Expert: Timmy Chou - 9/21/2010

Question
My husband is a residential contractor and has an LLC
business.  He purchased a one million dollar liability
insurance policy 13 yrs ago to protect him.  Less than two
years ago he built a house and 10 months ago a water line
burst and there was $20,000 damage.  The homeowhers policy
picked up the tab to do the repairs, because my husbands
policy would not cover the incident.  Now, the homeowners
insurance is suing my husband to repay the $20,000.  
Apparently the company my husband bought the policy from,
sold him a policy that is worthless.  Trying to read the
policy does no good because it is not comprehend-able to a
normal person.  A retired lawyer friend looked at the
policy and said it is worthless.  We feel he has been sold a
bogus policy that covers nothing pertaining to liability for
a contractor.  I know you can't advise us as to exactly what
to do, but I am looking for any input on your gut feeling as
to where we should go with this.  Please respond.


Answer
Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.   

I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience. Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

The first place I would send you is to your state's Insurance Commission or licensure office.  In most states insurance companies must operate under very strict rules set down by state statute.  Often they must post a bond or participate in some re-insurance pool set up for people like yourselves.  

Be prepared to bring copies of the policies, but most importantly bring any evidence of marketing materials or any notes about WHAT YOU WERE TOLD by agents or salesmen.  You must have had to provide EOI certificates to vendors, materialmen, banks, state contractors license boards and others.  These certs are all evidences of the coverage that is usual and customary and expected.  If these are provided in a form that is materially false you should be able to rely on the state to get involved and go after the company.  Clearly the company was happy to take your money, send out certs to everyone indicating your coverage, and then switching you out at the last minute.

Also, please see if you can determine MANY OTHER BUSINESSES that may have relied on the same company.  You would be better off together seeking a state action or class-action lawsuit, then you are alone.

These are some ideas.  Feel free to follow up with additional questions.

For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!


Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

Confidential, no public record
Limited exchange of documentation, information
Quick, don't have to wait for a court date
Arbitrators have expertise in the subject matter and are trained in conflict resolution
Cheaper than litigation
Preserves business relationships

Negatives of Arbitration

It's often a compromise, no 100% winner
Complex arbitration can be costly
If not satisfied, may litigate the arbitration procedure
Poor results with an unskilled arbitrator
Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

Neutral mediator can objectively suggest alternatives not considered before
Parties are directly engaged in negotiating the settlement
Can be quicker than litigation
Less costly than litigation
Preserves business relationships
85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

may not reach a binding decision
unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

a clear winner and loser
uses a prescribed set of procedures
more predictable outcomes
is final

Negatives of Litigation:

waiting for court dates can do more harm
usually more expensive than mediation and arbitration
part of the public record