Lawsuit Illustrates Importance of Care When Filling Out Insurance Applications

This may be the most valuable advice I give this year. Most people would assume that once their staffing firm paid their insurance premiums and received a Certificate of Insurance, they would be all set in the event of a catastrophic personal injury claim against the firm. However, this is not always the case.

The bigger the loss, the more likely it is that they insurer will review your initial or renewal coverage application and start looking for what the courts call "material misrepresentations." And if the insurer finds evidence that the insured answered the questions in ways that significantly minimized their risk profile, the staffing firm may find itself in court fighting the insurer's lawsuit to rescind (revoke) the policy, even after an accident occurs and an injury claim is filed.

Of course, it is counter-intuitive to put down all the ugly risk factors when filling out the application, but that is exactly what you should do if there is a question calling for it.  

A recent case filed against New York City staffing firm RHG Manpower, Inc. illustrates the point. In this particular case, the circumstances alleged by the insurer would perhaps seem to justify its position. Here, Lloyds of London underwriters seek to nullify the policy on the following grounds:

3. In its application for the Policies, RHG states unequivocally that it is 100% General Contractor with RHG’s only payroll being for the “Supervisory” class of work. See Ex. A, RHG Application. Further, RHG notes in its application that it does not hire “Day Laborers or Casual Laborers.”
4. RHG held themselves out as a general contractor without direct employees performing construction work on construction sites.
5. RHG represented that their annual income was expected to be $2,000,000.
6. Underwriters conducted analysis and provided a premium based on RHG’s representations.
7. RHG performed direct labor.
8. RHG is not a general contractor.
9. RHG is a subcontractor.
10. RHG’s annual income exceeded their represented income by multiples.
11. RHG has continually, and continues to, misrepresent its income during the policy period.
12. RHG’s representations: regarding the nature of RHG’s work; that they were a general contractor; that they had no direct employees or payroll beyond supervisory employees; and their annual income, were material misrepresentations.

It turns out that RHG was actually a labor subcontractor with a much larger business than stated, and not a general contractor. According to the complaint, "[u]nderwriters would not have issued the Policies as they stand if it was known that RHG directly employed laborers on construction projects." A footnote goes on to explain:

The risk, underwriting, and chances of a claim are different when there are direct employees on site conducting construction work. General contractors generally sub-contract to other contractors to complete work. A subcontractor is customarily contractually required to indemnify and provide insurance coverage for both the general contractor and owner, while a general contractor’s contractual indemnification and insurance responsibilities will likely be limited to an owner. For these and other reasons, the risks and calculations are different for a general contractor versus a subcontractor.

What triggered the insurer's action? It appears to relate to a major sidewalk scaffolding collapse on Broadway several years ago that injured a number of pedestrians, some seriously.

The takeaway is this. Do NOT casually fill out an insurance application, including renewal applications, without carefully reviewing the questions and gathering the information necessary to answer them accurately. When that big bad claim comes along, you will thank yourself.

Contact Bill Josey:  wjosey@staffinglaw.com