Andrew Richards, Kaufman Dolowich Voluck

As insurers look for new and creative ways to limit their potential exposure on policies issued to their insureds, it is important for policyholders to be aware of the details within their insurance contracts. An increasingly popular way in which insurers look to limit their risk within an insurance policy is the use of sublimits. Sublimits are extra limitations in an insurance policy’s coverage of certain losses. They are part of the original limit. That is, they do not provide extra coverage, but set a maximum to cover a specific loss. Sublimits may be expressed as a dollar amount or a percentage of the coverage available. Sublimits can show up in almost any type of insurance policy: homeowners to commercial property, and commercial general liability to health insurance.

A critical area to watch for property owners concerning sublimits are provisions which reduce the limits of an owner’s premises liability coverage if the loss arises out of work being performed at the premises by a contractor. In many policies, the owner’s limits are reduced if: (i) the contractor does not maintain its own coverage for such a loss and/or (ii) the owner does not have a written agreement with the contractor that requires the contractor to defend, indemnify and hold the owner harmless against losses arising out of the contractor’s work.

Quite often in such instances, coverage limits which would usually be $1 million per occurrence are reduced to $250,000 or even $100,000 per occurrence. These sublimits could be catastrophic to the property owner. For example, if an employee of a contractor is injured from a fall off of a scaffold, the owner could have liability under Sections 240(1) and/or 241(6) of the Labor Law, which impose strict liability on owners of construction projects. Jury awards in such cases tend to be significant, especially within New York City. If the injured worker is awarded $1 million and a sublimit is triggered because of a lack of contractor coverage or a written agreement, the owner may have an uninsured loss of up to $900,000.

Importantly, the fact that the owner may have excess or umbrella coverage will not limit the exposure because almost all of those policies will not “drop down” and fill the gap of coverage between the original limit of the primary policy and the sublimit. Thus, the owner will have to pay out of pocket to satisfy the judgment, which can be enforced against is real property.

For this reason, it is not enough for owners as policyholders to only know the overall limits and the general nature of the insurance coverage.  Owners must understand that whether they ultimately will have coverage for a loss, regardless if it is first- or third-party in nature, usually is determined by the details of the contract language.  In short, the devil is in the details when it comes to coverage in most instances. Policyholders must be proactive in analyzing their risks and ensuring that they carry the appropriate coverage at all levels because once a loss is sustained and a gap in coverage is exposed, it is too late to address the problem through the transfer of risk to the insurer.  Fortunately, sublimits are explicitly listed on the policy’s Declarations Page.  Thus, the dollar figure and general coverage area connected to the lower limits is easy to find. Owners should not hesitate to ask their insurance brokers to carefully review the policies they have procured on their behalf and confirm whether such sublimits exist.

Bottom line – read your policy. And, if you cannot understand it, give it to someone who can.

Andrew Richards, Esq., is a partner, and Elizabeth Marchionni is an associate at Kaufman Dolowich Voluck, Woodbury, N.Y.