Take A Good Look At Contract Insurance Requirements
Construction is a high risk activity with frequent personal injuries and property losses or damage arising out of construction work. In construction contracts, the owner normally requires the general contractor to show proof of various types of insurance, including a commercial general liability (“CGL”) policy, and for a general contractor to require its subcontractors to carry a CGL policy to protect against liability for personal injury and property damage.
Owners and general contractors typically require a general contractor or subcontractor to make the owner or general contractor an “additional insured” on the general contractor’s or subcontractor’s CGL policy. Typically, the owner or general contractor will require proof that it has, in fact, been added as an additional insured. The purpose of an “additional insured” endorsement is to require the general contractor’s or subcontractor’s insurance company to defend claims brought against the “additional insured” when the claims are based upon the negligent or wrongful conduct of the general contractor or subcontractor. In many instances, the general contractor or subcontractor will simply send to the owner or general contractor a certificate from its carrier showing the owner or general contractor as an additional insured on its CGL policy. This is done with little thought to the insurance requirements in the contract. Often the parties do not send or receive the endorsements from the insurance carrier which provide the terms of the actual coverage. Failing to closely examine the insurance requirements in the contract and getting the correct coverage could be disastrous to either the general contractor or the subcontractor.
An issue currently causing problems arises in connection with risks commonly called “completed operations,” and a general contractor’s or subcontractor’s inability to purchase a coverage making the owner or general contractor an additional insured for completed operations. In the context of construction, “completed operations” is the risk that general contractors (and subcontractors) have for liability arising out of finished projects. From the insurance company’s standpoint, it is an unusual risk because it relates not to the general contractor’s current activities, but past activities. Liability may arise many years after a project is completed for personal injury or property damage, including damage or loss of the project itself. A common issue is an electrical or mechanical system failure causing damage or injury alleged to be due to faulty construction. Insurance coverage may exist under current policies even though the construction was completed many years earlier. While the risks are unusual, most contractors’ CGL policies cover the contractor’s “completed operations.”
The effect of adding the owner or general contractor as an additional insured for completed operations is to make the contractor’s insurance company liable for defending claims against the owner based on the negligent or wrongful conduct of the contractor relating to completed operations. The insurer would like claims against the owner after completion, regardless of cause, defended at the expense of the owner’s insurance carrier rather than the contractor’s.
The problem from a general contractor’s or subcontractor’s standpoint is that it may not be able to procure an Additional Insured Endorsement for Completed Operations (ISO Form 20 37) even if required in the construction contract, and the current Additional Insured Endorsement (ISO Form 20 10) excludes completed operations. Insurance underwriters locally and nationally are increasingly hesitant or will not issue the Additional Insured Endorsement for Completed Operations because of the increased risks. Therefore, if a general contractor or subcontractor enters into a contract obligating itself to make the owner or general contractor an additional insured for completed operations, but cannot get the insurance and there is an otherwise covered loss, the general contractor or subcontractor may be contractually obligated to personally pay for the owner’s or general contractor’s legal expenses and any damages suffered. It is not difficult to envision a situation where a construction defect which does not surface until after the project is completed causes hundreds of thousands of dollars in damages to the owner, and would be a covered loss under an additional insured completed operations endorsement. Such liability could ruin an otherwise profitable general contractor or subcontractor.
While a contractor cannot force insurance underwriters to sell the various insurance endorsements required by the owner or general contractor of a project, a contractor can take some steps to mitigate risk. First, a contractor should not blindly enter into a construction contract without carefully considering the insurance coverages required. A contractor should understand the contract’s insurance requirements. Second, the contractor should submit the proposed contract to its insurance broker who can provide the appropriate coverages or advise that the coverages required under the contract are not available. Third, if the coverages required by the contract are not available (as may be the case with the additional insured endorsement for completed operations), the general contractor or subcontractor should renegotiate the contract with the owner or general contractor to eliminate the problematic insurance provision or understand the potential risk if it elects to proceed without coverage.