Builders and Contractors Exchange
Weekly Bulletin: 13 April 2007
Guaranty Fund Liability
By: Thomas S. Berkley
When operating in a construction industry frought with potential liabilities, contractors will often ensure that their chosen subcontractors have obtained sufficient liability insurance before sealing any contractual arrangements. Many contractors have learned that they should obtain a copy of the subcontractor’s certificate of insurance for proof of sufficient liability insurance. The astute contractor will also ensure that the policy period of the subcontractor’s insurance policy covers the project duration. This approach provides some relief in the industry. However, an often overlooked pitfall remains with this approach – the insolvency of the subcontractor’s insurance carrier. The insolvency of a subcontractor’s carrier can force the contractor’s carrier to bear the entire responsibility for any liabilities because of statutory mandates. A contractor can usually avoid this pitfall by simply doing a little investigation after receipt of the certificate of insurance.
In Virginia, and nearly every other state or commonwealth, the insolvency of a carrier generally relieves the insured subcontractor of liability and enacts the protections of guaranty funds statutes for the subcontractor. Virginia’s statutes establish the Virginia Property and Casualty Insurance Guaranty Association (Guaranty Fund). The Guaranty Fund provides some protection to injured parties, but it first demands that the injured party exhaust all other solvent insurance limits. Exhaustion means that the plaintiff must recover the entire policy limits of the solvent policy before seeking recovery against the subcontractor or the Guaranty Fund. This exhaustion requirement will tempt, if not, require, plaintiffs or the Guaranty Fund to bring suits against the contractor, which has solvent insurance, to recover for the injuries. To make matters worse, the solvent insurance carrier cannot later bring an action against the subcontractor with the insolvent carrier to recover monies paid. Of course, this result can cause insurance premiums to rise.
By simply contacting the Virginia Insurance Bureau (804-371-9741) of the State Corporation Commission, you can ask whether an insurance carrier remains in good financial standing. This does not guarantee that the carrier will remain in good standing throughout a project. So, regular calls during lengthy projects will provide some advance warning for the aforementioned pitfall.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.