Effective this March, the Insurance Services Office (ISO) revised its forms and endorsements for commercial general liability. This latest round of CGL changes is the largest the industry has seen in years. Major and minor modifications, along with new endorsements, could significantly affect, and in some cases narrow, the scope of CGL coverage moving forward. While insurers are obligated to notify insureds about changes that affect policy coverage, as always, the burden of due diligence ultimately falls on contractors to understand their coverage and its possible exposures.
"ISO forms are not used by everyone, but a lot of the industry works from these forms," says Frank Armstrong, senior vice president and national director of construction claims for Willis North America. "The changes being introduced offer some interesting clarifications that may change the fundamental breadth of coverage. There are more words than before, and that tends to create areas ripe with conflict."
"Some good things and bad things are going to come out of this," says Julian Ehrlich, senior vice president of claims for Aon Risk Solutions' construction services group in New York. "Some of these changes will expand coverage, some will restrict coverage, and others will introduce requirements never before seen."
According to Ehrlich, one of the "good" clarifications is a new paragraph in additional insured endorsements that expands coverage by eliminating uncertainty over contract requirements. The new language clarifies that general contractors (upstream parties) do not have to have a direct contractual relationship with subcontractors (downstream parties) to receive coverage as an additional insured. Another good revision is language that provides insurance to an additional insured "only to the extent provided by law." The revision addresses anti-indemnification statutes that have been adopted in some states. Such laws prohibit construction contracts from requiring one party to compensate another against liability for the other party's negligence or fault.
On the flip side, the ISO's decision to revise the "insured contract" definition has the potential to restrict coverage for policyholders in some states. "New language is always open to interpretation and may end up fueling litigation," Ehrlich says. "It is going to take some time to see how this new language affects coverage. It will probably take years for this to play out."
In light of sweeping ISO changes, it is a good time for contractors, whether insured through standard or excess lines, to have their insurance policy reviewed by an attorney to assess possible exposures, says Clayton Sharkey, vice president and director of the construction practice at Denver-based IMA Inc.
"Companies that are insured through excess and surplus insurance companies may be surprised what they find," Sharkey says. "These companies exist to handle risks that the standard companies do not want, but that means they have greater freedom to put in all kinds of endorsements. I ran across three policies this week alone where the coverage for construction defects had been removed by an endorsement."
Problems often arise with manuscript forms that contain terms or conditions negotiated between the insurer and the insured, Armstrong says. Some markets may introduce endorsements that amend the standard CGL terms to further restrict coverage, such as removing the exception to the "your work" exclusion. This narrows coverage by eliminating an important standard exception where the work from which damages arise was done by a subcontractor, he adds.
Construction defects are one potential exposure that is often overlooked and that may end up causing contractors problems after the fact. The policy language has been interpreted differently by courts. At the root of the issue is whether construction defects constitute an "occurrence" that triggers the policy. Contractors can ask for construction defects endorsements that broaden the interpretation of what constitutes an "occurrence" in favor of the policyholder—to include more types of construction defects claims—but it may not provide certainty in some jurisdictions, Ehrlich says.
"In a perfect world, a policy would perform the same in all states, but that's not necessarily how it works. Even under the standard ISO terms, different courts interpret those terms differently," says Paul Becker, chairman of the construction practice for Willis North America. "The policy that you thought was going to work in North Carolina may be interpreted differently in South Carolina. Contractors need to be aware of the possible exposures and follow how the courts in different states are ruling on policy disputes." The industry has seen growth in conflicts related to state anti-indemnity statutes, which can cause disparities in coverage from one state to the next. Understanding how state statutes regulate contractual third-party indemnification helps ensure greater recovery and minimize potentially voidable contract provisions, Becker adds.
"A lot of people think they have more coverage than they actually do," says construction attorney Gene Commander, managing shareholder for the Denver office of Polsinelli Shughart PC. "The fundamental question is, 'What is excluded from your liability coverage?'"