Risk Management

Speaking the same language

Coordinating the contracts assumed by contractors with the provisions of

By Donald S. Malecki, CPCU

Reviewing the insurance provisions of contracts is not what all producers would consider as being part of their service portfolio for insureds. In fact, many producers would likely try to avoid having to read contracts, even if they had the opportunity to do so.

Some producers, on the other hand, will not only read the insurance parts of contracts but also the remaining portions. Some producers also are known to change or even to draft certain provisions, with or without legal assistance. These producers sometimes are referred to as producer/consultants, rather than simply consultants because the latter do not sell insurance.

To the extent that producers want to get more involved with contracts, they need to train their insureds about the importance of reviewing contracts prior to their being signed. Unfortunately, it is well known—in insurance circles, at least—that many of those who must sign contracts do not bother to inform anyone about the executed contract until after it is signed or when some question arises. This often happens with real and personal property leases.

In other cases, particularly with regard to the construction business, many contractors may get the opportunity to sign the entire contract but are denied the right to review insurance policies to determine how coverage may compare with contractual requirements.

Producer/consultant requirements

Producer/consultants need to keep their guard up when dealing with contracts because the attorneys or others who draft contracts do not always understand the insurance nuances. It has been said, in fact, that attorneys who know the law do not always understand insurance, and producers who understand insurance do not always understand the law. The result is that both attorneys and producers or producer/consultants should work together, whenever possible.

Some leases, for example, are still being drafted using insurance language that is now considered history, such as the property insurance requirement of obtaining extended coverage or the liability insurance requirement of public liability coverage.

Construction contracts also can be controversial and fluid. Here, however, standard provisions have long been available that often serve as a prototype for those who may not want to re-invent the wheel. For example, many developers and general contractors have long relied on the construction contract provisions of the American Institute of Architects (AIA) as their model.

The one AIA document that has been commonly relied on with regard to contractual indemnification and insurance provisions is referred to as General Conditions A201 Form. To keep pace with construction industry practices and law, AIA amends provisions of its contracts every 10 years. Its latest revised contract was introduced in 2007.

In light of this practice of the AIA in amending its contract provisions every 10 years, producer/consultants need to keep pace with the changes, so they can understand what the current requirements are and also what the impact may be on their insureds to the extent the provisions are amended to correspond with the requirements of a particular construction project.

While this is not the forum in which to discuss the differences between the 1997 and 2007 AIA General Conditions A201 Form, it may be helpful to point out potential problems with regard to the indemnification agreement, the liability insurance provisions, and certificates of insurance.

Indemnification agreement

The AIA indemnification agreement in the 2007 edition remains relatively the same as the 1997 edition, being the equivalent of a limited form contractual agreement. This means that the contractor’s obligation to indemnify the owner, architect, architect’s consultants and their agents, and employees of any of them applies only when a claim for bodily injury or property damage is attributable to the negligent acts or omissions of the contractor, subcontractor, or anyone directly or indirectly employed by them.

For example, if the contractor were to be 70% at fault and the owner 30% at fault, the contractor’s obligation to indemnify the owner would be limited to 70% of the resulting damages.

Strictly from an insurance standpoint, the foregoing AIA indemnification agreement is not considered an “insured contract,” as defined in the CGL policy, because the contractor is not assuming the tort liability of the owner. With a contractor’s common law obligation to be responsible for its own acts or omissions, however, the contractor would be liable even in the absence of this contractual assumption.

A CGL policy amended with the Contractual Liability Limitation endorsement CG 21 39 is not advisable because it eliminates coverage for the tort liability assumed by the insured. However, the contractual liability coverage of this endorsement would not adversely affect a contractual undertaking if the foregoing AIA indemnification agreement were to be imposed.

The problem is that some owners (developers) or general contractors may amend the AIA indemnification agreement to impose a higher degree of contractual assumption. To the extent such an assumption is permitted in a given jurisdiction, a CGL policy amended with a contractual liability limitation endorsement might put the insured, who is assuming the tort liability of another, in peril.

It is important to note that there are two contractual limitation endorsements. The one mentioned earlier, CG 21 39, excludes any tort liability assumed. The other is the ISO endorsement titled, Amendment of Insured Contract Definition CG 24 26.

This latter endorsement was introduced by ISO as part of its July 2004 filing of amendments. While it covers some tort liability assumed, it would not, for example, encompass the sole fault of an owner or general contractor. Coverage is triggered only when the contractor who has assumed the tort liability of another is in whole or in part at fault.

Parenthetically, a comparable endorsement to the foregoing CG 24 26 is Limited Contractual Liability—Railroads CG 24 27. Considering how demanding some railroads are when work is being performed on their property, endorsement 24 27 should be avoided in lieu of Contractual Liability - Railroads CG 24 17 when a sole fault assumption of liability is required by the railroad.

Liability insurance provisions

Insofar as coverage for property damage liability is concerned, the requirement for coverage to apply for damage to property, other than to the “work” itself (the subject of builders risk insurance), is “injury to or destruction of tangible property.” This was the wording of the standard 1966 CGL policy.

Since most CGL policies refer to “physical injury to tangible property,” it may be impossible to obtain coverage for “injury to or destruction of tangible property.” While a possible defense of impossibility could be raised for any allegation of liability in failing to obtain a CGL policy with the 1966 wording, it may be wiser for the producer/consultant to point out this discrepancy and have it fixed by substituting “physical injury” for “injury.”

New to the 2007 AIA liability insurance provisions—at least compared to the 1997 edition—is a provision that requires the contractor to include the owner, architect, and architect’s consultants as additional insureds. The extent of additional insured coverage, however, is limited to essentially the same coverage currently available with the 2004 edition of additional insured endorsements CG 20 10, (CG 20 07 or CG 20 32 for architects, engineers or surveyors) and CG 20 37 for completed operations.

In other words, coverage for additional insureds is limited to claims or suits caused in whole or in part by the contractor’s acts or omissions during operations.

Certificates of insurance

Another one of the problems having to do with the 2007 AIA documents is that both the certificates and insurance required in the insurance section are to contain a provision that the coverage provided will not be canceled or allowed to expire until the owner has been given 30 days’ advance written notice.

What the AIA may not know (or may not care) is that ACORD certificates, which are almost universally used, barring manuscript ones, contain a provision stating that if the described policies are canceled before the expiration dates, the insurer will “endeavor” to send written notice. (There is no mention about notice for nonrenewals.)

So, if an insurer fails to mail such notice with regard to a cancellation or nonrenewal, it may not incur any obligation or liability for failing to do so with this language. Depending on the account, some insurers will issue an endorsement identifying certificate holders who will receive notice of cancellation.

In light of state laws precluding amendments to these certificates, it would not be wise for producers to amend them. What they should do is to point out that the certificates cannot be changed and that the insured will make every attempt to see to it that the certificate holder is properly notified if the occasion arises. Not all certificate holders are unreasonable and will, in fact, understand what the law mandates.

Other contracts

If the contract documents of the American Institute of Architects were the only ones relied on by owners and contractors, it would make the job easier for the producer/consultant. Unfortunately, however, several other such documents also are in vogue.

Another set of documents is referred to as the Standard General Conditions of the Construction Contract prepared by the Engineers Joint Contract Documents Committee. These have been available for some time but are not as widely relied on as a prototype as are the AIA documents.

The newest contract documents go by the name, ConsensusDOCS. These are said to represent the combined effort of many construction associations whose aim has been to identify and implement best practices for construction contracts.

Among the 22 organizations representing the combined effort include the Construction Owners Association of America, Associated General Contractors of America, American Subcontractors Association, Inc., and the Associated Builders and Contractors. The DOCS portion of these contracts gets it name from the participating organizations: Designers, Owners, Contractors, Subcontractors, and Sureties.

Conclusion

It will be interesting to see how well the ConsensusDOCS are received and used. These documents may be used in the same cut-and-paste way as are the AIA documents.

The more model construction contracts available, the more difficult it is for producer/consultants to get up to speed on the nature of the provisions and what needs to be viewed with caution. Then, again, no one has said that the job of the producer/consultant is easy.

The author
Donald S. Malecki, CPCU, has spent 48 years in the insurance and risk management consulting business. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business.