By AIA Contract Documents
April 30, 2024
The world of insurance can be dense and often confusing. Meanwhile, the insurance requirements of an individual project can vary widely depending on the jurisdiction and needs of the project. Insurance is an important aspect of any construction project and allows the parties to proceed with a sense of security that a financial backstop exists for errors, omissions, accidents, or other occurrences under the policy. However, the mere existence of a policy does not guarantee coverage for every incident on a jobsite. Therefore, understanding the various intricacies of your insurance program is crucial to proper risk management. In this article, we hope to provide a top-down survey of common insurance coverage you may see mandated by your contracts.
At the outset, it is crucial to define a few common insurance terms. First, insurance policies are often separated by what claims they cover, first-party or third-party. First-party claims are claims that an insured make directly to their insurance carrier. Insured with a first-party policy can turn directly to their insurer to make a claim for reimbursement. Conversely, third-party claims are made by someone other than the insured, against the insured’s policy.
Another important distinction is whether the policy is “occurrence-based” or “claims-made.” For a claim to be considered for coverage arising under an occurrence-based policy, the loss, or “occurrence” merely needs to take place during the policy period for coverage to apply. In claims-made policies, a claim needs to be made during the time the policy is active and reported “as soon as practicable” – which may extend beyond the policy period. Certain policies are also written as “claims made and reported” which will require any claim to be reported during the policy period. The key distinction between “occurrence-based” and “claims-made” is whether coverage is implicated by an occurrence itself, or the claim made against an insured.
Common Insurance Coverages
Builder’s Risk Insurance
Builder’s risk insurance, also called “course of construction” insurance, protects from property loss related to active construction projects. Builder’s Risk is a first party policy triggered by property damage. This type of insurance is often described as “no-fault” – meaning that determining who is responsible for the loss is not relevant to the provision of coverage. Builder’s risk is an occurrence-based product, meaning the loss must take place during the period during which the policy is in place. Builder’s risk policies are often issued for the final value of the entire project, but will impose sublimits for certain coverages such as ordinance violations or debris removal.
One important decision-point for builder’s risk policy is the identity of the “sponsor” of the builder’s risk program and whether it provides other parties on the project with “additional insured” status. If the sponsor (be it the owner or general contractor) does not provide all project participants with additional insured status, the participants not covered should consider obtaining their own builder’s risk insurance for the project.
Builder’s risk policies will cover resulting damage on a project. Whether defective work or defective design is covered turns on what “LEG” type the policy is written from. For more information on this, please speak with your insurance broker.
Commercial General Liability (“CGL”)
CGL insurance is not a construction-specific product. CGL coverage is one of the most common business insurance products on the market today. CGL policies are third-party liability, occurrence-based products – though they can be written on a claims-made basis for certain elevated risk work. CGL policies typically insure losses arising out of accidental bodily-injury or property damage. There has been significant case law devoted to attempting to determine whether CGL coverage is implicated by a contractor’s defective work. The through-line is that, generally speaking, insurers take the position that defective work is a “business risk” expressly excluded by the CGL policy language. Professional liability and defective design are also typically excluded under a CGL policy.
CGL policies are often written using industry-standard forms, though some insurers offer “manuscript” or “non-standard” policies. Again, it is crucial to speak with an insurance professional to determine the scope of the coverage provided by your CGL policy.
Professional Liability
Professional Liability insurance covers the coverage “gap” for professional liability in CGL policies. Professional liability most commonly arises because of defective design, errors or omissions, and a breach of the applicable standard of care. Professional liability policies are third-party liability, claims-made policies. These policies require the threat/potential for third-party liability to arise to be triggered. Both defective design and resulting damages are usually covered under these policies. A major distinguishing characteristic is that professional liability policies provide coverage for what are deemed “purely economic loss” such as delay or loss of use. Unlike most CGL policies, professional liability policies are “wasting” policies – meaning that defense costs will erode the limits available to pay for losses.
Parties have a decision to make when determining what professional liability insurance it may wish to obtain for a project. For instance, oftentimes a design professional maintains a professional liability insurance program for its practice as a whole that can be used to evidence that they are insured as required by contract. However, practitioners may also obtain project-specific professional liability insurance (“PSPL”).
Because these are claims-made policies, it is important to include an extended reporting period (“ERP”) beyond the actual policy period itself. Similarly, these policies often include retroactive dates that reach back to extend the policy term. The terms of an ERP can vary greatly depending on the insurer and policy at issue, so these should be carefully examined and discussed with your insurance broker.
Conclusion
This survey only provides a basic look at common insurance policies required on a construction project. While it is not intended to be exhaustive, we hope that it provides a useful look at some cornerstones of the construction insurance marketplace. This article is not a replacement for discussions with your attorney and insurance professional. The needs of each project, as well as the policies considered can vary widely and must be appreciated before entering into a contract for work on a construction project.
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AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.