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PERSPECTIVES: Building the right coverage

PERSPECTIVES: Building the right coverage

INSURANCE CONTRACTS FOR CONSTRUCTION COVERAGE is tricky, as it is tied to obligations from the owner to the general contractor and from the general contractor to the subcontractors. Various levels of coverage and indemnification apply at all levels. Here, Mary Ann Krautheim, client strategy officer for Aon Risk Solutions' construction services group, describes how to navigate this continually changing issue.

The best risk managers work with their brokers and insurers to obtain the broadest possible coverage for their risks. For risk managers in the construction sector, this may not be enough to assure that coverage is intact or aligned with contractual requirements of all parties, both upstream and downstream.

Construction claims can be tricky to sort out, as they are tied to contractual obligations from the owner to the general contractor, and from the general contractor to the subcontractor. Proper alignment among all parties and a clear understanding of the obligations of each party to contract is a must. Each party must also rely upon the support of the insurance policies purchased to support these obligations to the same degree as liabilities are transferred in the contract. Changes in case law have added to claims challenges for construction risk managers, resulting in the need to scrutinize contracts with owners.

One of the most difficult areas for a construction risk manager to navigate is the alignment of contractual obligations and the expectation of how the general liability insurance policies of each party will—or will not—apply to contractual undertakings.

Ideally, insurance provisions and contractual obligations work in concert. Contractual requirements are fairly straightforward in setting forth required insurance specifications. The contract outlines the distribution of risks between parties, in which the terms shift liabilities. More often, however, not all obligations entered into contractual agreements are commensurate with coverage. Two particular areas for review in the contract are the indemnity provisions and the request for additional insured status. Of course, statements vary and should be reviewed in relationship to the policy.

The indemnity provision in a contract transfers liability from one party to another. This pass-through may be complete or partial. In construction contracts, these agreements are routinely utilized to shift liability for potential loss occurring on the construction site or for damage that might occur after the project has been put to use. The general contractor will require subcontractors to indemnify the contractor in case of bodily injury or property damage for which the general contractor is legally responsible. General contractors consider such provisions to be essential, particularly in light of statutes enacted in many states that hold general contractors liable to injured workers, even when the general contractor is free from negligence or fault.

In some cases, a subcontractor may agree to indemnify the general contractor for bodily injury or property damage that results from or arises out of the general contractor's own negligence. Most jurisdictions have enacted legislation that invalidates broad form indemnity contracts, which would require a subcontractor to indemnify the general contractor for its sole negligence, as contrary to public policy, insofar as such provisions would induce the general contractor to engage in hazardous activity as it would be indemnified for the consequences.

The additional insured provision requires one party to obtain insurance to cover the liability of another. The policy will determine the depth and breadth of this coverage, if there is coverage at all. The additional insured language that is crafted in the contract may not be paralleled in the insurance policy. Many insurers have crafted their additional insured language that relies upon the exact transfer of liability as it is written in the contract itself.

The additional insured language of the insurance policy and contractual indemnity provisions operate independently of one another. Contract language will dictate the terms of additional insured status required. Additional insured status is determined by the policy language and is not limited by individual anti-indemnity statutes, as is the case with contractual liability.

It is usually the intent of the general contractor that the insurance provided by the subcontractor be the primary coverage. That said, the contract should clearly delineate the specific intent of all parties to have the subcontractor's coverage act as primary and not contribute with the insurance provided by the general contractor. Absent specific endorsement, the other insurance provisions in the commercial general liability policies may determine that the subcontractor's coverage is excess to the general contractor's, or that the policies provide concurrent coverage, instead of providing for the treatment of limits. Regardless of the intent of the parties as expressed in the contract, the other insurance clauses of each party's policy will be applied to share coverage in some fashion.

The general contractor must be named additional insured under the subcontractor's policy by endorsement, and the endorsement must clearly state that coverage under the subcontractor's policy is primary and noncontributory. The failure of a subcontractor to maintain policy language as required by contract may be the basis of a claim for contract breach. It is imperative that the general contractor review the pertinent insurance clauses, endorsements and limits to assure contractual compliance. This may not be achieved by merely accepting a certificate of insurance, as policy language is often altered from what is generally provided in standard Insurance Services Office Inc. policies.

Many insurers have created manuscript endorsement language that is tied directly to written contract provisions. The basis of these changes is meant to avoid covering damages that were not contemplated in the terms and conditions of risk transfer afforded the contractor.

It is also important to understand that an additional insured does not always enjoy the same privileges under the policy as does a named insured. Additionally, the named insured has certain obligations under the policy relative to reporting requirements, premium payment and deductible payments. Also, only the named insured has cancellation rights under the policy.

Other considerations include:

■ The additional insured endorsement may be limited to the specific language as written in the contract. The endorsement may limit the availability of coverage intended by the policy if the language is not in sync.

■ The additional insured may have coverage under the policy but will lose in the ability to control defense of the claim. The insurance carrier will most likely retain this right.

■ The additional insured language must be clearly stated as primary and noncontributory. This language should also be stated in the excess coverage to avoid priority of coverage disputes.

Tenders of defense must be timely to avoid late notice and other potential issues that work to the detriment of the additional insured. Many additional insured endorsements restate conditions that typically apply to the named insured to the additional insured relative to timely tender.

Limits or aggregate erosion can leave the additional insured with inadequate limits in the event of a claim.

While these technical issues have been discussed at length, it is critical for construction risk managers to frequently review best practices and all contract requirements against the appropriate policy language. For a general contractor, it is wise to carefully craft contract language to achieve the appropriate protection. This includes understanding the various iterations of additional insured endorsements.

Following is an example of language typically employed by general contractors:

“Subcontractor is required to add contractor as additional insured per (CG 20 10 11 85) endorsement or equivalent. If CG 20 10 11 85 is not available, CG 20 10 10 01 must be accompanied by CG 20 37 01 (or 07 04 versions). All coverage shall be primary and noncontributory with any other insurance available to contractor or owner.”

This language is designed to provide the general contractor with coverage for both ongoing and completed operations. General contractors also should consider whether the limits contemplated in the contract are sufficient given the scope of work. Many general contractors have begun to require higher occurrence limits of their subcontractors as well as specified excess liability limits. The excess liability policy should ideally also name the general contractor as an additional insured on a primary and noncontributory basis. The following are additional points to consider:

■ Whether the additional insured's own insurance will be excess of and not contribute with additional insured coverage regardless of any other insurance clause.

■ Whether the general contractor has procured broad indemnification from the downstream party.

■ Whether certificates of insurance are sufficient evidence of coverage or if the general contractor should also request copies of the additional insured endorsement. The terms of these endorsements change with individual carriers and their appetite for risk.

It is important for risk managers to take these points into consideration when drafting and reviewing contracts. It is equally important to check the general liability policy, including all relevant endorsements on an annual basis. Policies continually change, which makes it difficult for contractors to maintain a degree of confidence that all parties of the contract are in compliance or covered by their insurance policies. While the challenge is not new to the industry, it is ongoing and continually poses an obstacle for risk managers.

Mary Ann Krautheim is client strategy officer for Aon Risk Solutions' construction services group in New York. She can be contacted at or 212-441-2013.

The information in the piece is not legal advice and should not be construed as such and, of course, that nothing in the article constitutes a contract of coverage and coverage is subject to underwriters' assessments of risks and the specific terms and conditions of the policy issued.