Insurance Business | December 15, 2014
The intricacies of insurance requirements in construction contracts seem like they’ve never been denser.
According to a new white paper from Lockton Companies, insurance carriers are increasingly implementing restrictive additional insured endorsements, making full transfer of contributory negligence difficult.
“There is a wide array of words and phrases that trip people up when looking at the insurance requirements in construction contracts,” said Diane Bureman, Senior Vice President and Senior Account Executive with Lockton. “It is important that the insurance terms addressed in the construction contract are completely clear and ones with which you can comply.
“Every word and punctuation mark in a contract counts, so read everything literally.”
Misunderstanding such language can lead to rejected insurance claims for policyholders, and potential E&O claims for involved agents.
Bureman identifies specific examples of these terms in ‘5 Maddening Phrases That Can Cost You in Construction Contracts,” including:
1. Additional Insured vs. Additional named Insured
There’s just one word of difference between these two phrases, but that one word changes the meaning significantly. Bureman advises that most times, an insured would not want to add an “additional named insured” as they have the same rights as the primary insurance policyholder.
Additional insureds, on the other hand, are not covered for any claims not caused by the primary holder.
As such, additional named insureds receive the same coverage as the policyholder without having to pay a premium. You could be left with liabilities and exposures beyond your control by additing additional named insureds.
2. Maintain vs. Provide
When it comes to CGL policies, many contracts state CGLs must “provide” completed operations coverage for a certain number of years. This may force a contractor to implement a controlled insurance program, Bureman says, while “maintain” actually provides insurance covering the agreed up time frame.
3. Notice Requirements
Because insurers rarely provide notice of cancellation, expiration or a notice of material change, contractors may agree to provide notice of change, modification or nonrenewal if they want to assume this responsibility.
“There are times when exceptions may be made, for example, with governmental bodies like the Corps of Engineers,” Bureman says. “But these are rare and only available when there is a regulation, statute or covenant in place requiring this notice.”
4. Subject to Policy Terms, Conditions and Exclusions
A common contract phrase to limit liability, “subject to policy terms, conditions and exclusions” appears in many contracts to remind insureds that contractual liability coverage is just that: subject to policy terms, conditions or exclusions—things that aren’t always easily defined.
5. Aggregate Limits
A standard CGL policy contains a general aggregate and products/completed operations aggregate. The general aggregate refers to premises and ongoing operations occurrences.
Bureman says it is common for contracts to require CGL coverage with only a per-occurrence limit shown. That may lead many insureds to believe coverage is unlimited under the policy, though it is actually limited by policy aggregates—both of which must be stated.