Watch Your Language, Especially With Insurance-Related Contracts
Key phrases that are included in many construction contracts, such as “Additional Insured” and “Notification Requirements,” can be maddening if not fully understood.
But these phrases represent only a small number of the many issues that may present themselves when reviewing a construction contract. When insurance requirements are unclear in a contract, do not make assumptions. Always understand clearly what you are agreeing to, and whether it is even commercially available.
The best way to ensure you are properly covered and ready to sign the contract is by verifying the insurance requirements with a construction proficient insurance broker or legal counsel..
Notice requirements is one good example of a potentially troublesome phrase. Increasingly, contracts require notice of cancellation, expiration (nonrenewal), and/or material change (modification) to the owner of the construction project. The contracts may also require that the notices be sent by certified mail.
It is important to note that insurance companies usually will not agree to provide a notice of expiration (nonrenewal), a notice of material change, or a notice by certified mail. The certificate shows an expiration date for each line of coverage, which should be sufficient for notice of expiration and/or nonrenewal.
As for notice of material change or modification, this is an undefined term and could be construed to mean anything; as examples - reduction of policy aggregates by payment and/or reserve on a claim or deletion of an automobile (if it is the vehicle that is later involved in an accident).
Insurance companies will rarely agree to provide more than notice of cancellation. A solution to this issue is for the Contractor (not the insurance carrier) to agree to provide notice of cancellation, change, modification, or nonrenewal if it wants to assume this responsibility.
The standard CGL policy does provide contractual liability coverage as defined by the policy, but many policyholders and contract drafters often believe this covers any and all claims arising from the indemnity clause of the contract. However, many forget to take into consideration that coverage is “subject to policy terms, conditions, or exclusions.”
Just because a contract requires indemnification for “any and all” claims, the insurance policy may not respond. Coverage typically will not be as broad as the indemnities assumed.
Examples of claims that would not be provided coverage under the standard CGL are patent infringement, intentional acts, breach of warranty, breach of contract, professional, and possibly pollution.
It is important not only to pay attention to the coverage listed, but also to thoroughly review and understand the extent of coverages being called out in the contract. Read all the policy terms, conditions, and exclusions. Coverage may not be as broad as you, or the contract drafter, might anticipate.
Aggregate limits are another area of concern. The standard Commercial General Liability (CGL) policy contains two Aggregates, the General Aggregate and the Products/Completed Operations Aggregate.
An aggregate limit is the maximum dollar amount the insurer will pay to settle all claims arising from incidents that occur during the policy period. The General Aggregate is the maximum for occurrences other than Products/ Completed Operations-type occurrences. Products/Completed Operations claims are those losses that occur after you have sold your product or completed your project, not while it is being constructed. The General Aggregate applies to premises and ongoing operations occurrences.
It is common to encounter contracts that will require CGL coverage with only a per-occurrence limit shown. This could lead to the false impression that coverage is unlimited under the policy, which it is not. It is limited by the policy aggregates, both of which must be stated.
In connection with that, contracts quite often will require the Aggregate be on a Per-Project basis, without specifying which aggregate. Typically the only way to obtain the Products/ Completed Operations Aggregate on a Per-Project basis is through implementation of a Project-Specific policy or a Controlled Insurance Program. Both options could add considerable cost to a project or to the contractor’s overhead if it is not identified prior to contract finalization.
The phrases I've examined in both articles in this series represent only a small number of the many issues that may present themselves when reviewing a construction contract. When insurance requirements are unclear in a contract, do not make assumptions. Every word and punctuation mark in a contract counts, so read everything literally and pay attention to words and terms that are often overlooked.