Common Construction Insurance Coverages
This article describes the most common insurance coverages available to contractors in the marketplace today.
It is not enough for construction lawyers to be aware of the various risks in the construction industry. They must also assist their clients in making proper arrangements to assure that when a potentially devastating loss does occur it will be covered by insurance and/or transferred to another party through contractual indemnification. The most common insurance coverages available in the marketplace today are more thoroughly described below.
Commercial General Liability (CGL)
The Commercial General Liability policy provides third-party liability coverage for property damage and personal injury. The standard CGL policy form is promulgated by the Insurance Services Office, Inc. (ISO). Both insurers and insureds are free to deviate from the standard versions. It is therefore necessary that the specific language of individual policies be closely examined. CGL policies are more closely examined later in this chapter.
Most construction clients will at the very least maintain commercial general liability (CGL) insurance. In a CGL policy, the insurance company typically agrees to pay those sums that the policyholder becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which the insurance applies. “Bodily Injury” is defined as bodily injury, sickness or disease sustained by a person, including death. “Property Damage” is defined as physical injury to tangible property, including all resulting loss of use of that property.
Additionally, the CGL policy requires the insurance company to defend the insured against any “suit” seeking the aforementioned damages. Suit is defined as any civil proceeding in which damages because of bodily injury or property damage to which the insurance applies are alleged including arbitration proceedings or other alternative dispute resolution proceedings.
Many construction companies fall outside the guidelines for a standard CGL policy, thereby requiring a policy written by an Excess & Surplus Lines (E/S) insurance carrier. E/S insurance carriers offer insurance coverage for policy holders with unique risk factors such as new residential construction, heavy highway or extreme danger construction. Risk factors also include poor loss history or the need to obtain coverage without the standard CGL exclusions that are discussed in detail later in this chapter.
Builder’s Risk insurance protects a contractor from damage to his own materials and equipment at the job site and to the buildings under construction. Such risks are not usually covered by standard insurance.
Builder’s Risk policies cover the loss of, or damage to, covered property caused by or resulting from covered causes of loss. The damage must be “fortuitous” in nature. Most courts apply a subjective test to determine whether a loss is fortuitous, looking to what the insured knew or believed as to the probability of loss. Most policies contain a “faulty workmanship” exclusion, which excludes losses arising from faulty or inadequate work.
An Installation Floater policy, which is typically purchased by a subcontractor, is very similar to Builder’s Risk insurance. An Installation Floater provides coverage for materials, equipment, and personal property while in transit, while being installed, and until coverage terminates according to the terms of the floater. Installation Floaters are generally required when expensive equipment or materials, such as generators, compressors, etc., are involved in the project. While a builder’s risk policy is generally site specific, many installation floaters cover not only at site construction but also while the property to be installed is in transit. Thus, in some cases, the installation floater may cover a gap that otherwise exists in the builder’s risk policy.
Owner’s and Contractor’s Project Management Protective Liability
Owner’s and Contractor’s Project Management Protective Liability Insurance (OCP) is intended to protect certain owners and contractors, but only for operations performed for the named insured by the contractor listed in the Policy as the “Designated Contractor.” An OCP is a protective liability policy, usually purchased by a contractor for the sole benefit of another person. Generally, an OCP provides an owner with coverage in only two circumstances:
- if the owner is held vicariously liable for acts or omissions of the general contractor, or
- if the project owner is held directly liable for its acts or omissions in the general supervision of the operations of the general contractor.
Additionally, an OCP generally excludes coverage for bodily injury or property damage if such injury takes place after the earlier of when the operation has been completed or put to its intended use (i.e., completed operations).
Due to the limited coverage afforded in an OCP, an owner should not solely rely on it for liability protection. In other words, an OCP generally works in unison with, and not as a substitute for, a commercial general liability policy. Further, it may be a viable alternative to adding the owner or contractor as an additional insured on the CGL policy of a general or subcontractor. As an additional insured, limits are shared with any and all other insureds for the same occurrence, and aggregate limits are also shared. The OCP limits, on the other hand, are exclusive to the named insured.
An Owner Controlled Insurance Policy (OCIP) or Contractor Controlled Insurance Policy (CCIP), commonly referred to as a “wrap,” is a policy wherein the owner or contractor obtains insurance protecting the owner, the prime contractor and all subcontractors on a specific construction project. The wrap generally encompasses CGL coverage, builder’s risk coverage, workers’ compensation coverage, design errors and omissions, as well as excess, umbrella and other special coverages.
Historically, an owner accepts the economic risk of a project but seeks insulation of the construction risk through contractual indemnity provisions that shift the risk to the design professionals and contractors. In contrast, in an OCIP, the owner becomes responsible for insuring the project and for administering loss prevention programs and becomes exposed to construction risk.
A wrap can provide significant cost savings for projects exceeding $50 million. Additionally, wraps are being used in condominium and other multi-residential construction projects, as contractors and subcontractors find it increasingly difficult to obtain affordable coverage for these types of projects.
Wrap coverage for large projects should not be renewed until the statute of repose has expired. Wraps frequently end upon completion of the project, and coverage is generally limited to activities at the project site. As such, the existence of a wrap not eliminate the need to provide for contractual indemnity by the contractor. An owner should include a broad indemnity clause in the construction contract as a second basis of risk protection.
Contractor’s Design Liability
The standard CGL policy excludes coverage for design liability. The ISO has promulgated an endorsement to the CGL that negates this exclusion. Contractors can also procure their own design liability insurance separate from the CGL. Such professional liability coverage typically will have multiple and varying exclusions. Design liability can arise from either breach of contract (under the agreement with the owner) or tort (negligence in failing to exercise a reasonable degree of care and skill in carrying out professional duties).
The Arizona Workers’ Compensation system is statutory and is intended by the Legislature to assure speedy, reasonable compensation to all injured workmen, and to protect the contractor from liability in tort for accidents on the work site. The standard of proof for recovery is less than that in civil litigation. Workers’ compensation insurance is mandatory.
The ISO’s CGL policy expressly excludes coverage for workers’ compensation claims.
Automobile insurance is necessary to fill a gap in the CGL policy. The ISO issues a standard business automobile policy form that covers “autos.” Its definition of “auto” is broad enough to encompass some devices that may be used on a construction job site, including trailers and self-propelled vehicles to which cherry pickers or air compressors are attached. Automobile insurance provides both liability and physical damage coverage. The language of the standard policy is similar to that of a CGL policy, with similar exclusions for intended or expected damages.
“Umbrella” and Excess Insurance provides coverage upon the exhaustion of the limits of other policies. An umbrella policy provides additional coverage over multiple primary policies. The schedule of underlying insurance on the umbrella policy’s declaration page will dictate the umbrella policy’s coverage scope. An excess insurance policy differs from an umbrella as it is generally additional coverage for just one primary policy – usually a CGL.
Excess and Umbrella insurer’s obligations are triggered only upon the exhaustion of a certain level of the primary insurance. Only actual settlement or payment of judgment constitutes “exhaustion” that invokes excess insurance.
Contractor’s Equipment Insurance
Equipment floaters cover loss from physical damage to equipment used by the contractor in the construction process. To be eligible for an equipment floater, the equipment must be mobile in nature. Equipment typically insured under an equipment floater includes cranes, bulldozers, earth movers, tractors, air compressors, office and storage trailers, welding units, hand tools, and scaffolding. With a few exceptions, e.g., watercraft and aircraft, virtually any item of portable equipment used by a contractor can be insured under an equipment floater, provided that the equipment is normally used on the job and any storage of the equipment on the contractor’s actual premises is incidental to its normal use. An equipment floater can be obtained on either a named peril or all-risk basis. Named peril coverage provides insurance only for those losses that result from perils specifically named in the policy. All-risk coverage insures against all losses except those caused by perils specifically excluded in the policy.
Property Insurance is designed to insure against physical damage to buildings and their contents caused by perils such as fire, windstorm, and hail. Coverage can also be arranged to insure against indirect losses arising as a result of direct damage to property. Property Insurance policies should be purchased to insure against damage to the contractor’s real and personal property (e.g., office building and contents). Property Insurance does not cover construction projects.