothing wrong with that except if he did start a fire he would be probably be bankrupt
It can include a registered letter that this repair is a gesture of good will and does not perpetuate any warranty.

I had a HO call me 4 years after I built a patio cover for them. Well it had a leak. I usually pull up the existing roof and lay my roofing under it and replace the existing back over the top of the new. ( counter flash) well when I got up to his existing he freaked out about me removing his existing. He said that will void my warranty on the house roof. Then he says I'm a union sheet metal guy I will make some flashing that will work for that. So I installed the flashing and un-beknownst to me it leaked for four years. Ruined the 1-1/2" T&G ceiling below.

He sent me a registered letter that claimed the mold was causing his home to be un-livable. I immediately called my lawyer.

My lawyer told me this:

There's two types of construction defects

1.) latent defects ( undiscoverable )

2.) patent defects ( discoverable ) doesn't mean it had to be discovered either just means it could be reasonably discovered

Also he said the four years statutes of limitations is up because that is the law for this patent defect. ( in Cali )

In Cali the law for latent defects is 10 years.

Also he said the HO can't just wait and let it cause more damage and expect the contractor to be responsible for it. Its called a " Responsibility to Mitigate "

So I told my lawyer I don't mind fixing the issue just out of the kindness of my heart, but how do I approach this. Actually my lawyer told me to tell him to pound sand. ( got to love lawyers) but I couldn't do this. So my lawyer made me a letter that explained that even though your statutes of limitations is up, and out of good will I will remedy your roof. Also the language explained that this fix doesn't start the four yer warranty allowed by law to start over and perpetuate. He signed it I fixed it the right way by counter flashing like I wanted to, to begin with. Its been a couple years and all is well.

My lawyer also told me that because he made the flashing, weakens his position as a HO because he effectively became my partner. When the HO was made aware of all this info he changed his tune and settled for me fixing it.

By the way this lawyer was a client and friend of mine and did all this Pro bono.
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Old 10-08-2013, 05:56 PM   #17
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Re: Liability When Going Out Of Business


Hi Guys! Sorry it's been so long since I've visited CT, but I've got some free time so thought I would check in. This thread is, of course, interesting to me. Lots of different comments have been made and as 480sparky pointed out, the topic has split into two separate issues.

Here's my 2 cents:

Liability insurance covers you for several different types of liability:
  • Coverage A - Bodily Injury and Property Damage Liability
  • Coverage B - Personal and Advertising Injury Liability
  • Coverage C - Medical Payments
  • Coverage D - Tenants Legal Liability
  • Supplementary Payments (which deals with how adjusting/legal expenses are paid, other expenses, etc.)

Additional Coverage sections can be added, such as as Coverage E - Employee Benefits Liability or Coverage F - Non-Owned Auto Liability.

Anyway, Coverage A is the applicable coverage here; and there are two parts to Coverage A:

- Section 1 - Bodily Injury and Property Damage
- Section 2 - Products & Completed Operations (optional add-on)

Also, there are two types of liability policies: Occurrence and Claims-Made. Most of you should have Occurrence policies. As a contractor, your broker should ALWAYS make sure you have Completed Operations coverage on your policy, and preferably it should be on an Occurrence form.

Completed Operations coverage is not needed for a building owner, for example, who only rents out apartments but doesn't really "MAKE" anything. Any business which builds, constructs, creates, makes and repairs items absolutely needs to have Completed Operations coverage added to their policy.

So, this is how it works:

- If you are at a job site and someone gets hurt or property gets damaged while you are on site (example, homeowner trips over an extension cord), then that is Section 1. If you close up your business, you are no longer physically at any job sites, so you don't need this coverage anymore. No worries.

- If someone broke a leg while you were at a jobsite in January, then you closed your business in February, and in March they decided to sue you; your insurance company would defend that March lawsuit because the injury "OCCURRED" in January when you were still insured.

- If, however, you have a Claims-Made policy, then when you call your broker to cancel your insurance in February, they should tell you that you need to buy "tail coverage". Tail coverage will protect you for any claims that "occurred" before February when you closed your business, but weren't reported, i.e. "claim was made" until March or later.

To be clear:

On an "Occurrence" form:
... the injury/damage has to "occur" before you cancelled the policy.
... it doesn't matter when it was reported or claimed.

On a "Claims-Made" form:
... the injury/damage has to occur before you cancelled the policy, and
... the claim has to be made to the insurance company before you cancel the policy.

* If you have a "Claims-Made" form and buy the extra "tail coverage", then:
... the injury/damage has to occur before you cancel the policy, but
... the claim can be made after the policy was cancelled, up until the "tail coverage" expires (usually bought for 1 or 2 years, but sometimes longer).


Some things never change.... I've typed another long post so I'm splitting it into two. More to follow.

Last edited by Astrix; 10-08-2013 at 06:10 PM. Reason: spelling/grammar
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Old 10-08-2013, 06:04 PM   #18
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Re: Liability When Going Out Of Business


Next, Section 2 - Completed Operations coverage.

If you built a roof and left the job site, and 6 months later the roof leaked and the main floor of the house was water-damaged, this is the section that would cover you.

What's important here is that there is an exclusion called "Damage To Your Work". Some brokers/adjusters will try to tell you that because the water on the main floor was caused by your faulty work on the roof, there is no coverage. That is wrong! The roof itself (or even just the part of the roof that you worked on) would not be covered; but any other adjacent damage would be insured. So the roofing shingles and a few sheets of underlying plywood would not be insured, but the ceiling, main floor and water-damaged furniture would all be insured.

IMPORTANT: The problem with Completed Operations coverage when you close your business is that the "Occurrence" date is the date when the water damage occurred; not the date when you repaired the roof. So, if you repaired the roof in January, closed up business and cancelled your insurance in February, and then there was a big thunderstorm and the roof leaked in March, you have no insurance.

Ideally, if you are planning to retire, you would be best served to sell you business to someone who would then get insurance for the ongoing business, including any Completed Operations claims that may occur in the future for work you did in the past. It is then the concern of the new owner.

If, however, you totally close the business, then (and this is where a lawyer is required), it depends on how your business was registered:

1. If the business was incorporated (and therefore a totally separate legal entity) --- If the corporation is dissolved, then the homeowner is out of luck if any future claims happen because of past work. It would be the same like trying to sue a dead person. The business is dead so that's the end of it. The HO's insurance would pay but they have no one to subrogate against.

2. If the business was in your personal name as a sole proprietorship --- Then you have a problem. If the HO's insurance company can find you, then they may likely go after your personal assets to recoup the money they paid out. You would need to continue to buy a pared-down liability insurance policy that gives you Section 2 - Completed Operations coverage in order to be protected in the event of a future roof leak (and that's a whole other problem because they are hard to get at a reasonable cost).

More here for those who like to read: http://www.irmi.com/expert/articles/...anovich10.aspx


Okay, I'm done typing..... for now.
(See you around soon. )

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Old 10-09-2013, 06:41 AM   #19
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Re: Liability When Going Out Of Business


Thanks for popping back in Astrix...great informative post as usual

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