For many contractors and engineers, insurance is something handled by their insurance broker and controller, once a year in the week before renewal, and about as interesting and pleasant as a root canal. The policies are not quite reviewed, the broker says it will be alright, and describes the insurance required of your subcontractors, haulers and for your equipment, and then the praying begins. When an accident or casualty later occurs, what happens? That is when the pedal hits the metal.
This article is intended to help as a checklist for renewal, but more importantly, as a focus point for your safety profit center that sends your team, and all the folks on the job or in traffic around the job, home safe each day. Companies that engrain the “Safety First, Second and Third” mentality, build in safety rituals and reminders, and make it a source of pride not paper trial win – they win on jobs, they win with their workforce and their families, they win with their stakeholders, risk managers and customers. So after summarizing the various types of insurance and their coverages, exclusions and pitfalls, this article has a tie in to the safety program and program development.
Safety reduces costs, and impresses carriers to bring in lower premium quotes, modification rates for workers compensation ratings and the like. More and more, large projects use pre-qualification statements that require listing of the mod rate, and significant litigation as part of assessing the contractor. Make this your shining star to those customers, your insurers, and bonding companies. No one loves risk like contractors, and no one like contractors can manage risk while knowing, its part of what builds great bridges and infrastructure.
To a great extent, insurance, and related concepts of indemnity, additional insurance endorsements, liability limits, flow down provisions and subrogation, are attempts at risk transfer. I say “attempts” because what is on paper – the insurance policies, the insurance endorsements, the prime and subcontract, often do not fully anticipate the risk event that has everyone scrambling to sue each other and find lawyers who will speak in strange coded lexicon about “exposure”, “sharing in the pain”, or court cases that leave the lawyers unable to predict risk transfer. Us or them, which is it?
Whether insurance or indemnity, all risk transfer is about someone else paying for what you break – your carrier or your subcontractor – or sharing in that costs. For subcontractors, broad form additional insured requirements, with “primary and non-contributory” language, and “Type I” indemnity means potentially absorbing 100% of liability with little or no fault, or even control over the injury or property damage that occurred. For carriers, these risk transfer clauses are intended to spread or shift risk, and give arguments in court to find other “usual suspects” to shoulder more of the risk. Carriers want everyone to be chained to the deck of the ship that is sinking, to see what they will cough up in settlement funds. That process takes time, takes court more often than not, and is the gambit that explains why risk transfer clauses are the opening round not end game of who pays for what when an insurable loss occurs.
Insurance is a bit like a jagged jigsaw puzzle. You want each piece to fit so you are fully covered. The insurance market tries to exclude risks that are either runaway risks (terrorism, cyber breach) or which the market wants you to purchase separately (flood, earthquake, employment practices, etc.). It is critical that you spend quality time with your broker so the broker knows your operational risk and your tolerance for uninsured risk, and frankly, cash flow. While Lloyds of London is famous for insuring anything from a boxer’s hands against injury or a Hollywood actor’s looks, most contractors are not interested in the one-off risk, and comfortable with business and safety systems, and the corporate veil insulating the owners from personal liability from a costly accident. Selection and relationship with broker are key to risk management, no different than banker, bond broker and surety, legal counsel, safety manager, and CPA.
Sounds bad right? It need not be. Here are some quick definitions for your next meeting with your broker.
Types of Insurance for the Contractor
CGL – The Commercial General Liability Policy
This is a “third party” coverage policy. By “third party”, this policy is aimed at providing a legal defense and insurance coverage in case you are sued, or a claim made against you by a third party. It usually will not cover “first party” losses, such as to your own equipment or property.
A GCL aims at covering risks when your operations or activities cause personal injury or property damage to others. Not to sound like the new Farmers Insurance TV commercials, here are some examples:
- A construction defect claim by an owner (or an owner against prime contractor that the prime seeks to pass on to a subcontractor) that your completed operations on a project later results in leaks and water intrusion causing water damage inside a structure. There are plenty of exclusions to discuss, but this is the basic concept.
- A third party’s vehicle suffers damage when the crane boom fails from overload or fatigue, and lands on the trunk totaling the car. Or, injures the occupants. The CGL will be called upon to cover that loss, during the project.
- An employee of some other project participant is hurt by your operations – a piece of plywood you are hoisting is caught by the wind, falls off the winch, and lands on someone’s toe. If that person is not your employee, subject to exceptions that injured person may sue you (or other project participants who then demand you indemnify them). You will immediately notify your insurance broker, to immediately notify your CGL carrier, to assign an adjuster to investigate. If a lawsuit has been filed, your broker and you will ask the CGL carrier to retain an attorney at insurance carrier expense to defend you in court.
- The CGL premiums are usually based on gross receipts, and after a set premium schedule, go up or down based on receipts as a measure of risk pool. Audits happen.
- These policies are usually written on a “per occurrence” basis, meaning they cover or are triggered by a loss that arises or is manifest during the policy period. This is different that a “claims made” policy such as a Professional Liability policy, where the policy covers claims in the year the claim is made, not when it arose or manifest as damage.
- CGL policies usually have a per occurrence limit and an aggregate limit. States and localities differ as to what is a minimal level of insurance. There is also “Excess” or “Umbrella” insurance policies that can be obtained if the primary CGL policy limits are exceeded – the big doozy policy event.
- Some policies exclude residential work or condominium work due to their risk of later construction defect work (especially in California “real estate boom” periods).”
- Perhaps most importantly, these polices differ greatly as to whether “completed operations” coverage is provided to “additional insureds” a concept to be discussed later. While personal injury claims are usually covered when arising during or after the project, some policies do not protect additional insureds, only the primary insured, once the project is complete. And, as to ongoing operations –while the insured’s own work is ongoing and not complete, some policies do not cover property damage on the expectation that the project has a Builder’s Risk policy and coverage. See discussion below.
Common Exclusions to CGL policies
All insurance policies have exclusions. Many are standard. Some exclusions change or are introduced into CGL policies with recognition of new risk and market place changes. Three recent examples are terrorism exclusions, mold exclusions, and cyber breach exclusions. In some instances, such as mold/pollution and cyber risks, new insurance products have developed to price those risks that have increased and are no longer within the CGL policy. Read the fine print and have it explained. You might be able to buy another policy if the risk is acute for your industry or operations.
- Work Product Exclusion. CGL policies generally do not cover the work that fails, but the consequential property damages caused by the failed work. The simplest example of this is a leaky roof from lack of adequate waterproofing, bad nailing and substandard venting and gutters which causes the leaks, and leads to weakening of the roof itself. That failure and cost of repair will not usually be covered. But, if that failed roof causes damages to sheet rock, wiring, flooring and furniture, those consequential items are usually deemed “property damage” and covered. The reason for this exclusion is “stitch in time” motivation for the insured contractor to remedy work errors promptly, since the work product itself never gets covered.
- Purely Economic Losses. Though “loss of use” is sometimes covered, in most CGL policies there is no coverage for economic losses. Economic losses are losses that are not property damages or personal, physical injury. It could be things like lost profit while repairs take place or the damages shut down the building. Not usually covered.
- Mold and Pollution. The CGL will usually exclude from coverage, damages from mold, fungi, wet or dry rot. If there is water damage and mold damage, if concurrently causing the damage, the exclusion will often apply – but this issue gets heavily litigated, and often requires competing experts, insurance coverage counsel and legal wrangling to resolve. For contractors whose work creates weather related or mold risks, they should get a price quote annually on Pollution coverage, and decide if it’s worth securing to close this scope gap. Some owners require their prime contractors to also secure Pollution coverage.
- Injuries to your own employees. Your employees will be covered by your workers compensation insurance policy. Workers Compensation is generally an exclusive remedy on a no-fault basis by your employees, so they cannot sue in court against the employer, and usually not against other project participants.
- Design work. If your projects involve “design-build” elements, especially where an engineer’s or architect’s wet stamp is required on a submittal, design document, or design-assist element, your CGL may well not cover for risks arising out of design. In that case, you need a Professional Liability Policy. If you subcontract out design services, make sure the subcontractor-design professional has professional liability insurance adequate to protect you, and have your broker tell you if that is enough, or if you need your own professional liability or design rider.
- Exclusion of subcontractor scope if subcontract does not provide for Type I broad indemnity and issuance of an additional insurance certificate to the prime contractor. Some homebuilder policies, but also in the commercial arena, contain carrier risk by requiring the contractor insured to flow down insurance risk to each sub with a broad indemnity clause and additional insurance requirement naming the prime contractor an additional insured. The penalty clause in those CGL policies is loss of insurance for each subcontractor scope where those flow down, indemnity and additional insured (“AI”) clauses are absent, or the AI endorsement was not secured. Remember – every insurer wants to find another carrier or party to cover the risk assumed, as part of their risk spreading or transfer underwriting model.
- Intentional Acts. This goes without saying, but if the owner punches someone in the face, or road rages (auto policy, see below), intentional conduct versus accidents and negligence, will not be covered. Where this comes up is when the insured is a company, and is sued for negligent hire or supervision of a foreman or crewmember who threw the punch, and the company is sued. Often there is coverage, often there is not where a party is sued for negligence over another’s willful conduct.
Pollution Policies – CPL and PLL
These policies – “contractor’s pollution policy” or CPL, or PLL – “pollution legal liability” are to cover mold and other risks defined as pollution, and usually excluded from the CGL. These are third party policies and do not cover the insured’s own property typically. Sometimes these are site specific in which case, environmental studies tied to the insured project get reviewed as part of underwriting. Highly specialized insurance product. To get this one right might require an environmental consultant not just a broker, depending on the risk module.
Some large public project owners require a CPL or PLL, and require additional insurance coverage naming the owner as an additional insured on the policy. Then it gets purchased for the project, and adds to the cost of the bid.
Workers Compensation Insurance
All US states require any contractor, or employer, with some exemptions, to provide a statutory level of workers compensation insurance. This field is highly regulated. A contractor with a good safety record can reduce the premium by what is called the modification rate, like auto policies, where the contractor rates better than the industry average.
This insurance classifies employees by task and trade, with the amount of insurance due quarterly or otherwise based on the number of hours work by each such task or trade, in submitted workers compensation forms. These get audited, annually, both against the temptation to move workers into lower risk, less costly rates (land leveling versus carpentry or roofing), or unreported hours or employees. This typically required a dedicated staff person in the payroll or controller’s department to keep up with. This then gets tied to the Safety Program, safety or tailgate meetings, and Industrial and Injury Prevention Program (IIPP), that is required in most states and on most large projects.
Professional Liability Policies
This type of policy is for a professional engineer, architect, or surveyor, or provider of design or engineering services. These are typically on a “claims made” basis, meaning a policy covers those claims made in the policy period irrespective when the error or omission is alleged to have occurred. These policies often have large deductibles or Self Insured Retentions (“SIR” and explained later). These policies often have consent clauses meaning the professional can override the carrier and refuse to settle, out of consideration of the professional’s desire to protect his or her professional reputation against claim of error. Most states have additional statutory protections to design professionals before a suit can be filed, and enforce damage limitation clauses in their contracts, in the interest of keeping design fees affordable.
While most GCL policies do not cover what is called “economic loss” – non-property damage or personal, physical injury – professional liability policies in many instances due. This is partly due to the fact the nature of damages from errors and omissions are increased costs of construction from correction. Like a CGL policy, a Professional Liability policy has an aggregate limit and a per claim limit in amount.
Not much to say here. Main thing is to keep the driven equipment list up to date so all vehicles driven are listed as covered.
Equipment Policy – Cranes, Backhoes, and other non-road Equipment
The Equipment Policy covers your operating equipment, when they are damaged during performance of the work. A crane tip over or boom failure are examples. These can be intricate and often are given short shrift at the insurance renewal. I have seen policies with exclusions for crane overload, or for metal fatigue, that became insurance disputes later on what caused the crane or boom failure. My main advise here is – when there is an accident, do not just let the equipment carrier and broker handle it. Get involved, take photographs, have your general legal counsel do interviews, and make sure the damaged parts are preserved. Often the Crane Repair outfit with discard the boom or other parts (sheered bolts, cables, brake parts) before the insurance determination, only for you to learn you needed them to analyze metallurgical issues to prove coverage and disprove an exclusion. Policy limits are tricky too, since many companies have very well maintained but fully depreciated heavy equipment for which the repair costs far exceed the original cost of the rig. Usually this risk of underinsurance can be avoided by regular equipment appraisals.
First Party Property or Fire Insurance
If you own your corporation yard or offices, or both, then you will have property insurance which is also a lender requirement if there is a mortgage on the property. Sometimes this piece of insurance, handled at the property purchase, is handled by a different broker than the rest of the insurance program. This insurance covers fire, and other major casualty, though can at times cover odd items such as “advertising injury”, “trespass” and other non-obvious items. When in doubt, tender a loss to the carrier. Without a rider and added premiums these policies typically exclude flood and earthquake risks, which can be purchased separately.
As a “First Party” insurance policy, this insurance covers you as the insured, not third parties. Often if the First Property carrier pays and believes someone else is at fault – the driver who drove a truck into the side of the building – the carrier will pay off the claim and then sue the third party responsible for the loss, a process called “subrogation” and discussed a bit later in this article.
First Party Property policies usually exclude “course of construction” risks arising from a construction project on your property – for that, you need to secure a Builder’s Risk policy.
Builder’s Risk or “Course of Construction” Insurance
A Builders Risk policy is a first party insurance policy that covers risks arising from the course of construction. If the painter leaves out oil rags and the home or building burns down, this policy will usually cover. It will cover to replace and restart the project. A prime contractor will want its prime contract to state it is a beneficiary or additional insured of the policy in order to be the completion contractor and receive the full restored benefit of project completion. This can be a bone of contention with some owners who want the option to find another contractor if it seems sloppy safety or risk management by the contractor was the cause of the calamity.
Under a Builder’s Risk, the definition of recoverable cost or losses is very important. The policy should cover hard and soft costs such as A/E and further inspection and permit fees, and environmental or mold studies if water or mold damage requires assessment and remediation. One phrase in this field is “Probable Maximum Loss” or PML, used on big projects where determining the cost of restart and completion takes considerable analysis and sharp pencils on estimating paper.
Builder’s Risk policies often will contain “sublimits” used to contain insurance amounts on specific scopes of work. These may involve acceleration costs for premium time to get the job back on schedule, loss of use, and other such items. Who pays the deductible is also an issue that gets negotiated, especially if sizable.
Most Builder’s Risk policies cover the cost of replacing new work, but not the damage to old or existing work damaged by a fire or other accident occurring while building the new work. This can leave a coverage gap, unless the First Property Insurance or contractor’s CGL policy has coverage for course of construction consequential damages. This is often overlooked, and a sharp set of questions to the broker here is important before breaking ground. “What if” questions are important to put out there.
OCIPs, CCIPs, and Wrap Up Policies – Project Based CGL Policies
A Wrap Up is what it sounds like – a policy that is intended to cover the project risks normally covered by each of the construction team and the owner, in place of their policies. These policies can be “Owner Controlled Insurance Policies” that then include the owner as an insured, or “Contractor Controlled Insurance Policies” which exclude the owner but include the contractor and its subcontractors as insureds.
Why did these arise? Mainly two reasons. One, after a heyday of Plaintiff’s Construction Defect claims against subdivision and condominium projects, most insurance companies began to shy away from this risk and began excluding multi-family or condo coverage. But, an OCIP or CCIP policy garnering project wide premiums, and having re-insurers insuring the insurer, became a fairly safe model to insure the project as a whole.
Secondly, the view is that an OCIP or CCIP can reduce project costs. That cost reduction occurs because each subcontractor and prime contractor gives a contract credit equal to its usual insurance premium (based on contract price). In the aggregate, that may then total less than the premium cost of the OCIP or CCIP. So the owner reduces project cost by a less expensive insurance project, which in theory, has the same protection.
Another potential benefit is streamlined loss adjustment in the case of a casualty. This benefit arises because the project participants and their carriers are aligned, not adversarial, since there is one overall policy covering everyone. The alternative is the ‘battle royal” model or lawyer feeding trough where the owner sues the prime, and the prime sues all the subs, and separate insurance coverage litigation occurs parallel, the court designates the case as “complex” and assigns a “Special Master” to blow the referee whistle and squeeze out settlements that takes unusually no less than a year, and might also involve 20 or more definitions. Under a Wrap Up, it’s a single lifeboat situation, all for one, one for all, where finger pointing is not necessary. One lawyer, one carrier, one adjuster, and cleaner living, and quicker resolution.
There are potential pitfalls with Wrap Ups that require careful review with the broker before choosing an OCIP or CCIP. One is to make sure coverage is indeed equal to what a typical CGL policy covers. Some Wraps do not cover “employee over” suits by injured employees, for example. Also, it is important to get all subcontractors enrolled and enrolled timely. I have seen a case where a crane boom hit the neighboring building by the trucker or hauler trying to offload it, the day before the crane company was about to work, and was not yet enrolled. Then coverage may be lacking under the OCIP or CCIP for that pre-enrollment incident.
If a CCIP is used, then usually the CCIP names the owner as an additional insured. If a OCIP, the premium is paid by the owner. Deductible responsibility usually needs to be set forth in indemnity clauses, and that is where “fault” arguments still apply, especially if a high deductible.
OCIPs and CCIPs do not typically include design professionals, who are covered by a different form of policy, the Professional Liability Policy.
Excess or Umbrella Policies
On all large public works projects and most large private projects, the owner will insist on an excess or umbrella policy by the prime contractor. These range from $3 to $10 Million, but can be much higher on mega-projects. The purpose of an excess or umbrella coverage is to extend the coverage of a CGL policy beyond its policy limits, as a further insurance buffer for a large claim. But, the excess carrier has no duty to cover or defend until the primary coverage is exhausted. Usually this policy will have “follow form” coverage to match the terms of the CGL policy terms – but your broker should verify that.
Many smaller subcontractors will not automatically have an excess or umbrella policy. Consider requiring excess coverage, if only to verify the financial stability of the subcontractor, and its own risk management system as mature.
Hauling and Cargo Policies
Most contractor hire third party truckers and haulers to move their non-road equipment jobsite to jobsite. Those haulers will need their own suite of insurance, CGL, Auto, etc., but also hauling or cargo insurance. Cargo insurance covers damage to equipment being hauled. So, if the trucker backs into a driver on the highway, damage to the rear-ended vehicle is covered by the Auto policy, but when the Crane falls off the Low-Boy trailer and is damaged, that is covered by the Cargo policy.
My experience is that many truckers, especially the smaller “ma and pa’ one or two truck owning family businesses, are underinsured. The policies have exclusions that are not-obvious. I recommend a contractor secure all the Hauler’s policies and have the broker review them for adequacy and policy limits. For clients I recommend a master hauler agreement to cover all hauling orders and transport. In some cases, a contractor may want to have risk tiers so some haulers with lower insurance can move less expensive equipment, but not the big ticket items which can be hauled only by those trucking companies with extensive insurance. Beware here.
Ok, the Rest of the Risk Transfer Jig Saw Puzzle – Additional Insured, Indemnity, Subrogation, Deductibles and Self Insured Retentions (SIR)
It’s true – talking insurance is like listening to the weather channel, slow, boring, and tedious with traps for the unwary. But to round this out:
- Additional Insured. Additional Insured status is a key feature on most projects. Owners insist that prime contractors and their subcontractors name the owner as an additional insured, with an issued additional insured certificate. The prime contractor will want to have the same regime with its subcontractors, requiring they name the prime as an additional insured on their policy and issue insurance certificates to that effect. To make this work, the subject prime contract and subcontracts should have an indemnity clause (making it an “insured contract” an insurance term of art for assumed contractual liability). It is also important to provide in the contracts that the additional insurance and AI certificate provide that the additional insurance is “primary and non-contributory over all other insurance.” That places the AI coverage ahead of all other insurance, which becomes excess, in theory. In practice, this is often a dog fight between carriers on multiple levels, as they trade barbs, policy language plot twists, and court cases from different jurisdictions saying opposite things.
- Indemnity is basically a clause that attempts to say, “You pay for what I break” or “as between you and me, you pay 100% for what we together or you and others break”. It involves a subcontractor to a prime, or prime to an owner, assuming the defense and protection (indemnity and hold harmless) of the other party for a common risk of liability. Most insurance companies require subcontracts to have a broad form of Indemnity called Type I that places all the risk downstream, “to the greatest extent permitted by law.” The law in most jurisdictions precludes indemnity for intentional acts or the other parties’ sole negligence. Some states have passed “anti-indemnity” legislation that limits indemnity to “active negligence” and excludes indemnity for “design defect” – as Legislatures have concluded these limits on indemnity are important to keep their state user friendly for insurers wary of over-absorbing project risk.
- Subrogation is a process of “pay and chase” where a party or insurance company pays for a loss and then seeks reimbursement from another party who in fairness should pay it. A classic example is a first party auto policy paying for an accident caused by an u motorist, and then the carrier suing the uninsured motorist. Or a prime contractor’s carrier paying to re-roof a defective roof and then suing the roofer for recovery of those costs.
- Waiver of Subrogation. Some contracts provide for “waiver of subrogation”. This clause is most often this is seen in AIA construction contract forms, some say cynically, to protect the architect and his consultants from design defect claims by the prime contractor’s carrier after settling with the owner. I tend to think these are not good clauses for contractors as they shut off opportunities to recoup insurance losses.
- Deductibles and Self Insured Retentions. Almost all insurance policies require the insured to pay a deductible with the loss is settled. Some use Self Insured Retentions or SIRs which basically mean the insured is self-insured up to a certain dollar amount. An SIR can mean, if sizable, that the insurance market has responded to excess loss runs, or that the company has decided its internal risk management is well enough developed to adjust losses under $100,000 (or more) in-house, and save on premiums.
- Deductible and SIR amounts and who pays when an Additional Insured is involved. When the deductible or SIR is sizable – $25,000 or more – it becomes very important to allocate responsibility for its payment in the contractor prime contract. If an additional insured makes a claim that party wants indemnity from the covered claim but also the deductible or SIR. The carrier will not cover the SIR or deductible, so that issue then falls back to the indemnity clause. Usually more specific contract language is used to address this issue, such as “subcontractor shall be responsible for all SIRs and deductibles”. Also a subcontract or prime contract should usually limit the deductible or SIR, either to $10,000 or some fair amount commensurate with the project size.
Conclusion – Talk to your Broker – Often
None of the above is self-executing. It’s the worse time to learn you are underinsured when an accident occurs, and now you are reporting to the Board of Directors or CPA that there is a potential uninsured risk.
Many brokers will review your contracts for insurance compliance, and I recommend it as part of that relationship. Bring in your legal counsel for an annual tune up. Go over all the policies at least twice a year, and start the renewal process early. If there is every a better safe than sorry arena, this is it.
Selecting the broker is a whole nuther topic. It is important your broker has experience in your industry and the size of your company. It is important they review your additional insured and enrollment programs and audit a job or two a year for compliance, and help with staff training. Building a strong relationship with a carrier who knows your risk and your mindset can be a further benefit, when the bump in the night occurs.