Federal Appeals Court Ruling Highlights Risks in Construction Insurance Policies
A recent federal appeals court decision has sparked significant discussion in the construction industry. The ruling, favoring Liberty Mutual’s surplus lines carrier, focuses on a contractor-controlled insurance program (CCIP) policy involving Kaufman Lynn Construction. While it’s seen as a legal victory for Liberty Mutual, the case also underscores deeper issues with insurance policies that contractors often face.
The Conflict Over the Fine Print
At the heart of this case is the “course of construction exclusion” (COCE) in Kaufman Lynn Construction’s CCIP policy. This controversial clause ultimately blocked coverage for $3.3 million in water damage caused by Tropical Storm Eta in November 2020.
Kaufman Lynn argued the exclusion unfairly barred their claim, as portions of the massive construction project in Deerfield Beach, Florida, were already completed and occupied, despite other phases still being underway. The contractor alleged the insurance policy as issued differed materially from its initial application, and this disconnect was exacerbated by unclear underwriting practices.
However, the 11th U.S. Circuit Court of Appeals found the COCE clause unambiguous. No matter how the term “project” was defined, the ruling maintained that coverage wouldn’t kick in until the “entire project” was complete. For Kaufman Lynn, this meant there was no reimbursement for damages—even for the finished sections of the development that suffered storm-related water intrusion.
The Bigger Picture with Contractor-Controlled Insurance
Contractor-controlled insurance programs (CCIPs), often called “wrap-up” policies, are marketed as a streamlined, cost-effective way for contractors to oversee their liability coverage on complex projects. Unlike traditional general liability policies, CCIPs can consolidate coverage under one umbrella, reducing administrative burdens.
However, their appeal has been overshadowed by issues like the COCE in this case. Many CCIP policies exclude certain risks until project work is fully complete, leaving contractors with potential coverage gaps during phased developments.
Dallas attorney Patrick Wielinski, who filed an amicus brief for construction trade groups in this case, called these exclusions a widespread problem in the industry. Contractors are often surprised when broad exclusions in policies eliminate coverage for risks they thought were included.
“Contractors aren’t being warned about provisions that leave yawning gaps in their coverage,” Wielinski said. His comments echoed concerns raised by contractors nationwide about insurers “baiting and switching” on the supposed benefits of wrap-up policies.
The Lessons for Contractors
A key takeaway from this case? Read every line of your insurance policy before signing it. It’s an elementary step, but one that is frequently overlooked in large, fast-moving projects. Kaufman Lynn had brokers, legal advisors, and internal risk-management teams, yet still ended up with a policy they claim didn’t match their expectations.
For construction professionals, this verdict should serve as a reminder to approach insurance contracts as critically as any building blueprint. Phased projects, in particular, demand closer scrutiny of exclusions that may leave vulnerabilities for incomplete sections of work. Contractors must ensure their brokers, advisors, and insurers are on the same page about the scope of coverage.
The Call for Clearer Language
It wasn’t just Kaufman Lynn under scrutiny; Liberty Mutual’s policy drafting also raised eyebrows. The 11th Circuit Court acknowledged that the COCE could have been worded more precisely to avoid misinterpretation. The ruling suggests a growing need for insurers to create policies with straightforward, clear language that aligns with today’s project complexities.
This clarity is especially important as construction technology and techniques evolve, often resulting in phased projects with occupancy staggered across timelines. Using vague terms like “completion” or “project” without expressly defining them invites confusion and potential lawsuits.
Practical Insights Moving Forward
For insurers, this ruling is a wake-up call to refine exclusion clauses. Overly broad language can alienate the clients they aim to serve, leading to costly disputes that damage industry trust. By tailoring policies more closely to contractors’ operations, insurers could both mitigate risks and foster better collaboration with builders.
For contractors, improved communication with insurers at the drafting stage is critical. Ask specific questions about how exclusions apply in phased projects or unique situations. Contractors should also consider supplemental policies, like builder’s risk insurance, to fill coverage gaps left by CCIPs.
Finally, staying informed about evolving case law, like this decision, empowers contractors to better protect their businesses. Courts increasingly favor policyholders when insurers rely on vague or overly complicated terms, but understanding those rulings ahead of time can help avoid litigation altogether.
Building Smarter Insurance Practices
The Kaufman Lynn case underscores a fundamental truth in construction and insurance alike: clarity is key. Contractors need insurance they can trust, not policies riddled with exclusions that only come to light when it’s too late. Similarly, insurers must strive to create policies that reflect real-world conditions without ambiguity.
While this ruling may not resolve every issue with CCIPs, it offers lessons for both sides. By focusing on transparency, collaboration, and proactive policy review, the construction industry can build more robust, reliable solutions for risk management.
Ultimately, the goal should be to ensure that, whether dealing with storm damage or a new skyscraper, all parties involved are equipped to weather the challenges ahead. By learning from this case now, contractors and insurers can chart a clearer, more secure path moving forward.