During a construction or building project, a person with a claim for personal injury or property damage – including most landowners and any third parties involved – will first look to the prime or general contractor and its insurance coverage to pay damages for the alleged injury or damage. Therefore, contractors must ensure that their own insurance policies are in place and afford appropriate coverage for all risks. Furthermore, contractors must confirm that their subcontractors have insurance policies that provide adequate coverage and are in force. Once the construction is complete, or the policy expires, coverage under the policy stops unless the insured obtains an endorsement for completed operations or the policy is renewed.
In the construction industry, most commercial general liability (CGL) insurance policies provide coverage on an occurrence basis rather than a claim made basis – meaning the incident giving rise to the claimed loss or damage must have happened during the policy period. A CGL policy typically provides coverage to the insured for those sums the insured becomes legally obligated to pay as damages for:
- Bodily injury or property damage;
- caused by an occurrence;
- in the coverage territory;
- during the policy period.
There are many exclusions that can limit an insured's coverage under a CGL policy, and there are a few key business risk exclusions related to construction work of which an owner, contractor, and subcontractor should be aware. These policy exclusions are primarily predicated on the fact that a CGL policy is designed to provide the insured with coverage against third party claims for injury or damage. The most relevant exclusions are:
- your work exclusion;
- owned property exclusion;
- contractual liability exclusion; and a
- residential exclusion.
In addition to construction-specific policy exclusions, a contractor must be aware that almost all construction contracts require the contractor or subcontractor to obtain CGL coverage for additional insured parties that may not be directly associated with the construction contract. Generally, the contract should require a contractor or subcontractor to name the following additional insureds:
- the owner;
- any unaffiliated developer entities;
- construction lenders;
- owner's representatives;
- construction manager; and
- all high tier contractors.
Absent the insurance coverage as an additional insured, the owner or the contractor against whom a claim is asserted based on another's negligence or defective work must first obtain a judgment against the culpable entity before being able to make a claim to the culpable party's insurance carrier.
Another vital consideration for contractors and subcontractors is the manner in which insurance requirements flow down from general contractors to sub-contractors. The insurance requirements for all contractors working on a construction project, both general and sub-contractors, should specify:
- the same types and limits of coverage;
- the policies name as additional insureds;
- that all coverage be primary and non-contributory;
- that the carrier will provide ample notice of the intent to cancel the policy for nonpayment; and
- the flow down of insurance requirements for workers compensation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
