By AIA Contract Documents
February 2, 2023
One of the best ways to manage risk on construction projects is through insurance and bonds. Throughout the next several weeks, the AIA Contract Documents Program is going to release a series of articles pertaining to construction insurance. This is Part 7: Premiums, Deductibles, and Self-Insured Retentions.
What is the difference between Premiums, Deductibles, and Self-Insured Retentions?
Let’s look at each of these three concepts, in turn. First, what are Premiums? Premiums are, essentially, the cost of buying insurance. Premium costs are typically annualized, meaning the “price” that an insured sees is the annual cost of purchasing a certain insurance product. Payments, however, can be made more frequently than annually.
Once an insurance product is purchased for the premium price, the insured now has coverage for an insured event (such as a fire). If a covered event occurs, the insurance company will pay much of the damages, but the insured is also responsible for a small portion of the damages – this is referred to as a deductible. Deductibles are typically structured as a flat fee and will usually vary in relation to the size of the insurance product purchased. So, as an example, if an insured has a $1,000,000 policy and a $100,000 deductible, the insurance carrier will pay up to $1,000,000 to the claimant, and then seek reimbursement of up to $100,000 from the insured. Typically the premium and the deductible are inversely correlated; meaning, you can choose to pay more of a premium to receive a lower deductible.
Lastly, self-insured retentions (or SIRs) are like deductibles but have some important distinctions. An SIR is the amount that an insured must pay before coverage is triggered. So, as an example, if an insured has a $1,000,000 policy and a $100,000 SIR, then those two amounts are “stacked” such that the total coverage is $1,100,000, but the insured pays the first $100,000 directly to the claimant. Then, once the insured pays the entire $100,000 to the claimant, the insurance carrier will step in to pay up to the $1,000,000 policy limits.
Do AIA Contracts Contain Insurance Requirements Related to Premiums, Deductibles, and Self-Insured Retentions?
Yes. Section A.3.1.2 of the Insurance and Bonds Exhibit (Exhibit A) to A101-2017 requires the contractor to disclose to the Owner any deducible or SIR that are applicable to any insurance that the contractor is required to procure:
A.3.1.2 Deductibles and Self-Insured Retentions. The Contractor shall disclose to the Owner any deductible or self-insured retentions applicable to any insurance required to be provided by the Contractor.
Additionally, the owner can choose to purchase extended property insurance, which can cover some types of premiums, as set forth in Section A.2.4.7:
A.2.4.7 Soft Costs Insurance, to reimburse the Owner for costs due to the delay of completion of the Work, arising out of physical loss or damage covered by the required property insurance: including construction loan fees; leasing and marketing expenses; additional fees, including those of architects, engineers, consultants, attorneys and accountants, needed for the completion of the construction, repairs, or reconstruction; and carrying costs such as property taxes, building permits, additional interest on loans, realty taxes, and insurance premiums over and above normal expenses. (emphasis added).
Stay tuned for Part 8!
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.