Basic Construction Insurance Coverage

Attorneys: Schoumacher, Bruce H.

September 2010

Construction contracts commonly contain insurance provisions. Insurance provisions are included in both general contracts and subcontracts. Unfortunately, many attorneys draft such provisions without input from, or review of, the provisions from their clients' insurance brokers. As a result, these attorneys run the risk of drafting provisions with which no contract can comply.

Each construction project should have certain basic insurance coverage. Most projects require builder's risk, commercial general liability, workers' compensation, employer's liability and automobile liability policies.

The builder's risk policy insures the actual construction against claims for damage arising from certain risks, such as fire and wind. Builder's risk policies usually cover the interest of the owner, general contractor, and subcontractors of any tier. Because the owner and contractors are "insureds" under this policy, the insurer cannot seek recovery against any of them in subrogation for a loss covered by the policy. Architects and engineers are usually not covered by builder's risk insurance policies.

Most builders' risk policies do not cover claims for defective construction. Thus, if a contractor causes damage to the structure because of defective construction, the loss may be covered by the contractor's general liability insurance policy.

Builder's risk policies can be purchased by either the project owner or the general contractor. The AIA general conditions provide that the owner shall purchase the builder's risk policy.

The owner, general contractor, and all subcontractors should have commercial general liability policies. Most such policies have adopted the latest commercial general liability form published by Insurance Services office. These policies cover damage arising from bodily injury and physical damage to the property. They also cover other risks such as advertising and personal injury. In Illinois, claims for defective construction are not covered by commercial general liability policies. CMK Development Corp. v. West Bend Mut. Ins. Co., 917 N.E.2d 1155, 335 Ill.Dec. 91 (1st Dist. 2009); Stonebridge Development Co. Inc. v. Essex Ins. Co., 382 Ill.App.3d 731, 888 N.E.2d 633, 321 Ill.Dec. 114 (2d Dist. 2008). The Illinois courts have concluded that defective construction claims are not occurrences under the standard policy, because there has been no accident. Moreover, defective construction claims are excluded from coverage by more than one of the business risk exclusions of the standard general liability policy form.

In consultation with the client's insurance broker, the attorney drafting the insurance provision should specify which coverages should be provided as party of the general liability policy. Many brokers request that contractors provide policies of specific monetary limits and completed operations/product liability, contractual liability and explosion, collapse and underground coverages.

Most construction contracts provide that the owner and the architect shall be named as additional insureds under the general liability policy. In addition, general contractors usually require the subcontractors to name the owner and/or architect and general contractor as additional insureds under their policies. Usually, most general liability policies require that in order for the additional insured to be covered, the contract must specifically provide in writing that the additional insured will be covered by the insureds general liability policy. United States Supply Co. v. Zurich American Insurance Company, D.C., 386 Ill.App.3d 88, 896 N.E.2d 425, 324 Ill.Dec. 639 (1st Dist. 2008).

The attorney must be sure that his or her client's have the appropriate insured endorsement. Under the latest ISO additional endorsement form, CG 20 33, the endorsement only covers as an additional insured the other party to the contractor. Accordingly, if a subcontract requires a subcontractor to cover both the owner and general contractor as additional insureds under its general policy; only the general contractor will be covered because the owner is not a party to the subcontract.

With increased frequency, owners are requiring the general contractor to name the owner as additional insureds on a primary and non‑contributory basis. If the general contract does not provide for primary and non‑contributory coverage, then pursuant to the Illinois courts' interpretation of the other insurance provisions of the standard general liability insurance policies of both the general contractor's and owner's policies, both parties must defend and indemnify the additional insureds. Alcan United, Inc. v. West Bend Mutual Ins. Co., 303 Ill.App.3d 72, 707 N.E.2d 687, 236 Ill.Dec. 560 (1st Dist. 2009).

Today, most general liability policies have limits of liability of one or two million dollars per claim and one or two million dollars in the aggregate. Thus, owners will frequently require by contract that the general contractor and each of its subcontractors of any tier procure umbrella or excess liability policy of specific monetary limits. If the owner is named as an additional insured under the general contractor's policy on a primary and non‑contributory basis, and if the limits of the general contractor's primary policy are exhausted, the general contractor's policy does not drop down to insure the owner. Rather, the limits of the owner's primary insurance policy must be exhausted first, before the general contractor's policy drops down to defend and indemnify the owner as an additional insured on a primary and non‑contributory basis. River Village I, LLC v. Central Ins. Companies, 919 N.E.2d 426, 335 Ill.Dec. 707, (1st Dist. 2009).

Owners also require the general contractor and subcontractor of any tier to maintain workers' compensation insurance with statutory limits. Owners include this provision in the construction contract because if any of the contractors do not have workers' compensation insurance, the owner could end up being liable for the workers' compensation claim of any injured contractor employees. 820 ILCS 305/1 (2005). In addition, the owners usually require the contractors to maintain employer's liability coverage.

Finally, the owners usually require the contractors to maintain automobile liability coverage. Here, the owners usually request to be named as an additional insured under the contractor's automobile liability insurance policies.

Because the owner and contractors may have personal property which could be damaged due to the fault of one of the parties; many construction contracts contain waiver of subrogation provisions. Such provisions usually provide that waiver is good only so long as valid and collectible insurance covers the loss.

Further, most insurance provisions require the contractor to furnish certificates of insurance to the owner. Such certificates are usually issued by the contractor's insurance broker and list the insurance policies maintained by the contractors and frequently described any significant endorsements to any of the policies.

To avoid confusion, the attorney drafting the insurance provision should list the specific policies required of the contractor with monetary limits for each policy along with significant coverages and endorsements. Some attorneys will even provide as an attachment to the contract a ­pro forma certificate of insurance drafted by the client's insurance broker.

If the client's broker works with a number of owners and/or contractor, he or she may have drafted an insurance provision which the attorney can use to tailor an insurance provision for the contract. However, the broker should review the final draft of the provisions before execution of the contract.

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