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Key Construction Insurance Issues – How 3 Form Contracts Address Them
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November 9, 2009
(This paper was Chapter 15, Insurance, in The Construction Contracts Book: How to Find Common Ground in Negotiating the 2007 Industry Form Contract Documents (American Bar Association Forum on the Construction Industry, 2008, 2d ed.)
By Seth D. Lamden and Andrew M. Reidy
Howrey LLP
INTRODUCTION
The importance of insurance as a risk management tool in construction projects cannot be over-emphasized. Construction is an inherently risky business, and virtually every construction project presents myriad exposures to loss and liability for all parties involved. Risks presented by a typical construction project can include property damage to the project itself both during construction and after the completion of construction; third-party liability claims stemming from delays, cost overruns, or defective or incorrectly performed work; liability for bodily injury to personnel or third parties; lost profits; business interruption; and increased costs for financing or materials. Several different types of insurance policies can cover many of the risks presented by a construction project.
On a construction project, owners usually are responsible for insuring against damage to the project or project materials while work is in progress. A builder's risk insurance policy covers this risk. Unlike a commercial general liability policy, which provides coverage for third-party bodily injury or property damage claims, builder's risk coverage is referred to as "first-party coverage" and does not cover liability to third parties. Because there is no standard form builder's risk policy, coverage varies among companies. In most cases, a builder's risk policy covers property of every kind and description to be used in the fabrication, erection and construction of the project. This coverage often is written on an "all risk" basis, which typically covers direct physical loss or damage to insured property unless the cause of the damage is specifically excluded by the policy language. A builder's risk policy frequently covers damage due to such things as flood, theft and vandalism. This coverage also can extend to ensuing losses (that is, consequential damage) arising from the physical damage to the work. It generally does not cover damage caused by defective workmanship or design.
Commercial general liability (CGL) insurance covers third-party claims against an insured for bodily injury or property damage. CGL policies typically cover the defense of a claim as well as any judgment or settlement entered against the insured. Construction contracts often address the scope and terms of CGL coverage that the contractor is to carry. From the owner's perspective, the contract language pertaining to the contractor's CGL coverage should address the rating of the insurer providing coverage, the policy form used for this coverage, policy limits, and additional insured requirements.
CGL insurance should be provided by a carrier that meets a specified rating issued by a recognized source. The owner does not want the contractor to carry CGL coverage provided by a financially unstable company that soon may be defunct. Owners can use widely published rating guides, such as A.M. Best, as the source for financial ratings to be specified in the construction contract.
It may be advisable to specify the form to be used to provide the CGL coverage. The Insurance Services Office, Inc. (ISO) forms are the most widely used. Designation of the form ensures that particular coverages necessarily will be included. An alternative is to include provisions describing the particular types of risks that should be covered under the CGL policy.
If the owner desires to cover its risk of bodily injury and property damage arising out of the work of the contractor, the contract should require the contractor to endorse its CGL policy to name the owner as an additional insured. The contract also should include the names of those parties that must be added as additional insureds under the policy. An additional insured endorsement gives the owner a direct cause of action against an insurer to enforce its rights to the insurance benefits rather than claiming them through the contractor.
In lieu of an endorsement to the CGL policy naming the owner as an additional insured, the parties may consider the use of an owners and contractors protective (OCP) policy. An OCP policy is designed to protect the owner from liability arising out of operations performed by the contractor, and coverage typically terminates once the contractor's operations are completed. The owner is the named insured on an OCP policy. The standard OCP policy provides coverage in one of two situations: (1) the owner is liable for injury or damage that arises out of the designated contractor's operations; and (2) the owner is liable by virtue of its own acts or omissions in connection with its general supervision of the designated contractor's work.
In the situation where the obligation to procure insurance is satisfied by an additional insured endorsement on the contractor's CGL policy, the owner and contractor share the indemnity limits of the policy (defense costs, however, do not erode the policy limits). With an OCP policy, the owner is entitled to coverage up to the indemnity limit on the policy.
An OCP policy does have certain drawbacks. For example, an OCP policy will not cover bodily injury or property damage that occurs after the contractor completes the project. This coverage, referred to as "completed operations" coverage, insures against claims that occur during a specified period of time following the expiration of the policy. Unlike OCP policies, CGL policies typically provide completed operations coverage; those that do not can be endorsed to provide this coverage.
For large construction projects, owners should consider as an alternative to additional insured status on a contractor's CGL policy the purchase of an owner controlled insurance program (OCIP) or a contractor-controlled insurance program (CCIP). Under an OCIP, the owner procures insurance policies covering the owner, the general contractor and the subcontractors. An OCIP generally provides, at a minimum, builder's risk, workers' compensation and CGL coverages. Under a CCIP, the contractor buys these policies. When compared to a situation in which all parties involved in a construction project procure separate policies, the benefits of an OCIP and a CClP include cost savings and control over all aspects of insurance for the project, including procurement and claims. The downside is that all parties share the same indemnity limits, and it is important for the OCIP or CCIP to have limits sufficient to cover all potential claims.
FREQUENTLY USED CONTRACT PROVISIONS
American Institute of Architects
AlA A201 contains numerous provisions addressing both liability and property insurance. With respect to the contractor's liability insurance, AIA A201 lists the types of risks to be insured against without specifying a particular policy. Specifically, AlA A201 provides:
11.1.1 The Contractor shall purchase from and maintain in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor's operations and completed operations under the Contract and for which the Contractor may be legally liable, whether such operations be by the Contractor or by a Subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable:
.1 Claims under workers' compensation, disability benefit and other similar employee benefit acts that are applicable to the Work to be performed;
.2 Claims for damages because of bodily injury, occupational sickness or disease, or death of the Contractor's employees;
.3 Claims for damages because of bodily injury, sickness or disease, or death of any person other than the Contractor's employees;
.4 Claims for damages insured by usual personal injury liability coverage;
.5 Claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom;
.6 Claims for damages because of bodily injury, death of a person or property damage arising out of ownership, maintenance or use of a motor vehicle;
.7 Claims for bodily injury or property damage arising out of completed operations; and
.8 Claims involving contractual liability insurance applicable to the Contractor's obligations under Section 3.18.
The AIA A201 does not specify particular limits of coverage but contemplates that the required limits will be specified elsewhere in the contract documents. The document also mandates the length of time that the contractor's policies are to remain in effect.
11.1.2 The insurance required by Section 11.1.1 shall be written for not less than limits of liability specified in the Contract Documents or required by law, whichever coverage is greater. Coverages, whether written on an occurrence or claims-made basis, shall be maintained without interruption from the date of commencement of the Work until the date of final payment and termination of any coverage required to be maintained after final payment, and, with respect to the Contractor's completed operations coverage, until the expiration of the period for correction of Work or for such other period for maintenance of completed operations coverage as specified in the Contract Documents.
AlA A201 requires certificates of insurance as evidence of the contractor's insurance and requires notice to the owner of any cancellation or material alteration.
11.1.3 Certificates of insurance acceptable to the Owner shall be filed with the Owner prior to commencement of the Work and thereafter upon renewal or replacement of each required policy of insurance. These certificates and the insurance policies required by this Section 11.1 shall contain a provision that coverages afforded under the policies will not be canceled or allowed to expire until at least 30 days' prior written notice has been given to the Owner. An additional certificate evidencing continuation of liability coverage including coverage for completed operations shall be submitted with the final Application for Payment as required by Section 9.10.2 and thereafter upon renewal or replacement of such coverage until the expiration of the time required by Section 11.1.2. Information concerning reduction of coverage on account of revised limits or claims paid under the General Aggregate, or both, shall be furnished by the Contractor with reasonable promptness.
11.1.4 The Contractor shall cause the commercial liability coverage required by the Contract Documents to include (1) the Owner, the Architect and the Architect's Consultants as additional insureds for claims caused in whole or in part by the Contractor's negligent acts or omissions during the Contractor's operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor's negligent acts or omissions during the Contractor's completed operations.
As for the owner's liability insurance, AlA A201 simply provides in Section 11.2 that the owner should purchase and maintain “its usual liability insurance." The owner also is required to procure an “all risk” builder's risk policy to cover any loss to the project during construction:
11.3 PROPERTY INSURANCE
11.3.1 Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder's risk all-risk or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Subsubcontractors in the Project.
11.3.1.1 Property insurance shall be on an “all-risk" or equivalent policy form and shall include, without limitation, insurance against the perils of fire (with extended coverage) and physical loss or damage including, without duplication of coverage, theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and startup, temporary buildings and debris removal including demolition occasioned by enforcement of any applicable legal requirements, and shall cover reasonable compensation for Architect's and Contractor's services and expenses required as a result of such insured loss.
The AlA A201 does allow the contractor to purchase the builder's risk insurance if the owner notifies the contractor in writing that it will not be purchasing such insurance. If the contractor does purchase the insurance, the owner will be responsible for reimbursing the contractor for the cost. Section 11.3.1.2 provides:
11.3.1.2 If the Owner does not intend to purchase such property insurance required by the Contract and with all of the coverages in the amount described above, the Owner shall so inform the Contractor in writing prior to commencement of the Work. The Contractor may then effect insurance which will protect the interests of the Contractor, Subcontractors and Subsubcontractors in the Work, and by appropriate Change Order the cost thereof shall be charged to the Owner. If the Contractor is damaged by the failure or neglect of the Owner to purchase or maintain insurance as described above, without so notifying the Contractor in writing, then the Owner shall bear all reasonable costs properly attributable thereto.
The AlA A201 charges the owner with responsibility for paying deductibles under the builder's risk policy.
11.3.1.3 If the property insurance requires deductibles, the Owner shall pay costs not covered because of such deductibles.
An important provision dealing with builder's risk insurance is the waiver of subrogation clause. It prevents the builder's risk insurer from stepping into the shoes of its insured to assert an action against another project participant for the amounts that the builder's risk insurer paid on a claim. Section 11.3.7 of AIA A201 reads:
11.3.7 WAIVERS OF SUBROGATION.
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors described in Article 6, if any, and any of their subcontractors, subsubcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect's consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.
ConsensusDOCS
ConsensusDOCS 200 also has extensive provisions addressing insurance coverage for third-party claims for property damage or bodily injury. Paragraph 10.2 provides:
10.2.1 Prior to the start of the Work, the Contractor shall procure and maintain in force Workers' Compensation Insurance, Employers' Liability insurance, Business Automobile Liability Insurance, and Commercial General Liability Insurance (CGL). The CGL policy shall include coverage for liability arising from premises, operations, independent contractors, products completed operations, personal injury and advertising injury, contractual liability, and broad form property damage. If requested, the Contractor shall provide the Owner with certificates of the insurance coverage required.
Subparagraph 10.2.1 of ConsensusDOCS 200 also allows the parties to fill in the amounts of coverage that the contractor is to carry. The language reads as follows:
The Contractor's Employers' Liability, Business Automobile Liability, and Commercial General Liability policies as required in this Subparagraph 10.2.1, shall be written with at least the following limits of liability:
1. Employers' Liability Insurance
a. $ _______
Bodily Injury by Accident
Each Accident
b. $ _______
Bodily Injury by Disease
Policy Limit
c. $_______
Bodily Injury by Disease
Each Employee
2. Business Automobile Liability Insurance
a. $_______
Each Accident
3. Commercial General Liability Insurance
a. $_______
Each Occurrence
b. $_______
General Aggregate
c. $_______
Products/Completed Operations Aggregate
d. $_______
Personal and Advertising Injury Limit
The requirements for the owner's liability insurance are set forth in Subparagraph 10.4.2. It requires the Owner to “either self-insure or obtain and maintain its own liability insurance for protection against claims arising out of the performance of this Agreement, including without limitation, loss of use and claims, losses and expenses arising out of the Owner's errors and omissions.”
Subparagraph 10.5.1 allows the owner to specify whether the contractor's CGL coverage will be primary to the owner's CGL coverage. If the owner requires that the contractor's coverage be primary to the Owner's CGL coverage, Subparagraph 10.5.1 also allows the owner to require the contractor to name the owner as an additional insured under the contractor's CGL policy or procure an Owners' and Contractors' Protective Liability Insurance (OCP) policy "with limits equal to the limits on Commercial General Liability Insurance specified, or limits as otherwise required by Owner." Subparagraph 10.5.2 requires that the owner pay for the cost, if any, associated with this additional coverage.
Many owners prefer that the contractor procure additional liability coverage for the owner that is primary to the owner's own CGL coverage. This coverage allows the owner to preserve the limits on its own CGL policy, as well as keep its insurance premiums low by having a favorable loss history. As an additional insured, depending on the language of the applicable endorsement, the owner is insured for third-party claims arising from the contractor's work. Subparagraph 10.5.2 requires that the additional insured endorsement provide coverage for "operations and completed operations, but only with respect to liability for bodily injury, property damage or personal and advertising injury to the extent caused by the negligent acts or omissions of Contractor, or those acting on the Contractor's behalf, in the performance of Contractor's work for Owner at the Worksite."
The contractual liability coverage required under Subparagraph 10.2.1 ensures that many of the contractor's indemnity obligations to the owner for third-party liability claims are insured under the contractor's CGL policy, thereby giving the owner assurances that the contractor will be financially able to satisfy its indemnification obligations. In addition, even if the indemnity and hold-harmless provisions of the contract are found to be invalid, the owner will be entitled to coverage from the contractor's CGL insurer.
ConsensusDOCS 200 mandates the length of time that the contractor's policies are to remain in effect and also contemplates the delivery of certificates of insurance as proof that the required insurance is in place. The ConsensusDOCS 200 goes one step further than the AlA by requiring that the completed operations coverage under the contractor's CGL policy remain in effect for a minimum of one year after acceptance or substantial completion. Subparagraph 10.2.3 provides:
10.2.3 The Contractor shall maintain in effect all insurance coverage required under Subparagraph 10.2.1 with insurance companies lawfully authorized to do business in the jurisdiction in which the Project is located. If the Contractor fails to obtain or maintain any insurance coverage required under this Agreement, the Owner may purchase such coverage and charge the expense to the Contractor, or terminate this Agreement.
The policies of insurance required under Subparagraph 10.2.1 shall contain a provision that the coverage afforded under the policies shall not be cancelled or allowed to expire until at least thirty (30) Days' prior written notice has been given to the Owner. The Contractor shall maintain completed operations liability insurance for one year after acceptance of the Work, Substantial Completion of the Project, or to the time required by the Contract Documents, whichever is longer. Prior to commencement of the Work, Contractor shall furnish the Owner with certificates evidencing the required coverages.
Like the AIA A201, ConsensusDOCS 200 specifies that coverage for direct loss to the project before the completion of construction operations is to be provided , under an "all risk" builder's risk policy procured by the owner. ConsensusDOCS 200 assigns responsibility for deductibles under this insurance to the owner and includes a waiver of subrogation clause. Paragraph 10.3 provides:
10.3 PROPERTY INSURANCE
10.3.1 Before the start of Work, the Owner shall obtain and maintain a Builder's Risk Policy upon the entire Project for the full cost of replacement at the time of loss. This insurance shall also name the Contractor, Subcontractors, Sub-subcontractors, Material Suppliers and Architect/Engineer as insureds. This insurance shall be written as a Builder's Risk Policy or equivalent form to cover all risks of physical loss except those specifically excluded by the policy, and shall insure at least against the perils of fire, lightning, explosion, windstorm, hail, smoke, aircraft (except aircraft, including helicopter, operated by or on behalf of Contractor) and vehicles, riot and civil commotion, theft, vandalism, malicious mischief, debris removal, flood, earthquake, earth movement, water damage, wind damage, testing if applicable, collapse however caused, and damage resulting from defective design, workmanship or material, and material or equipment stored offsite, onsite or in transit. The Owner shall be solely responsible for any deductible amounts or coinsurance penalties. This policy shall provide for a waiver of subrogation in favor of the Contractor, Subcontractors, Subsubcontractors, Material Suppliers and Architect/ Engineer. This insurance shall remain in effect until final payment has been made or until no person or entity other than the Owner has an insurable interest in the property to be covered by this insurance, whichever is sooner. Partial occupancy or use of the Work shall not commence until the Owner has secured the consent of the insurance company or companies providing the coverage required in this Subparagraph 10.3.1. Prior to commencement of the Work, the Owner shall provide a copy of the property policy or policies obtained in compliance with this Subparagraph 10.3.1.
10.3.2 If the Owner does not intend to purchase the property insurance required by this Agreement, including all of the coverages and deductibles described herein, the Owner shall give written notice to the Contractor and the Architect/Engineer before the Work is commenced. The Contractor may then provide insurance to protect its interests and the interests of the Subcontractors and Sub-subcontractors, including the coverage of deductibles. The cost of this insurance shall be charged to the Owner in a Change Order. The Owner shall be responsible for all of Contractor's costs reasonably attributed to the Owner's failure or neglect in purchasing or maintaining the coverage described above….
10.3.3 Owner and Contractor waive all rights against each other and their respective employees, agents, contractors, subcontractors and subsubcontractors, and the Architect/Engineer for damages caused by risks covered by the property insurance except such rights as they may have to the proceeds of the insurance and such rights as the Contractor may have for the failure of the Owner to obtain and maintain property insurance in compliance with Subparagraph 10.3.1.
Engineers Joint Contract Documents Committee
EJCDC C-700 requires the contractor to carry the same type of insurance as AlA A201. Paragraph 5.04 provides:
5.04 Contractor's Insurance
A. Contractor shall purchase and maintain such insurance as is appropriate for the Work being performed and as will provide protection from claims set forth below which may arise out of or result from Contractor's performance of the Work and Contractor's other obligations under the Contract Documents, whether it is to be performed by Contractor, any Subcontractor or Supplier, or by anyone directly or indirectly employed by any of them to perform any of the Work, or by anyone for whose acts any of them may be liable:
1. claims under workers' compensation, disability benefits, and other similar employee benefit acts;
2. claims for damages because of bodily injury, occupational sickness or disease, or death of Contractor's employees;
3. claims for damages because of bodily injury, sickness or disease, or death of any person other than Contractor's employees;
4. claims for damages insured by reasonably available personal injury liability coverage which are sustained:
a. by any person as a result of an offense directly or indirectly related to the employment of such person by Contractor, or
b. by any other person for any other reason;
5. claims for damages, other than to the Work itself, because of injury to or destruction of tangible property wherever located, including loss of use resulting therefrom; and
6. claims for damages because of bodily injury or death of any person or property damage arising out of the ownership, maintenance or use of any motor vehicle.
EJCDC C-700 also requires the contractor to name the owner as an additional insured on the contractor's CGL policy. Like the AlA and ConsensusDOCS forms, EJCDC C-700 specifies the length of time that the contractor's insurance is to remain in effect. EJCDC C-700 identifies certain types of coverages that should be included in the contractor's insurance, such as the completed operations and contractual liability coverages. Specifically, EJCDC C-700 states in Paragraph 5.04:
B. The policies of insurance required by this Paragraph 5.04 shall:
1. with respect to insurance required by Paragraphs 5.04.A.3 through 5.04.A.6 inclusive, be written on an occurrence basis, include as additional insureds (subject to any customary exclusion regarding professional liability) Owner and Engineer, and any other individuals or entities identified in the Supplementary Conditions, all of whom shall be listed as additional insureds, and include coverage for the respective officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of all such additional insureds, and the insurance afforded to these additional insureds shall provide primary coverage for all claims covered thereby;
2. include at least the specific coverages and be written for not less than the limits of liability provided in the Supplementary Conditions or required by Laws or Regulations, whichever is greater;
3. include contractual liability insurance covering Contractor's indemnity obligations under Paragraphs 6.11 and 6.20;
4. contain a provision or endorsement that the coverage afforded will not be canceled, materially changed or renewal refused until at least 30 days prior written notice has been given to Owner and Contractor and to each other additional insured identified in the Supplementary Conditions to whom a certificate of insurance has been issued (and the certificates of insurance furnished by the Contractor pursuant{to Paragraph 5.03 will so provide);
5. remain in effect at least until final payment and at all times thereafter when Contractor may be correcting, removing, or replacing defective Work in accordance with Paragraph 13.07; and
6. include completed operations coverage:
a. Such insurance shall remain in effect for two years after final payment.
b. Contractor shall furnish Owner and each other additional insured identified in the Supplementary Conditions, to whom a certificate of insurance has been issued, evidence satisfactory to Owner and any such additional insured of continuation of such insurance at final payment and one year thereafter.
Paragraph 5.03 contemplates that the contractor delivers certificates of insurance as evidence of coverage. The provision also anticipates that the owner (and other additional insureds) may require more documentation.
5.03 Certificates of Insurance
A. Contractor shall deliver to Owner, with copies to each additional insured and loss payee identified in the Supplementary Conditions, certificates of insurance (and other evidence of insurance requested by Owner or any other additional insured) which Contractor is required to purchase and maintain.
B. Owner shall deliver to Contractor, with copies to each additional insured and loss payee identified in the Supplementary Conditions, certificates of insurance (and other evidence of insurance requested by Contractor or any other additional insured) which Owner is required to purchase and maintain.
C. Failure of Owner to demand such certificates or other evidence of Contractor's full compliance with these insurance requirements or failure of Owner to identify a deficiency in compliance from the evidence provided shall not be construed as a waiver of Contractor's obligation to maintain such insurance.
D. Owner does not represent that insurance coverage and limits established in this Contract necessarily will be adequate to protect Contractor.
E. The insurance and insurance limits required herein shall not be deemed as a limitation on Contractor's liability under the indemnities granted to Owner in the Contract Documents.
Under EJCDC C-700, the owner is not required to procure liability insurance but may do so.
5.05 Owner's Liability Insurance
A. In addition to the insurance required to be provided by Contractor under Paragraph 5.04, Owner, at Owner's option, may purchase and maintain at Owner's expense Owner's own liability insurance as will protect Owner against claims which may arise from operations under the Contract Documents.
Also similar to ConsensusDOCS 200, EJCDC C-700 requires the owner to procure property insurance for the project:
5.06 Property Insurance
A. Unless otherwise provided in the Supplementary Conditions, Owner shall purchase and maintain property insurance upon the Work at the Site in the amount of the full replacement cost thereof (subject to such deductible amounts as may be provided in the Supplementary Conditions or required by Laws and Regulations). This insurance shall:
1. include the interests of Owner, Contractor, Subcontractors, and Engineer, and any other individuals or entities identified in the Supplementary Conditions, and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them, each of whom is deemed to have an insurable interest and shall be listed as a loss payee;
2. be written on a Builder's Risk "all-risk" policy form that shall at least include insurance for physical loss or damage to the Work, temporary buildings, falsework, and materials and equipment in transit, and shall insure against at least the following perils or causes of loss: fire, lightning, extended coverage, theft, vandalism and malicious mischief, earthquake, collapse, debris removal, demolition occasioned by enforcement of Laws and Regulations, water damage (other than that caused by flood), and such other perils or causes of loss as may be specifically required by the Supplementary Conditions.
3. include expenses incurred in the repair or replacement of any insured property (including but not limited to fees and charges of engineers and architects);
4. cover materials and equipment stored at the Site or at another location that was agreed to in writing by Owner prior to being incorporated in the Work, provided that such materials and equipment have been included in an Application for Payment recommended by Engineer;
5. allow for partial utilization of the Work by Owner;
6. include testing and startup; and
7. be maintained in effect until final payment is made unless otherwise agreed to in writing by Owner, Contractor, and Engineer with 30 days written notice to each other loss payee to whom a certificate of insurance has been issued.
B. Owner shall purchase and maintain such equipment breakdown insurance or additional property insurance as may be required by the Supplementary Conditions or Laws and Regulations which will include the interests of Owner, Contractor, Subcontractors, and Engineer, and any other individuals or entities identified in the Supplementary Conditions, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them, each of whom is deemed to have an insurable interest and shall be listed as a loss payee.
EJCDC C-700 includes an extensive set of provisions dealing with waivers of subrogation. These provisions appear in Paragraph 5.07, which reads:
5.07 Waiver of Rights
A. Owner and Contractor intend that all policies purchased in accordance with Paragraph 5.06 will protect Owner, Contractor, Subcontractors, and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) in such policies and will provide primary coverage for all losses and damages caused by the perils or causes of loss covered thereby. All such policies shall contain provisions to the effect that in the event of payment of any loss or damage the insurers will have no rights of recovery against any of the insureds or loss payees thereunder. Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes, of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused. None of the above waivers shall extend to the rights that any party making such waiver may have to the proceeds of insurance held by Owner as trustee or otherwise payable under any policy so issued.
B. Owner waives all rights against Contractor, Subcontractors, and Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for:
1. loss due to business interruption, loss of use, or other consequential loss extending beyond direct physical loss or damage to Owner's property or the Work caused by, arising out of, or resulting from fire or other perils whether or not insured by Owner; and
2. loss or damage to the completed Project or part thereof caused by, arising out of, or resulting from fire or other insured peril or cause of loss covered by any property insurance maintained on the completed Project or part thereof by Owner during partial utilization pursuant to Paragraph 14.05, after Substantial Completion pursuant to Paragraph 14.04, or after final payment pursuant to Paragraph 14.07.
C. Any insurance policy maintained by Owner covering any loss, damage or consequential loss referred to in Paragraph 5.07.B shall contain provisions to the effect that in the event of payment of any such loss, damage, or consequential loss, the insurers will have no rights of recovery against Contractor, Subcontractors, or Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them.
ALTERNATIVE CONTRACT PROVISIONS
The following clauses can be nominally classified as owner-sided but are set forth below to identify the issues addressed by owners, contractors and subcontractors alike. Most are important to the upstream party. These clauses identify the particular ISO form that should be used to provide CGL coverage, allow the parties to designate the financial rating of the insurers that will provide insurance, require that the specified limits of insurance be available for the project, establish the contractor's policy as primary to any other insurance that the owner may carry, mandate the type of additional insured endorsement to be used, mandate that the contractor provide copies of endorsements and relevant policies, and allocate responsibility for the deductible under the builder's risk policy.
Insert a Provision Identifying the Particular ISO Form that Should Be Used for the Contractor's Liability Insurance
CGL insurance coverage as required herein shall be written on ISO Form ____ or equivalent.
This provision assures the owner that the contractor procures CGL coverage that is acceptable to the owner. Input should be sought from the appropriate insurance agent or broker to ascertain the appropriate ISO form to specify. Coverage can differ significantly depending upon the ISO form.
Insert a Provision Specifying the Financial Rating Required of Insurers that Are Covering the Contractor
All insurance specified herein must be placed with insurance companies rated ___ or better by Best's Key Rating Guide and which are authorized and licensed to do business in the jurisdiction where the project is located.
This language provides assurances that the coverage is procured from a financially solvent insurer that will have sufficient assets to pay claims.
Insert a Provision Requiring an Endorsement to the Contractor's CGL Policy Assuring that the Specified Policy Limits Are Available for Claims on the Project
The Contractor's commercial general liability policy shall include a per project endorsement providing that the limits of such insurance specified in the Contract Documents shall apply to the Project without erosion of such limits by other claims or occurrences.
Insert a Provision Stating that the Contractor's CGL Policy Shall Provide Primary Coverage to the Owner and the Owner's Policy Shall Be Excess
Additional insured coverage afforded to the Owner pursuant to the Contractor's CGL policy shall apply as primary insurance and the Owner's liability insurance shall apply as excess.
The AIA, ConsensusDOCS and EJCDC forms either require or permit the owner to procure its own liability insurance. The ConsensusDOCS and EJCDC forms also provide for the owner to be named as an additional insured on the contractor's CGL policy. EJCDC C-700 specifies in Paragraph 5.04B that insurance provided to additional insureds shall provide primary coverage. ConsensusDOCS 200 does not address whether the owner's or contractor's insurance is primary. To ensure that the contractor's CGL policy, rather than the owner's policy, will apply as primary insurance to any claim brought against the owner and arising out of the contractor's work, the owner should include the above-referenced provision in any contract, specifying that the contractor's CGL insurance will be primary coverage and the owner's liability insurance will be excess. A provision in the contract specifying that the owner's liability insurance shall apply as excess coverage will preclude the contractor from endorsing its policy to apply as excess coverage for additional insureds or changing its CGL policy from primary coverage to excess after work on the project commences. In addition, the owner's CGL policy should include an endorsement specifying that it is excess to any other available coverage.
Insert a Provision Specifying the Particular Form of Additional Insured Endorsement that Should Be Used to Name the Upstream Parties as Additional Insureds
The [lower-tier parties’] primary CGL coverage shall be endorsed to include the [upper-tier parties] as an additional insured pursuant to ISO Form __or an endorsement providing equivalent coverage to the [upper-tier parties] with respect to the [lower-tier parties’] ongoing operations and the completed operations of the [lower-tier parties] for a period of at least [duration] years following the completion of the project.
In general, as an additional insured on a contractor's CGL policy, an owner is entitled to coverage under the contractor's CGL policy only for third-party liability claims arising in some way from the contractor's work in connection with the construction project.
The specific coverage afforded to an owner as an additional insured, however, can vary greatly depending on which additional insured endorsement is used. For example, some older ISO additional insured endorsements (e.g., the 1997 version of CG 20 10) provide coverage for liability "arising out of" the contractor's operations for the owner. The term "arising out of" has been interpreted very broadly by courts. The 2004 version of CG 20 10 (CG 20 10 04 97) provides more limited coverage and covers "liability for bodily injury or property damage ... caused, in whole or in part, by (1) [the contractor's] acts or omissions, or (2) or the acts or omissions of those acting on [behalf of the contractor] in the performance of ongoing work for [the owner]" in connection with the construction project. In other words, absent any fault of the contractor, the owner is not entitled to any coverage as an additional insured under the CG 20 10 04 97. On the other hand, even if the owner's liability is only slightly caused by the contractor, the owner is entitled to full coverage. In addition, nothing in the newer version of additional insured endorsement CG 20 10 07 04 requires that the contractor's "acts or omissions" be negligent as a prerequisite to coverage for the owner.
In addition, most additional insured endorsements limit an additional insured's coverage to liability only for property damage or bodily injury that occurs while the project is being built and excludes coverage for completed operations. In other words, if a claim is brought against the owner in connection with property damage or bodily injury that occurs after the contractor's work on the project is finished, the owner will not be entitled to coverage unless the additional insured endorsement provides completed operations coverage. To ensure that the owner is entitled to coverage as an additional insured after the project is completed, the owner should specify that the additional insured endorsement provide completed operations coverage to the owner. Although rarely used by insurers anymore, ISO form CG 20 10 11 85 or an equivalent endorsement provides broad additional insured coverage and includes completed operations coverage. Another endorsement that may be used to obtain completed operations coverage is ISO form CG 20 26, which provide additional insured status for "liability arising out of [the named insured's] operations pr premises....” Another option is to require the policy to include endorsement CG 20 37, which, when used in conjunction with a post-1997 version of CG 20 10, provides an additional insured with completed operations coverage.
Insert a Provision Requiring a Broad Form Additional Insured Endorsement
The Contractor's CGL policy shall be endorsed to specify that any person or organization that the named insured has agreed in writing to name as an additional insured is entitled to coverage as an additional insured under this policy.
Often on construction projects, a contractor is required to name a number of entities as additional insureds on its CGL policy. Through underwriting or broker error or oversight, the insurer may fail to issue all of the necessary additional insured endorsements. If an owner is not included as an additional insured on the contractor's CGL policy before a claim arises, it will not be entitled to any coverage under the contractor's policy for that claim. One way to prevent the owner from inadvertently being omitted as an additional insured is for the owner to require that the contractor endorse its CGL policy with a blanket additional insured endorsement (e.g., ISO form CG 20 33) that provides that every entity the contractor is contractually required to name as an additional insured is automatically included as an additional insured on the contractor's policy.
Include a Provision Requiring Not Only Certificates of Insurance but Copies of the Relevant Policies
Prior to commencing work on the Project, Contractor shall provide the Owner with a certificate of insurance reflecting the Owner's status as an additional insured and a summary of coverage provided under the Contractor's CGL and umbrella policies. In addition, Contractor shall provide the Owner with a copy of its CGL and umbrella policies applicable to the Project within ___ days of issuance by the insurer.
A certificate of insurance is merely evidence of insurance, and neither provides any coverage nor alters the terms of an insurance policy. In addition, an insurer ordinarily will not provide an additional insured with a copy of the policy. Consequently, the owner should include a provision requiring the contractor to provide the owner with a copy of the contractor's CGL policy and umbrella policy, including a copy of the endorsement making the owner an additional insured. Insurers often do not issue policies immediately. When time is of the essence, to avoid any delay in beginning work on the project, this provision should be considered.
Insert a Provision Making the Contractor Responsible for the Deductible Under the Builder's Risk Policy or Dividing the Responsibility for That Deductible
Contractor shall pay, at its sole cost and expense, all deductibles under the builder's risk policy.
OR
Contractor shall pay at its sole cost and expense the deductible for any claim under the builder's risk policy up to $____. If the deductible for a claim under the builder's risk policy exceeds this amount, Owner shall be responsible for the excess.
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For more information about the issues covered in this report, please contact Seth D. Lamden in our Chicago office at 312-846-5677 or at LamdenS@howrey.com, Andrew Reidy in our Washington office at 202-383-7485 or at ReidyA@howrey.com, or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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