THE COST OF INSURANCE has gone up and coverage seems to be shrinking. Is it any wonder that owners and general contractors want to make sure that their insurance isn’t going to be called upon to pay for what someone else did? The way they avoid this in construction is to require the contractors or subcontractors to buy insurance that will protect their interests in the event that they get sued.
In order to make sure that the owners or contractors can require the insurer to protect their interests, even if the firm they hired is not around any more, or for whatever reason doesn’t make a claim, owners and general contractors require that the contractors or subcontractors make them “additional insureds” on their insurance policies. This gives them the right to make a claim or demand directly against the insurer.
It is common (although not universal — AIA contracts don’t provide for this, but Engineers Joint Contract Documents Committee forms do) for a construction contract to require the contractor to provide the owner with a certificate of insurance that specifically states that the owner is an additional insured
Ah, if that was all there was to it! Not these days. Now, you have to be careful to make sure the agreement is clear as to just what kind and how much coverage is being required. Otherwise, the insuring contractor could find itself required to cover claims that are not its responsibility, or the customer could find itself without coverage on which it was counting.
Some of the things to watch out for:
What claims are you covering? If the contract requires you to buy “contractual liability” coverage and make someone an additional insured, it probably means that you have also agreed in the contract to indemnify the other party in the event it is sued. That means it is important that you and your attorney carefully review the indemnification clause. Some clauses try to get the contractor to defend the owner/GC even if the claim is for something that is 100% his fault, in which case the contractor/sub should not be defending him at all.
Who are you covering? It is not unusual for the insurance clause to require you to insure not only the customer, but the owner, the owner’s architect or engineer, lender, employees, etc. (The EJCDC form documents require this, for example). Some insurance policies will require that you specifically notify the insurer who these additional insureds are for each project or you don’t get the coverage.
It is also possible to get “blanket” coverage that will cover whomever you have to cover in your contracts, but you have to make sure to ask for it.
How long are you covering the additional insured? Particularly in this “hard” insurance market, most insurers will want their coverage to stop when you stop working on the project, particularly for additional insureds. The problem with this limitation is that a defectively installed pipe could damage this property years later and the owner/general contractor could get sued. If it looks to you for coverage and you didn’t get such extended insurance, you could find your own company on the hook to pay up as an insurer would. To rectify this, you need “completed operations” coverage.
What are the coverage limits? Don’t make any assumptions here either:
- An additional insured will never get more coverage than the named insured.
- An additional insured will be subject to all the same exclusions, sub-limits, and co-pays as the named insured and possibly a lot less if its policy limits are eroded by other claims.
- If the primary insured has exhausted its limits of coverage due to other claims on its policy, the additional insured’s coverage will be exhausted too.
The lesson here is that additional insured coverage should never be viewed as a replacement for one’s own liability insurance.
For years the same form of “endorsement” was used to add people and firms as additional insureds to contractor’s insurance policies. Since the mid-’80s the form to use was called the “CG 20 10 11 85” — meaning that it was issued in November 1985. However, life in the 21st century is more complex and you have to look at a number of different forms. Now, the CG 20 10 version in general use is the 07 04, which no longer covers completed operations and requires you to write in the identities of all additional insureds for each project.
The CG 20 33 07 04 provides blanket coverage of all persons you are required to insure by written contract but no coverage for completed operations. The CG 20 37 07 04 provides coverage for completed operations, but it requires you to write in the identities of all additional insureds for each project.
Each contractor will need to work closely with its insurance consultant to make sure that it is getting the coverage it needs. The time to find out what you can buy is before you sign a contract requiring you to have it, when you can still raise the problem at a pre-bid meeting, or negotiate a pass-through increase in premium or reduction in scope of coverage.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to [email protected].