Omissions: Are You Covered? Probably Not…

Tom Tanner, owner of A-1 Sweeping Service in Salinas, California, responded to an October 2016 WorldSweeper editorial by Ranger Kidwell-Ross with an email about how to protect a sweeping company from contractual omissions’ clauses. The editorial is available in the WSA Contract Issues area. Overview of the problem: Contract language regarding “omissions” has become commonplace in construction-oriented sweeping contracts.  In addition to “commissions” — things that someone “commits,” like a car accident, or a spill, or a banana peel left on the ground that someone slipped on, etc… — some contracts now have clauses for “omissions,” as well. I.e., things you DIDN’T do that your client decided you were supposed to. How, Tanner wanted to know, might he insure or otherwise protect his company against “omissions,” which his insurance company had told him were not covered under his general liability and automobile policies. To get those questions answered, we conducted a three-way podcast that also included Scott Cerosky, Marketing Manager for Pavement Maintenance – Contractors Segment , with the Crum & Forster insurance organization. You will find the unedited, approximately 75-minute, podcast linked at the bottom of this article. As an example, the following is contract language that is on the “must sign as is” contract issued by one of California’s largest general contractors who, for the purpose of this article, we term General Contractor X. Note that in this contract the sweeping contractor is the ‘Service Provider.’

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10. DAMAGES CAUSED BY SERVICE PROVIDER. If Service Provider, or any subcontractor or supplier of Service Provider, or anyone else for whose acts Service Provider may be liable, should by any act or omission cause delay to Project work, Service Provider shall be liable for all losses, costs, expenses, liabilities and damages, including liquidated damages, sustained by General Contractor X, or for which General Contractor X may be liable to the Owner or any other party, because of such of act or omission. Service Provider agrees to provide such protection as is necessary to protect the employees of General Contractor X, Owner and other subcontractors and service providers, from Service Provider’s operations. Service Provider shall be liable for any loss or damage to any project work in place, or to any equipment or materials on the Project site, caused by Service Provider or any party for whose acts Service Provider may be liable.

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Here are just a few examples of how this clause can cost a sweeping contractor in a big way:

Example #1: Let’s say a sweeping contractor has a flat tire on the job. And, by the time the road service got there to fix the flat, or by the time dispatch got a back-up sweeper sent there, let’s suppose the job was held up for 1 or 2 hrs. Let’s also say that in that amount of time, two truckloads of hot asphalt ($4k each) cooled down, and a crew of 15 guys are left idle on the clock. So, you are presented with a bill for $10k to $15k. When the contractor turns it over to his insurance carrier, since there has been no “accident,” per se;  i.e., nothing physically contacted, nothing spilled, no one injured, etc., the insurance company says the situation is essentially a quality complaint.  So the insurance company rejects the claim. Example #2: Another instance where such a contract clause might be invoked is if the sweeper did not show up to the jobsite. Perhaps the operator dropped dead at the shop before s/he even left, or an accident closed the highway, or someone forgot to dispatch a driver, etc…  You then get a bill for $40k for lots of cooled-down asphalt, a whole crew sent home, as well as the fines from the highway department for not finishing the job on time. Example #3:  Let’s suppose that weeks after a job is completed someone decides the asphalt didn’t stick well enough. They then decide this occurred because the sweeper didn’t sweep well enough. So they decide to (or are required to) rip out all the asphalt for a mile and start over. You are sent the bill. Can you imagine the cost of that?! That’s right: Requested damages in this type of instance might be well more than the amount of your own contract for sweeping. Technically the client could even use an omissions’ clause to back-charge you for simply “not going fast enough” in their opinion. For example if they planned to do a mile of freeway in one night, but only managed 1/2 a mile, and they figure that the oil truck and paving machine weren’t progressing fast enough because the sweeper wasn’t cleaning fast enough.  Given this scenario, the sweeping company could be billed for the difference in the General Contractor’s (GC’s) planned profit margin! Unfortunately, when you return a contract after lining out the offending few sentences, you will find that most GCs will not agree to the change,  pointing out that other sweeper companies have signed it. “So it wouldn’t be fair to allow you to do so,” they might tell you, “while others agreed to the terms.” The fact is, other companies who sign to such omission clauses, are either a) Simply not reading the contract and/or not mentally imagining the potential; or, b) Are simply banking on the fact that the odds are remote. And/or are so hungry for business that they sign on any dotted line they are shown.

What we learned from the three-way podcast:

Unless there are actual damages created by the actions of a representative of your company, i.e., someone in your employ committed some type of actual accident, neither your general liability nor your vehicle policy will cover it. The only way to gain coverage, according to Cerosky, would be to obtain a performance bond on each and every job with such a contract clause. These typically cost between 1% and 2.5% of the anticipated job cost. However, the needed amount of the performance bond is made difficult to assess in a situation like those given in the above examples. That’s because omissions’ contract language might be used to assess liability far in excess of your projected income from sweeping the job. Any such performance bond would have to be procured for each and every sweeping contract that included omissions’ language, rather than an overarching performance bond that covers all your work. If you do not have a contractor’s license, which is not generally required for sweeping contractors, you may even find that will complicate your ability to buy a performance bond. In any event, in addition to the expense there are time costs involved with providing the information needed by the bond company, including a host of financial information. Since the client will probably not accept your line-outs on the contract — especially if other bidders have agreed to the contract’s terms – here’s what we suggest: Discuss the issue with the GC or other potential client’s risk manager(s) and make sure they understand that NONE of the other sweeping companies’ insurance will cover omissions, either. Then, suggest that if the clause is to remain in the contract, contract wording is amended to require the winning bidder to buy a performance bond to cover any such omissions that might occur. Also suggest that the total liability to the sweeping contractor under the omissions language be limited to the amount of the required performance bond. This will create a level playing field for all bidders. Barring that, you may want to consult your attorney about the possibility of incorporating another business entity — one with little-to-no assets that, perhaps, leases the sweepers it uses from your current company — and use that alternate business to bid on any contract that includes an omissions’ clause. What no sweeping contractor can afford to do is sign contracts like the one shown in the example without somehow mitigating their liability. To do so runs the risk of bankrupting your company or, at the very least, exposing your company to losses from which you may never recover. You may reach Scott Cerosky, at WSA’s recognized insurance provider, Crum & Forster, by calling 1.914.714.0787. You may also email him at:  Scott.Cerosky@cfins.com.