Attorneys: Schoumacher, Bruce H.
Related Practices: Construction
Related Industries: Construction
December 15, 2011
Most construction contracts contain provisions requiring the contractor to have specific insurance coverage during performance of the contract. Construction contracts also state that the contractor shall furnish proof of such insurance coverage by providing the owner with a certificate of insurance. Moreover, most contract provisions state the insurer will notify the owner of cancellation of any coverage.
For decades, contractors have given owners certificates of insurance using forms prepared by the Association of Cooperative Operations Research and Development (ACORD), an insurance industry group which produces standard coverage forms. The forms are completed by the contractor’s insurance broker. The most commonly used certificate form is ACORD 25.
In October 2009, ACORD amended the ACORD 25, effective October, 2010. The old ACORD 25 stated, in part, if a policy listed on the certificate was cancelled prior to the expiration date that the insurer would “endeavor” to give notice of cancellation to the certi-ficate holder. The new ACORD 25 states that notice of cancellation “will be delivered in accordance with the policy provisions.” However, standard insurance policies do not contain provisions requiring the insurer to notify any certificate holders of cancellation of the policy.
Obviously, owners want to be sure that contractors maintain the required insurance coverages during performance of the construction contract. Several alternatives have been developed.
First, the construction contract can state that the contractor will give the owner notice of cancellation of coverages. Of course, an owner may not accept this approach because there is no guarantee that the contractor will comply with this provision.
Second, the contract can provide that the contractor’s insurance broker will furnish the owner with notice of cancellation of coverages. Under this option, the broker should either be a party to the construction contract or should confirm in a separate agreement that it will be bound to this provision of the construction contract. Of course, some brokers may not want to undertake this obligation; however, through negotiation, the owner and broker could reach a compromise limiting any risk to the broker.
Third, the contract can require that the insurer agrees to notify the owners of cancellation of its policy prior to the expiration date shown on the certificate. Some insurers will endorse their policies stating that they will give notice of cancellation to specific named certificate holders. Unfortunately, not all insurers offer such endorsements. Further, those who do, do not readily advertise their availability. Rather, the contractor must specifically request it.
Using prior ACORD forms is not an option. They are copyrighted, and use of them requires acceptance of the terms of the ACORD licensing agreement. Under the licensing agreement, prior editions of the ACORD 25 may not be used. In addition, some state insurance commissioners have ruled that the prior editions may
not be used.
In conclusion, when drafting construction contracts, attorneys and their clients must be aware of the limitations of revised ACORD 25. They will have to develop contract provisions which recognize those limitations.