An Overview of Construction Liability Insurance Issues
William C. Last, Jr.
In a number of construction industry related disputes insurance maybe a means for a defendant in a lawsuit to obtain a defense and indemnity of the lawsuit by its insurance carrier.
Generallly, there are three types of liability insurance policies available for a construction project: (1) a comphrensive general liablity policy (CGL); (2) an architect or engineers porfessional liability policy; and (3) a liability policy for a specific project such as a Awrap around@ policy or an Owner Controlled Insurance Policy (OCIP).
This article is intended to provide an overview of a typcal comphrensive general liablity policy (CGL). The article will first discuss typical construction contract insurance clauses and then examine the typical components of a CGL policy.
Typical Construction Contract Insurance Clauses
Construction contract insurance provisions generally set forth the insurance coverage that the contracting party is obligated to provide. The clauses typically specify: (1) the types of policies that are to be provided; (2) the number of years for which insurance coverage is to be obtained; (3) the insurance policy monetary limits; (4) the form of the policy (Aclaims made@ vs. Aoccurrence@); (5) the hazards that are to be covered (e.g. Acompleted operations@ vs. Aongoing operations@); and (6) what evidence of compliance with these insurance requirements must be supplied.
Many insurance clauses, also require that the policy be a primary policy. Primary policies are those which obligate the insurer to be the carrier to respond to a claim. Secondary policies are only obligated to respond when the primary policy limits have been exhausted.
Generally, the types of policies that usually are required include: (1) general liability (GCL); (2) automobile liability; (3) excess liability; (4) workers compensation and employer liability; and (5) professional liability. The general liability policy is intended to provide indemnity and a defense against third parties who seek damages for bodily injury and/or property damage. This article will focus on the general liability policies.
The evidence required to show that a contractor has satisfied insurance requirements generally is in the form of a Certificate of Insurance and an Additional Insured Endorsement. A Certificate of Insurance is only intended to prove that insurance has been procured. The nature of the Additional Insured Endorsement is best described in context of what is included in a typical policy.
Components of a Liablity Policy
The Insurance Services Organization (AISO@) provides standard forms for the insurance industry. It should be noted that insurance carriers also can special manuscript (write) the actual policy and any endorsement to a policy. In such a case, the carrier can restrict or enlarge the coverage set forth in the ISO forms.
Insurance policies have the following main components: (1) a declaration page that includes the name of the insured; the policy period; the designation of coverage; policy limits; deductibles, and a list of accompanying forms and endorsements; (2) definitions of certain key terms; (3) an insuring clause that includes the basic agreement to provide insurance coverage; (4) a number of coverage exclusions and exceptions that limit the coverage provided under the insuring clause; and (5) conditions on coverage that place specific duties on the insured as condition to providing coverage.
The Declaration Page
The declaration page is usually comprised of a page or two. It sets forth the name of the insured(s), the period for which the policy is in effect, designates they type of coverage, limitations on the insurers policy limits, the deductibles on any claims, and a list of accompanying forms and endorsements.
Endorsements are simply modifications to the policy provisions. Endorsements can expand, or limit the coverage that is being provided by a policy. An endorsement can be part of the policy when it is first issued, or be added at a later date. The primary purpose of an additional insured endorsement is to add additional names to those parties who are insured by the policy. However, the effect of adding additional parties to the policy can be far reaching.
Once a party becomes an additional insured on the policy, the insurer is obligated to defend and indemnify that additional insured in accordance with the policy terms and conditions. The fact that the additional insured pays no premium does not dimish the insurer obligation. Generally, the insurer remains obligated to fulfill its obligations under the policy even if the additional insured negligence is the sole cause of the liability for which damages are being sought. However, insurers naturally always seek to limit such exposure.
There are different forms of Additional Insured Endorsements. The typical form that is issued in the construction industry is the CG 20 10. That form has been modified over the years. The date of the issuance of the form can be determined by reading the last four digits that follow CG 20 10. For example, a CG 20 10 03 97 indicates that form was issued during March of 1997.
The Insuring Clause and Definitions
Most insuring clauses in a CGL policy provide that coverage is triggered if the insured occurrence arises during the policy period. There are, however, policies that provide that a carrier=s duty is only triggered if a claim is made during the policy period (Claims Made). What constitutes an occurrence is defined within the body of the policy.
Most construction contracts require an occurrence policy. A claims made policy requires that insured claim occuring the policy period and that the claim be tendered to the carrier while during that policy period. As to an occurrence based policy coverage is triggered on a defect by defect basis. In the event of an onging latent defect taht is not discovered until after the policy period expires coverage is typically triggered on the date of original injury. In the event of a continous undiscovered injury that continues to harm the property each insurer during the date from the initial injury through the discovery date maybe responsible.
The insuring clause also sets forth when an insurer has a duty to defend the insured. As previously stated, an insurer=s duty to defend an insurer is far broader then its duty to pay a claim. This obligation is of great value to an insured.
- -Completed Operations vs. Ongoing Operations
Since most construction contracts require complete operations coverage that aspect of the insuring clause is significant to contractors. The typical ISO CGL policy defines the 'products-completed operations hazard' to include:@all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned. However, 'your work' will be deemed completed at the earliest of the following times: (a) When all of the work called for in your contract has been completed. (b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site. (c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.@
Complete operations coverage is for a contractor=s liability for injuries and property damage suffered by third parties after the contractor completes it work on the project from which the claim arises. For example, if a gasline was defectively installed and as a resulted exploded after the project was completed, completed operations would typically provide coverage for the liability. However, the injury must occur after the work or operation is completed and during the policy term.
Exclusions And Exceptions That Limit The Coverage
There a number of exclusions and exceptions in a liabiltiy policy that impact construction contractors. Most exclusions and exceptions limit or take away what was granted the insured in the insuring clause.
Since insurance carriers do not want to insure a contractor for cost of replacung the contractor=s defective work since they believe that such costs are part of the risk of being a contractor most of the exclusions are intended to exclude the cost of reparing defective workmanship.
However, it is not uncommon for an insurance carrier to settle a owner=s claim for defective work even though there maybe an applicable exlusion in the policy. It should also be noted that an insurance carriers duty to defend a contractor is greater than his duty to pay a claim. As a result an insurance carrier may agree to tender a defense to a claim but reserve its rights to pay any sums on the claim. In such a case, an insurance carrier will send a letter to its insured that points out the applicable Since carrier may tender The following discussion is limited to the basic coverage exclusions which may apply to defective workmanship claims.
Generally, there are two types of exclusions that insurer=s may assert as basis for denying coverage for a construction defect claim. They are: (1) contractually assumed liablities; and (2) damage to the insureds work product. The remainder of this section will discuss those exclusions.
The Contractual liability exclusion
The contractual liability exclusion clause usually states that, subject to certain exceptions, the insurance being offered does not apply to contractual liabilities for 'bodily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. There are three basic exceptions to the exclusion.
Since mostly all construction contracts include a indemnity clauses the first exception is significant. Indemnity clauses are the primary contractual device that is used to shift risks associated with a party=s negligent acts from one party to another. In essence, one party (indemnitor) promises to pay the other party=s (indemnitee) attorney=s fees and any judgment that may result from one or both parties= wrongful conduct. The first exception to a contractual liability exclusion clause is for Ainsured contracts.@ An insured contract is that part of a contract that pertains to the contractors business and under which the insured assumes the tort liability of another to pay for bodily injury or property damage to a third person. That definition has been interpreted to include a typical construction contract indemnity clause.
The second exception to the exclusion is when the if the insured would have had such liability even if had not entered into the contract. The third exclusion is for an incidental contract. An incidental contract is one that is collateral and independent to the principal agreement.
Worked Performed Exclusions
This is a category of exclusions that can be written in different forms, but essentially excludes coverage for damages to the insured=s work by the insured. Once again, insurance carriers believe that this type of loss should be borne by insured since the loss results from the contractor=s own defective workmanship.
While the insurer make take the risk of loss due to damage to other partys workmanship due to a contractors negligence, the carrier will not take the risk of repairing and replacing the contractors own work that was damaged by the contractor=s negligence. For example, if plumbing contractor installs a gas line that leaks which ultimately results in a fire that damages the structure, the cost of repairing the gas line is not covered but the cost of repairing the fire damage structure is covered.
As was previously stated, there are a number of exclusions in a typical CGL policy. Other exclusions that maybe relevant to a contractor include, but are not limited to: (1) a joint venture exclusion; (2) an exlcusion for explosion, collapse, and underground property damag (3) an exclusion for pollution related losses; and(4) an exclusion for recall of products, work or impaired property.
A number of polcies have conditions on coverage that place specific duties on the insured as condition to providing coverage. Normal conditions include the following: An insured=s duty to cooperate with the insurer. An insured=s duty to provide timely notice of a claim against the policy. An insured=s duty to mitigate damages. An insured=s duty to make a voluntary payment to the claimant. An insured=s failure to satisfy these conditions may result in a carrier asserting that it has no duty to defend and/or indemnify the insured. It should be noted that there are exceptions to these conditions.
The insured=s obligation to cooperate and give notice is significant. In essence, if you are served with a lawsuit that contains claims that maybe covered under the policy you must tender that claim to your carrier in a timely manner. Futhermore, you must cooperate with the insurer in its defense against the claim. If you fail to fulfill these conditions the carrier maybe able t argue that it has no duty to defend you and/or pay a covered claim.
If you have ever read your comphrensive general liablity policy you discover that the language in the policy is to a large extent legalistic and complex. As a result, there have been numerous court cases that have arisen due to disputes over coverage. California courts have created a number of general rules for interpreting insurance policies. They include: (1) the policy language should be given its plain meaning or the Aplaining meaning@ rule; (2) if there is no plain meaning then the words must be interpreted in manner by which the insurer reasonably believed the insured would have understood them to mean or the Aobjectively reasonable expectations of the insured@ rule; (3) the general rule that if the language in the policy is ambiguous it is construed against the drafter or Acontra-insurer: rule; and (4) exlcusions and must be conspicuous, plain and clear or the A conspicuous, plain and clear limitations coverage@ rule.
The fact that courts have created these intepretation rules over the years points out the obvious. While an insured thinks it has bought an insurance policy that covers it for certain losses, insurance carriers may not agree. In which event, a carrier may out right reject a tendered claim or offer to defend against the claim with a reservation of rights. In which event, an insured must determine if the policy in question provides a defense against the claim and is obligated to pay on a claim.
This is intended to be a general discussion of a typical comphrensive general liablity policy that would be issued to a contractor. If you have a question about your policy covering a specific loss you should discuss those concerns with your insurance agent and/or an attorney that has experience interpreting policies in context of the relevant case law.
This article, 82006, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 26 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California AA@ and AB@ license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.