Insurance-Related Phrases in Contracts That Can Cost You
The effectiveness of contractual risk transfer is more strained than ever. Upstream parties have attempted to toughen the insurance requirements in their construction contracts, utilizing terms that truly alter the intent of the requirement. And, which may, or may not, be insurable. Insurers are pushing back.
In this situation, every word and punctuation mark in a contract counts, especially construction contracts. I’m going to point out some key phrases that are included in many construction contracts – but phrases that few people fully understand.
There is only a one-word difference between the phrases “Additional Insureds” and “Additional Named Insureds.” But that one word represents a significant variance in coverage. In the vast majority of situations, an insured would not want to name an upstream party as an additional named insured.
Additional Insured under the Commercial General Liability (CGL) policy refers to those covered by the policy for claims that are caused, in whole or in part by, actions or omissions of the Named Insured on the insurance policy.
Additional Named Insureds would have the same rights as the primary insurance holder listed on the policy. Additional named insureds could have coverage even if the named insured is not involved in the claim.
An Additional Named Insured would have the same coverage as the policyholder without having to pay any premium. Complying with this term in a contract means that your insurance company could wind up providing coverage for liabilities and/or exposures beyond your control. By using the correct term - “additional insured,”-liability is limited to occurrences related to your work.
There are consequences to poor wording, and here’s one example. A construction company agreed to name a city government as an additional named insured in a construction contract. And, the insurance agent erred in issuing a certificate stating this, even though policy did not provide this status.
Far from where the project was being built in the city, there was a vehicle accident occurred in due to faulty stoplights.. The individuals involved in the accident sued the city. Upon discovering the certificate of insurance, lawyers for the injured parties made a claim under the construction company’s policy.
This claim was made despite the fact that the occurrence that led to the injury was completely unrelated to the construction company’s scope of work. While the insurance policy may or may not respond and provide coverage or legal defense, the insurance agency has a professional error and the party signing the contract is in breach of contract!
The contractor should have amended contract to provide Additional Insured status. Most likely this is what the upstream party actually intended.
A common question involving occurrence-based policies for construction projects, such as the commercial general liability (CGL) policy, is “which policy will respond if a loss happens?” The answer is the policy period in which the bodily injury or property damage occurs, not when the work was completed. This is of particular concern for completed operations claims.
Typically, a future insurance policy will be the one responding to claims for projects being completed today. That is why a contractor could not agree to “provide” coverage today. However, they are in a position to agree to “maintain” coverage. This would be accomplished simply by renewing the CGL coverage without any form of exclusion for prior work, either specific projects or scopes of work.
An increasing number of contracts will state the CGL policy must “provide” completed operations coverage for a specified number of years. As the typical occurrence-based CGL policy is written on an annual basis, to “provide” completed operations at this time would require the purchase of a Controlled Insurance Program or Project Specific CGL coverage that would include extended completed operations coverage. Either of which would mean an additional cost to the project.
By using the word “maintain” in a contract, you would agree to maintain such insurance during the contractually agreed upon time frame. This would be accomplished by renewing your standard CGL policy. In the vast majority of cases, this is the word you will want to use.
Do not get caught unintentionally agreeing to provide insurance under a different delivery mechanism than you normally would. It could result in your fee being totally eroded.