Every word and punctuation mark in a contract counts, especially the insurance-related language in construction contracts. When insurance requirements are unclear in a contract, do not make assumptions. Before you agree to enter into a contract, always make sure you fully comprehend that contract 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 phrase that is potentially troublesome. Increasingly, contracts require notice of cancellation, expiration (non-renewal) and material change (modification) to the owner of the construction project. The contracts may also require that the notices be sent by certified mail.
Insurance companies usually will not agree to provide a notice of expiration (non-renewal) or a notice of material change; also, they usually will not send 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 non-renewal.
However, giving “notice” is an undefined term and could be construed to mean anything: for example, reduction of policy aggregates by payment and reserve on a claim or deletion of an automobile (if the vehicle is involved in an accident later).
Insurance companies rarely will agree to provide more than a 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 non-renewal if it wants to assume this responsibility.
Liability coverage is another interesting area. The standard commercial general liability (CGL)policy does provide contractual liability coverage as defined by the policy, but policyholders and contract drafters often believe this covers any and all claims arising from the indemnity clause of the contract. However, many forget 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 policy are patent infringement, intentional acts, breach of warranty, breach of contract and possibly pollution.
Pay attention to the coverage listed and thoroughly review and understand the extent of coverages 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, anticipate.
Types of Aggregates
Aggregate limits are also an area of concern. The standard 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. Claims for products/completed operations are those losses that occur after a company’s product has been sold or the project has been completed, not those losses incurred during the product’s construction. The general aggregate applies to premises and ongoing-operations occurrences.
It is common to encounter contracts that require CGL coverage that has only a per-occurrence limit. This stipulation could lead to the false impression that coverage is unlimited under the policy; it is not. It is limited by the policy aggregates, both of which must be stated.
In connection with that, contracts 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 the implementation of a project-specific policy or a so-called controlled insurance program. Both options could add considerable cost to a project or the contractor’s overhead if not identified prior to contract finalization.
In this two-part article, the phrases we’ve examined represent only a few of the many issues to scrutinize when reviewing a construction contract. When insurance requirements are unclear in a contract, do not make assumptions.
Diane Bureman is senior vice president and senior account executive for Lockton Cos. She can be reached at firstname.lastname@example.org.
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