The effectiveness of contractual risk transfer is more strained than ever. Upstream parties have attempted to toughen the insurance requirements in their construction contracts, using terms that truly alter the intent of the requirement, 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 few people fully understand but that are included in many construction contracts.
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 policy’s primary insurance holder. “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 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. For example, a construction company agreed to name a city government as an “additional named insured” in a construction contract. The insurance agent erred in issuing a certificate stating this, even though policy did not provide that status.
Far from the project site in the city, a vehicle accident occurred 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 made a professional error, and the party signing the contract is in breach of contract!
The contractor should have amended the contract to provide “additional insured” status, which was mostly likely what the upstream party actually intended.
A common question involving occurrence-based policies, such as the CGL policy, for construction projects 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 distinction is of particular concern for completed operations claims.
Typically, a future insurance policy will be used to respond to claims for projects being completed today, which is why a contractor could not agree to “provide” coverage today. However, a contractor is in a position to agree to “maintain” coverage, which would be accomplished by simply 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 that 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 so-called 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, a contractor would agree to maintain such insurance during the contractually agreed-upon time frame. This maintenance would be accomplished by renewing your standard CGL policy. In the vast majority of cases, this word is the one to use.
Do not get caught unintentionally agreeing to provide insurance under a different delivery mechanism than you usually would. It could result in your fee being totally eroded.
Diane Bureman is senior vice president and senior account executive for Lockton Cos. She can be reached at dbureman@lockton.
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