Construction Insurance Contracts | Do Your Provisions Actually Have You “Covered”?
Construction insurance contracts are a must as construction projects are notoriously risky endeavors. In order to cover these risks, the parties usually employ the following types of insurance coverage: builder’s risk, commercial general liability, umbrella, contractor’s pollution, auto, and workers’ compensation/employer’s liability. Each insurance type has gaps, but often there are ways of modifying the policies to fill in some of these gaps — for a price. So, it is important to identify the risks associated with a project and make sure that the terms and limits of the insurance policies are adequate to cover potential losses.
Let’s review each of these construction insurance contracts and their policies.
Builder’s risk insurance is a special type of property insurance that indemnifies against damage to buildings while they are under construction. Because a builder’s risk policy is temporary in nature, a builder should confirm that the coverage is effective prior to when the materials are delivered to the job site and carefully consider when the policy terminates, such as at the closing of the sale, occupancy, or on a set policy expiration date.
Typically, builder’s risk policies cover perils such as fire, wind (may be limited in coastal areas), third-party theft, vandalism, lightning, hail, explosion, vandalism, and vehicles/aircraft. These policies often do not cover perils such as earthquakes, floods, accidents, and injuries at the workplace, employee theft, water damage, weather damage to property in the open, war, government action, contract penalty, and mechanical breakdown.
The Commercial General Liability (CGL) creates a base for coverage, and other policies can be acquired to coordinate coverage depending on the circumstances. The standard CGL policy insures against liability related to “bodily injury” and “property damage,” both of which are usually defined terms in the policy. Also, each policy will set limits per each occurrence, and limits for aggregated values. (Because of the complexity of these policies, the next article will explore the coverage afforded by CGL policies in more detail.)
A Contractor’s Pollution policy provides coverage for third-party claims for bodily injury and/or property damage, along with coverage for remediation costs associated with pollution incidents resulting from the builder’s covered operations.
Commercial Auto Insurance provides the coverage for vehicle repair, medical expenses, or potential lawsuits as a result of unforeseen auto accidents.
Workers’ compensation provides pay and medical benefits to employees who have a work-related injury or illness. Included in a standard workers’ compensation insurance policy is coverage called employer’s liability insurance (sometimes called Part 2 or Coverage B). Part One of the policy covers the employer’s statutory liabilities under workers compensation laws, and Part Two of the policy covers liability arising out of employees’ work-related injuries that do not fall under the workers compensation statute. These policies provide coverage for the cost of work-related injuries or occupational diseases, regardless of employee negligence.
An employee, however, can only receive benefits if the employee’s injury or illness relates to the employee’s job duties or employment. If an employee is not acting within the scope of their employment and becomes injured, such as doing yard work at home or engaging in sports on a day off, workers’ compensation insurance will not cover the employee. While an employer in Texas may choose not to have workers’ compensation insurance (such employers are referred to as nonsubscribers), employers should only do so after conferring with an attorney.
Because of limits on other policies, an umbrella policy is often used to extend the coverage amounts. These policies often supplement a CGL policy and commercial auto policy because these policies have maximum policy limits that may not cover all the builder’s liability. In that case, an umbrella policy provides coverage for amounts above the policy limits of other policies.
Most importantly, just because the construction contract obligates a contractor or subcontractor to obtain certain insurance, it does not mean the policies that are obtained conform to the terms of the contract.
The best practice is to review the actual policies of insurance rather than the certificates of insurance. Reviewing the policies will provide insight as to whether certain endorsements, e.g., additional insured provisions or primary insurance provisions, are actually included. Moreover, a builder should include the right to have access to the insurance policies in its contract.
Because of the importance of procuring the proper construction insurance contracts, a builder should consult its insurance specialist or attorney. If you need assistance, call us today – 817.338.1700 or visit our website for more information.