Construction contracts at all tiers usually include terms requiring certain types of insurance, and often contain related provisions about indemnity. This “boilerplate” can be important if a job goes south, so here’s a short explanation of some of the key terms and how they relate to one another:
- Builder’s risk insurance: This is insurance purchased by the owner or general contractor that covers property, equipment, and supplies at the jobsite (and sometimes beyond). It is a form of property or “first-party” insurance that pays to replace or repair covered property in case of theft, a fire, etc. It will usually provide coverage for some subcontractor supplies and equipment (but not all).
- Liability insurance: This is insurance against claims made by others for property damage or bodily injury. Often called “third-party” insurance, this comes in many forms, the most common of which is “Commercial General Liability” or “CGL.” Everyone on a job should have their own CGL insurance, even if there is a “wrap” (see below), and of course, CGL is required by the CCB. One common dispute between policyholders and insurance carriers is over what kind of liability for property damage the insurance covers, and what it does not. Generally speaking, CGL insurance will cover liability arising from property damage to the work of other trades (or to the completed project), but will not cover the cost of correcting defects in the insured’s own work. In a classic example, CGL insurance should cover water damage to framing caused by incorrectly installed siding, but may not cover the cost of redoing the siding if there has been no damage to anything else. (Notice that we said “may not.” Whether insurance applies often depends on all the facts of a case and subtleties in the policy language. It is therefore very difficult to provide hard-and-fast rules about what is and what is not covered.)
- “Wrap” insurance: This is a form of liability insurance purchased by the owner (“Owner Controlled Insurance Program” or “OCIP”) or the general contractor (“Contractor Controlled Insurance Program” or “CCIP”). It provides coverage for everyone enrolled in the “wrap,” which usually includes all trades, but excludes design professionals. If there is a wrap, the subcontractors will generally be asked to exclude insurance costs from their bids. Most CGL policies held by individual subcontractors exclude coverage for any project with a wrap.
- “Additional insured”: Most construction contracts require that the lower tier contractor add the upper tiers as “additional insureds” on the lower tier’s liability insurance. This means that if the upper tiers are sued for something that involved the lower tier’s work, the upper tier contractors (and owner) can tender the claim to the lower tier contractor’s insurance and that insurance company will pay for their defense lawyer and (potentially) the settlement. This is a method of shifting risk from the upper tier contractor down to the lower tier. One common problem that we see is a mismatch between the scope of the coverage that the lower tier contractor promises to provide and what the lower tier contractor’s insurance policy actually provides. Liability policies usually have an additional-insured “endorsement” (an add-on to the policy) that says that anyone that the policyholder has agreed to add as an additional insured is an additional insured. But those endorsements often limit additional-insured coverage to less than the full scope of coverage provided by the policy. It is a good practice to have your insurance broker compare a draft of your construction contract with your insurance policy to make sure that you are not promising more than you can deliver.
- Indemnity: Most contracts require the lower tier contractor to “indemnify” the upper tier contractors and owner from claims relating to the lower tier contractor’s work. This is a separate obligation from that of providing “additional insured” coverage, but involves many of the same concepts. And of course, in reality the lower tier contractor may not have the resources to pay to “indemnify” anyone beyond what is available from its insurance. In Oregon, the obligation to indemnify someone generally includes the obligation to pay for a defense lawyer. It is therefore important to pay close attention to claims that may trigger the obligation (and having insurance to step in), because they can be quite expensive.
Boilerplate clauses in construction contracts often turn out to be critical if something goes wrong. That is certainly true of insurance terms. Involving your insurance broker and counsel can help prevent problems down the road, and having a good understanding of the basic terms can make that conversation more efficient. Happy contracting!
