Construction contracts can contain pages and pages of requirements, with issues ranging from labor and safety practices to minimum liability coverages and more.
A contract is primarily designed to protect the property owners that hire your company. Because contracts can be so complex and vary with each project, knowing whether you’re in breach of those contracts is a major challenge.
Almost all agreements require that contractors have adequate commercial general liability (CGL) insurance to mitigate against accidents on the construction site and other risks, but it’s important to read the fine print. Whether a subcontractor or general contractor, use these tips to help manage it all and remain in compliance.
On top of any CGL insurance policies, multiple endorsements or add-on coverages are often required as part of a contract. An example of an endorsement might include a waiver of subrogation. A subrogation clause allows an insurance company that has paid for a claim to pursue third parties to recoup the money they paid out.
However, when a property owner waives this clause in their contract, it means the insurance company can’t pursue the property owner in the event of a claim, even if the owner was responsible for the loss. In this instance, you’ll need to make sure such clauses are allowed by your insurance company. Other endorsements may include primary and noncontributory requirements, a 30-day notice of cancellation, and additional insured.
Additional Insured — Ongoing and Completed Operations
Property owners typically require that you extend coverage to “additional insured” parties, and it’s important to make sure you understand who should be included. For example, additional insured coverage may be required for parties who don’t sign the contract, such as another contractor, architect or engineer. Some policies don’t automatically extend to these non-direct parties.
Additionally, project owners don’t just care about what happens while you’re onsite performing the work during “ongoing operations,” they may also demand additional insured coverage for “completed operations” long after you’ve left the jobsite.
During ongoing operations, if a construction worker accidentally drops a load of lumber and damages vehicles belonging to another party and that party sues the property owner, the property owner would be covered under “additional insured” as part of the contractor’s general liability policy.
If damage occurs after operations were completed as a result of poor workmanship or other negligence, the additional insured coverage may apply, but only if “completed operations” coverage was specified. Sometimes contracts will state that additional insured protection be provided through the “statute of repose,” which may be 10 years or more. Make sure you identify exactly which coverage you need and include any ongoing costs in your bid price.
Insurance Coverage Exclusions
Construction contracts usually require “comprehensive” commercial liability insurance. Defining “comprehensive” isn’t always cut-and-dried, however. Some insurance companies can issue what is referred to as a comprehensive policy, but then attach exclusions.
These exclusions or exceptions often outline various types of losses that won’t be covered in the event of a claim, such as bodily injury claims for employees injured while on the job. Contracts often prohibit these types of exclusions and, without adequate coverage, it could constitute a breach of contract. The term “comprehensive” insurance is a misnomer and should never be listed as such in a contract.
Contracts Between General Contractors and Subcontractors
Those hiring upper-tier general contractors for a construction project often require them to enter into binding contracts with any subcontractors they hire, and for those subs to enter into contracts with their sub-tier subcontractors. This helps ensure that the project owner isn’t liable for any negligence down the chain of command.
Insurance companies that insure contractors often require proper “Risk Transfer.” Requirements vary between insurance companies, but the penalty for non-compliance could include increased deductibles, increased premiums or, in the worst case, your own insurance company could exclude coverage due to non-compliance.
Commercial Automobile Coverage
Most agreements will require a contractor to obtain commercial auto insurance. Contractors should make sure their employees are not using personally owned vehicles for business purposes, as personal auto policies often fail to meet contractual requirements.
Understanding the complexities of insurance language and various stipulations can be confusing when determining your insurance requirements in construction contracts. Just as important is understanding the potential risks and developing a strategy for mitigating them in the first place.
By Bill Julius, McClone
Bill Julius is Executive Vice President of Sales for ABC member McClone. He can be reached at 800-236-1034.