February  28, 1997

Bulletin #13: Insurance

Acme Sheet Metal is performing subcontract work on the HVAC system for an office building. Before starting work, the Acme office manager called the company’s insurance agent and requested the "normal insurance certificate." The certificate was sent to the general contractor and work started. Nobody gave much more thought to the insurance coverage until two months later.

One afternoon, sparks from a welding torch ignited nearby construction materials. Before the fire could be contained, substantial damage was done to two floors of the building, including materials stored on site and equipment owned by the general contractor, Acme, and other subcontractors. Two workers and a city inspector were injured. Suddenly, insurance coverages became of much more interest to everyone working on the project.

Assuming that sufficiently broad insurance coverages with proper policy limits were in place for each party, the fire at the job site would likely produce the following outcome:

1. The building would be restored under the owner’s or general contractor’s "builder’s risk" policy.

2. The cost of restoration of the damaged work in process would also be paid for out of the "builder’s risk" policy.

3. The general contractor and each subcontractor would claim against its own property insurance policy for equipment and on-site materials not yet integrated into the work.

4. The owner would recover for machinery being installed under its boiler and machinery insurance coverage.

5. The owner would recover for lost income on the building through its business interruption or rent-loss insurance.

6. The injured employees would claim against their employers under their workers compensation insurance and receive payment of their medical expenses and lost wages. (In some jurisdictions, they may also be able to claim against other parties who may have contributed to their injuries.)

7. The injured city inspector would likely claim against the owner, general contractor, and welding subcontractor (and perhaps others) and would recover from one or more of their comprehensive general liability policies.

In each case the party ultimately paying is an insurer. That is how it should work. However, it is easy to make a mistake in purchasing coverages or to misunderstand what is actually being covered. If there are no claims, an insurance problem may never be noticed. In a worst case scenario, such a mistake can destroy a business.

It is impossible to cover all aspects of insurance in two pages. A more detailed discussion of insurance, indemnity, and liabilities is contained in a 1995 SMACNA publication entitled, Risk Shifting and Subcontractor Liability on the Construction Site. However, it is still worthwhile to review some general principles that apply to construction insurance coverages.

There can be wide variations in insurance coverage from policy-to-policy and carrier- to-carrier, but each insurance policy typically contains three basic elements: (i) definition of the scope of coverage, (ii) policy limits, and (iii) provision for deductibles.

This "Scope of Coverage" specifies what property or interest is being insured and against which risks. Most policies contain exclusions from coverage (some of which may not be obvious) which have to be understood in evaluating what is really insured. The "policy limits" are the maximum amount the insurer will pay out on the policy. Policies can be set up with "per occurrence" limits and almost always have "aggregate" limits, which set the absolute maximum that will be paid during a policy period.

Deductibles are an amount the insured party must pay before the insurer has to pay. Insurance policies may have a general deductible or a deductible per occurrence. A $5,000 deductible on a construction project may not seem like much, but if the deductible is $5,000 per occurrence and the subcontractor ends up with five claims, it could face a $25,000 uninsured cost.

A subcontractor will generally be required to carry certain coverages to meet minimum contract requirements. These include: (i) worker’s compensation insurance; (ii) employer’s liability insurance; (iii) property insurance on its own equipment and on materials and supplies until they have been integrated into the overall work or control over them has been accepted by the owner; and (iv) a comprehensive general liability policy covering contractual liability, independent contractor liability, and personal injury perils. In almost all instances, the subcontractor would also be required to carry automobile liability insurance. It may be that a specific project also requires additional endorsements such as "XCU" coverage (explosion, collapse, and underground hazards) or coverage for rented equipment. If expensive equipment or components vulnerable to damage are to be hoisted and fitted into place on the job site, the subcontractor may purchase an "installation floater" to its property policy. Specific jobs may also mandate other coverages.

At a minimum, the subcontractor must make certain that its insurance coverages meet the minimum requirements of the subcontract. Failure to do so would constitute a breach of the subcontract and could expose the subcontractor to damages, as well as uninsured liabilities and claims. The subcontractor may wish to carry higher policy limits or additional coverages beyond what the subcontract requires. A good insurance agent is a necessity.

It is also important that the subcontractor understand the difference between "occurrence" and "claims made" coverages. A policy written on an "occurrence" basis will provide coverage as to matters occurring during the Policy Period, even if the actual claim comes later.

However, a "claims made" policy will provide coverage only if the actual claim is brought while a policy remains in effect. Claims asserted later will not be covered, even if the event creating the claim came during the policy period. Therefore, it is strongly recommended that subcontractor liability insurance be written on an "occurrence" basis, if possible.

"Claims made" insurance creates the greatest risk when the subcontractor is changing insurance carriers or insurance programs or significantly reducing or letting its liability insurance coverage lapse due to a current lack of activity.

The subcontractor must also be careful that its insurance policies properly name the "additional insureds" required under the subcontract. It is typical that the general contractor and owner will be named as "additional insured" on the employer’s liability, automobile liability, and comprehensive general liability policies of the subcontractor.

As a practical matter, it is highly recommended that, when binding coverage, the subcontractor provide its insurance agent or consultant with a copy of the insurance and indemnification sections of the proposed subcontract (or the entire subcontract) and seek written verification that the required coverages are being provided.

A Subcontractor should also request written verification from the general contractor that the coverages evidenced by the certificates of insurance delivered by the subcontractor meet the requirements of the general contract. The subcontractor should also consult with its insurance professional on whether it needs coverage in excess of what the subcontract requires or an increase in policy limits because of project risk or the need to designate numerous additional insureds.

The subcontractor should always retain copies of insurance policies, even after the project is completed. A claim can arise years after the completion of a project and the Subcontractor will not want to rely upon the insurer to find an old policy so that the subcontractor can make a claim against it.

A subcontractor pays a lot for insurance. In the best case, a sloppy approach to insurance will result in a waste of money. In the worst case, it can result in uninsured claims and potentially the destruction of the subcontractor’s business. Understand your insurance coverages before the claims come in. It won’t do you any good if you only figure them out after the fact.


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