August 28, 2018
Author: Bruce Partington
Organization: Clark Partington Hart Larry Bond & Stackhouse
The 2007 versions of the form contract documents promulgated by the American Institute of Architects make some meaningful changes to the insurance requirements of prior versions of the documents, and also reaffirm the predominant insuring burdens. For the vast majority of projects, the most significant types of insurance are property insurance and liability insurance.
Property insurance is intended to cover damage to property that is not necessarily the “fault” of another party, such as fire, storm damage, or damage from unknown site conditions. Historically, a builder was considered to have committed to deliver a structure for a given price, and the “risk” of damage to the structure during construction was the builder’s.1 As a result, this type of insurance came to be known as “Builder’s Risk” insurance because the builder had the greatest interest in insuring such risks. Over time, and likely because the Owner was the ultimate beneficiary of the builder’s work, and the Owner of the underlying property, the “default” obligation to provide this insurance, at least under the documents promulgated by the American Institute of Architects, was shifted to the Owner.
As a result, for the last several iterations of the AIA contract documents, it has been the obligation of the Owner to provide property insurance of various types (standard casualty coverage, flood, etc.) The documents impose various obligations on the Owner in the event of a claim covered by property insurance, including acting as the “fiduciary” to adjust and settle a loss.
If the parties decide to put the insuring obligation for property insurance back on the Contractor (or design builder or construction manager), then the parties need to be careful to ensure that the other relevant provisions of the Contract Documents are also carefully revised to ensure that the risk, and concomitant obligations, are allocated consistently.
The AIA documents also consistently include “waivers of subrogation” for property damage claims. What this means is that the insurer who pays a claim is prevented from pursuing potential “at fault” parties and the loss remains with the insurer (who has, of course, received a premium for accepting the risk of that loss). This encourages cooperation among the construction team to get the project completed, rather than assigning blame, with the parties agreeing to accept the insurance proceeds as appropriate compensation for any claims arising out of that casualty. If the parties started pointing fingers, the project would promptly become paralyzed. As a practical matter, and while insurers know that such clauses are contained within the most widely used form construction agreements, it is prudent nevertheless to ensure that the insurer is aware that the contract they are insuring contains such a clause as many property insurance policies prohibit impairing the insurer’s rights of subrogation.
Property insurance, with some exceptions such as windstorm and flood, does not come on standardized forms, so it is always important to review the policy or policies to ensure that they insure what the contract documents require, and the risks that are appropriate to be covered given the projects’ requirements.
The more complex issues arise with liability insurance coverage because of the continuing evolution of what actually purports to be a standardized form, including the insurance industry’s deliberate attempts to un-insure a risk which voluntarily assumed as a selling point in the 1970s, and which prompted major changes in the structure of the construction industry, but which the industry now seeks to disavow.
Before the 1970s, “general contractors” typically self performed a great deal of work themselves except for trades which required separate licenses, such as mechanical, electrical and plumbing. In the 1970s, however, insurers restructured their policies by changing the definition of the “your work” to exclude from the definition the work of subcontractors. This drove many general contractors to begin subcontracting much more work, and the business model evolved to its present form where most general contractors self-perform very little work. As the model changed, the insurance industry disavowed the significance of the very revision it had implemented to sell more insurance policies. Now, some carriers have deleted the “subcontractor exception” entirely by re-writing the definition, some have modified the definition by endorsement, and some have continued with the prior definition.
So why does this matter? As a general statement, liability insurance provides insurance coverage for “bodily injury” or “property damage” arising out of an “occurrence” during the “policy period” for which the insured is at fault or liable. The threshold analysis is this: unless there is “property damage” or “bodily injury” there is no insurance coverage. In short, there is no insurance coverage for painting the building the wrong color. There must be property damage or bodily injury.
Assuming that there is property damage that arises from an “occurrence”,2 this is where the “your work” exclusion becomes pertinent. If the “property damage” is to “your work” then the “your work” exclusion kicks in. This is why it was so significant to when “your work” excluded work performed by subcontractors – if the property damage was not to self performed work, there was coverage.
Whether the “subcontractor exception to the ‘your work’ exclusion” exists or not, the Contractor needs to insure that subcontractors have adequate coverage. But, where the coverage exists is if the defective work of a subcontractor causes damage to the work of another subcontractor or to the work of the general contractor. So, in considering the appropriate limits for subcontractor coverage, the question is not, what is the value of the individual subcontractor’s work, but rather, what is the potential claim from improper work by the subcontractor, which results in damage to the work of
From the perspective of both the owner and general contractor, this issue of insurance coverage raises the issue of the adequacy of defining the “work” provided by (or “products” provided by) the subcontractor are adequately defined, and the scopes of work among the different trades be clearly delineated.
The 2007 AIA Forms
The 2007 AIA forms made several important changes to the insurance requirements in the requirements regarding liability insurance. For purposes of this discussion, the context will be the “General Conditions” (AIA Document A201) since they deal more expansively with insurance, and most subcontracts are written to incorporate A201 by reference so the General Conditions’ insurance provisions effectively become a “floor” for insurance obligations. The property insurance provisions in the General Conditions were re-numbered, and made to conform with the other revisions to the AIA documents regarding dispute resolution, but there were no substantive changes.
Perhaps most significant was the requirement of the Contractor that the Owner and Architect be made additional insureds under the Contractor’s liability policy during construction of the project, and that the Owner continue as an additional insured after completion. § 11.1.4. In the 1997, 1987, and earlier versions, unless modified, the default was that the Owner and Architect could not be made additional insureds by the Contractor (former § 11.3.3). The new provision is likely insufficient for perceptive Owners because it is arguably limited to the Owner’s vicarious liability for the acts and omissions of the Contractor, but it is nevertheless a significant change to require it at all.
Second, the 2007 documents create an intentional emphasis on “completed operations” coverage generally. The AIA and the other organizations involved in developing and revising the documents perceived that this coverage was becoming less commonly provided by insurers to contractors. For example, in § 11.1.1, the words “and completed operations” were added to the introductory language on types of liability insurance required (despite making the sentence grammatically challenging).
Section 11.1.2 adds a new requirement that the Contractor maintain completed operations coverage “until the expiration of the period for correction of Work or for such longer period for maintenance of completed operations coverage as specified in the Contract Documents.” Additional language regarding completed operations coverage in renewal policies was added to § 11.1.4, including a requirement that proof of the continuation of insurance be “submitted with the final Application for Payment.”3 Proof of insurance during the additional time period required by § 11.1.2 is also required upon renewal or replacement of such coverage.
The entire section in the General Conditions on “Project Management Protective Liability Insurance” was deleted because few such policies were ever issued, and the policy coverage “has become extinct.” The 2007 A201 Deskbook, American Bar Association Forum on the Construction Industry (2008) at 89.
Aside from a numbering change (from § 11.2.1 to § 11.2), the 2007 General Conditions make no change to the rather generic requirement that the Owner is “responsible for purchasing and maintaining the Owner’s usual liability insurance.”
What is “Completed Operations” Coverage?
When do most claims relating to construction projects arise – during construction, or after construction is complete?
This distinction – “during construction or after construction is complete” is the distinction between coverage for “ongoing operations” or “operations” and “completed operations.” Coverage during “ongoing operations” is important, but, in reality, most construction claims arise from defects that first appear after the project is complete, and therefore within what liability policies define as the “completed operations hazard.” “Products/Completed Operations” is a separate coverage under liability policies, with its own limits – it is shown as a separate coverage with separate limits on both the declarations page of insurance policies, and also on certificates of insurance. In fact, there is some debate about whether the exclusions that apply during “operations” even continue to apply under the “products/completed operations hazard” unless the exclusion specifically mentions its applicability to that risk.
In addition to providing coverage for the insured itself, completed operations coverage is also integral to the indemnity obligations present in nearly every prime and sub-contract. These indemnity obligations are insured under the standard CGL policy, assuming that completed operations coverage is in place.
Completed operations coverage is valuable coverage for all those involved in construction. It is most likely required of you by those “upstream” and with the current AIA forms, is a coverage most parties will be required to maintain after construction, including keepings others as “additional insureds.”
Finally, as noted above, the AIA forms have evolved to require the maintenance of completed operations coverage after construction is complete, with “upstream” parties being additional insureds for such coverage. The question then becomes for how long such coverage may be required to be maintained. The “default” under the AIA documents is the “correction period” which is one year after substantial completion. At the other end of the spectrum is a requirement to maintain such coverage for the full length of the statute of repose (generally about 10 years from completion of the project). Somewhere between those extremes is the “right” answer, and it may vary by the individual project. The parties who are required to provide this coverage should: (a) be aware of the time requirement; and (b) make whatever financial and calendaring arrangements are necessary to ensure that they meet the obligations they have undertaken (and been paid to assume) under their contracts.
Important Coverages to Have (or Ensure that Others Have)
With regard to property insurance, it is important to all involved in the project that: (1) someone is carrying insurance, (2) of appropriate risks, (3) in appropriate amounts or limits, (4) with appropriate deductibles. This is particularly true with respect to risks (e.g. windstorm or flood) that are not covered under the typical property policy. Without wading into the climate change debate, if climate change is occurring, then coverages such as windstorm and flood likely assume increased importance.
With regard to liability insurance, it is important that the Owner understand the Contractor’s liability policy coverages, because those coverages may affect what the owner (and contractor) require of the subcontractors for their liability insurance. For example, if the general contractor’s insurer will not maintain or replace the “subcontractor exception to the ‘your work’ exclusion,” then the coverage of subcontractors becomes more important to the Owner, as to the subcontractors’ additional insured endorsements.
By the same token, it is important to ensure that elements or types of construction which will be utilized in the project are not excluded by endorsement, or that the type of project is not excluded. For example, if the project is going to incorporate EIFS, then the general contractor and plastering contractor’s policies should not have an endorsement excluding coverage for EIFS. Similarly, if the project is a condominium or apartment building, neither the contractor nor any of the subcontractors should have policies with “condominium or multi-family” exclusionary endorsements.
If these problematic endorsements or exclusions are present, the Contractor or subcontractor can often “buy out” the exclusion for some additional premium, or perhaps even get an additional limited policy covering that particular risk.
It is also important to balance the allocation of “design risk” or “professional services risk” and confirm that it is adequately insured. This comes up most often in two circumstances (aside from the insurance of the design professionals themselves). The first is a “construction management” contract because construction management is generally considered to include some level of “professional services.” So, if the project is configured as a “construction management” project, it is important that the construction manager have an endorsement to include construction management services in its general liability policy.
The other area where there can be uninsured “design risk” results from “design delegation” either by the use of performance specifications, or the outright express delegation of design for systems or elements of construction. If these circumstances exist, the owner and contractor need to be sure that the subcontractors responsible for the delegated design also carry (or the design professionals they employ carry) professional liability insurance.
It is also important to consider the limits of liability for the project. While it may be tempting just to have prescribed limits in form documents that carry over from project to project, does that really make sense? Does liability limits first prescribed for a project with a value of $3,000,000 make sense for a project with a $100,000,000 value? Or vice versa? By the same token, does the interior trim carpenter really need to have the same limits required as the mechanical, electrical, or exterior cladding subcontractors?
Finally, it is most rational that these insurance questions be considered before the project is issued for bid or before the contracts are finalized. If the contractors and subcontractors are not fully apprised of their insuring obligations when developing their pricing, a change in those obligations may either disqualify a contractor from the project, or result in a request for a change order to the Owner to address the additional costs to obtain these coverages.
Additional Insured Provisions and Endorsements
The coverage afforded to “additional insureds” has evolved over time. It is not enough just to be a “certificate holder” with your name on an “ACORD” form. All that a certificate does is serve as a confirmation that the coverages identified on the certificate are in place. To be an “additional insured” however, is to have some degree of rights as an insured under someone else’s insurance policy. While there is authority that a statement on a certificate that the “certificate holder” is an “additional insured” may convey some rights on the putative “additional insured,” the safer path is to insist on seeing the actual policy endorsement that defines the rights of an additional insured, and if the endorsement does not provide the rights necessary, to obtain another endorsement that does.
The additional insured endorsements have varied since 1985, in a cycle which seems to reflect a contraction of coverage benefits for the additional insured in 1993, followed by an expansion in response (in 2001), with a general increase in complexity (2004 and 2013) in an effort to limit coverage. The most favorable endorsement for additional insureds is dated in 1985 is likely unavailable today. The “default” endorsement by most insurers will almost certainly be one that covers ongoing operations only, and affords no coverage to the additional insured for completed operations (e.g. CG 20 10 10 93). The 2013 endorsement has not been widely circulated yet, and so if the contract requires completed operations coverage for additional insureds, the most likely form offered at present will be the 2004 forms (CG 20 10 007 04 in conjunction with CG 20 37 07 04).4 However, a problem with using these two endorsements – rather than a single endorsement, is that the policy will have endorsements which could be read to conflict with each other, or the insurer could provide one and not its companion. The first, CG 20 10, affirms coverage only for ongoing operations. The second (CG 20 37), basically says that there is also coverage for completed operations. However, a conflict between endorsements would most likely be construed in favor of the insured, and against the insurer.
The 2013 endorsements (CG 20 10 04 13/CG 20 37 04 13) tie coverage closely to the language of the contract, which increases the importance of careful drafting to specify, in the contract, what coverage is expected. This is actually a rational approach - - assuming that one has paid attention to the requirements of additional insured coverage in the contract. If a contract has non-specific language about the requirements for additional insured coverage the outcome becomes uncertain.
The point of all of this, however, is that you should insist on the party whom you seek to require to make you an additional insured (whether they are the contractor or a subcontractor) provide you with the actual endorsement, and if the endorsement does not provide the required coverage, particularly for completed operations, insist on the issuance of an endorsement that does. Do not rely on a certificate of insurance, even if it says that the “certificate holder is an additional insured.”
When one is an additional insured, the language of endorsement is not the sole issue. There next tier of issue is which policy is primary and which is considered excess (or secondary or tertiary). Put simply, this issue is which policy pays first, which pays second, etc. It is best if this is specified in the contract. Rationally, the party who most likely will be “at fault” if the insurance is invoked (e.g. the further downstream), should typically be “primary” with the “upstream” policies as excess (i.e. paying second or third after the “primary” policy is exhausted).
A term typically found in contracts, but undefined in policies or meaningfully defined in law, is “noncontributory.” The phrase typically found in contracts requires the “downstream” party’s insurance to make the “upstream” party an additional insured on a “primary and noncontributory basis.” If the term is intended to mean the same thing as “primary” then it is unnecessary as inserting two terms could imply they mean something different, and this is problematic if one of them (non-contributory) is not well defined.
Usually “contributory” and “non-contributory” in relation to insurance most typically refers to a situation such as where an employer agrees to provide a certain type of insurance provided that the employee also “contributes” to the cost of insurance. This context is not material to the issue of which insurance pays first or second in the event of a loss, and so is unhelpful.
In sum, the term “contributory” or “noncontributory” is unhelpful and meaningless. Specifying which policy is “primary” and which is “excess” is unambiguous and sufficient.
Another common requirement (and also found within the AIA forms), is that the liability insurance policies cannot be cancelled without some amount (typically 30 days’) notice to the Owner or other parties. Most construction loan agreements will also require notice to the Lender.
Endorsements modify an underlying insurance policy by either adding to or reducing the coverage described in the original policy. They are akin to change orders or “value engineering” in construction contracts.
It is important that insureds know and understand what endorsements are issued with their policies. If they are problematic, then the insured should request that the endorsement be modified or eliminated, “buy out” the endorsement for some additional premium, or even purchase an additional insurance policy to insure the risk that is uninsured.
For example, (and this is a true story) a railing fabricator and installer from an unnamed coastal part of Northwest Florida spent years fabricating and installing railings for condominium projects. When a claim arose, the installer discovered that it had an endorsement excluding coverage for condominium and multifamily projects, leaving the installer “bare.” If you are a plastering contractor or a general contractor whose projects include EIFS or DEFS (or even stucco), does your policy exclude those types of materials? Do you use products that might fall within the pollution exclusion?
If so, have you investigated getting a policy to cover that risk? The key here is knowing what the endorsements mean, and what your “risk” is that is uninsured, and then making an informed decision on how to manage that risk. If you are a roofer or in the concrete trade, having an EIFS exclusionary endorsement on your policy is likely irrelevant. If you are never going to work on a condominium or apartment, having a condominium or multi-family exclusion is irrelevant. But, if your work encompasses those risks, failing to have those risks insured can be the death knell of your company in the event of a large claim.
Activity in the construction industry is rapidly accelerating. For several years, what insurance one did or didn’t have was of less importance because there was so little work. Now, however, it will not be long before contractors and subcontractors become so busy it will be difficult to focus on issues like ensuring that the risks of your work are properly insured.
1 This principle was also reflected in the law in Florida. See Moon v. Wilson, 100 Fla. 791, 130 So. 25 (1930).
2 An “occurrence” is defined as an “accident” that is neither “expected nor intended” and can include the “continuous and repeated exposure to the same harmful condition.”
3 The language actually quoted here is not new, but the emphasis on completed operations coverage as a requirement of the continued insurance in the section is new.
4 The 2004 and 2013 endorsements also are split between two endorsements, with the completed operations coverage being added by the form CG 20 37)