Posted In: Insurance Recovery
By Stacy RC Berliner on June 11, 2019
When drafting contracts, parties usually spend the majority of the time negotiating the warranty, project/product specification, and price provisions. Little time is spent anticipating issues surrounding insurance coverage for loss incurred or damage caused by faulty work: Who is going to pay for the damage; did someone get insurance for this; what does it cover; does it cover me? Often, the first-time parties read the insurance procurement provisions when it’s too late to protect their interests. This article will discuss the five most important provisions in the insurance procurement process.
The purpose of an insurance procurement provision is to transfer risk from the parties to an insurance company. Typically, one party agrees to procure the benefits of insurance for both parties regardless of the cause of the loss. Insurance requirements in a contract ensure that, in the event of a loss arising out of the work performed on your behalf, you will have assets available for that loss. If you are the general contractor, or you are hiring subcontractors or vendors, there are several things you need to know.
1. Specify the Right Policies and Limits to be Procured
Depending upon the project, contract documents may require the subcontractor to obtain specific insurance policies that would cover loss caused by the subcontractor including, commercial general liability (CGL), professional liability (if professional knowledge is involved), automobile liability, workers’ compensation and employers’ liability policies.
You should list the required policies as specifically as possible. To the extent you use any ambiguous terms (such as “liability policies”), you may obtain less coverage than you intended or needed. To avoid ambiguity, use titles or exact types of coverage forms to be maintained. For example, many policies require standardized policy forms issued by the Insurance Services Office (ISO) wherever possible.
Determining the amount of coverage to procure is difficult, as it is dependent upon the project and the subcontractors, and the work being performed. In order to determine the appropriate limits, you should always evaluate the potential of loss, the potential benefit to the organization for the service provided and, finally, the subcontractor’s financial capacity to purchase coverage at reasonable rates. Please note that the amount of the contract work should not govern the amounts of limits required; instead, if the work involves significant or dangerous factors (such as water, scaffolding, numerous employees, electricity, dangerous or flammable substances, etc.), the limits should reflect those factors due to the potential losses that could result.
2. Get Endorsed as an Additional Insured
Typically, the subcontractor adds the general contractor to its policy as an additional insured. This gives both parties direct access to the insurance policy, often saving the additional insured the costs associated with deductibles (under their own policy) and potential premium increases; and it greatly increases your chances of recovery. Standard contract conditions should specify that you and your officials, employees, and volunteers be added by endorsement as additional insureds to all liability policies, except workers’ compensation or professional liability (errors & omissions) policies - where it is not possible.
3. Make Sure the Other’s Policy is Primary and Non-Contributory
To avoid finger-pointing during the pendency of a claim, the contract should require that your subcontractor’s policy be primary and non-contributory. In other words, the other party’s policy will be primary and will not seek contribution from your carrier or your self-insurance program. To fully transfer the risk, you do not want your insurance program called upon to contribute to a loss that should otherwise be paid in full by the other party’s insurer.
4. Specify Maximum Deductibles and Self-Insured Retentions
The contract should have maximum deductibles or self-insured retentions, and should indicate which party will pay the deductibles or self-insured retentions. The contract should indicate that the party procuring the insurance will pay any deductible or self-insured retention if it is solvent, or that you may seek reimbursement directly from the other party in accordance with the indemnity or hold-harmless clause of the contract. If the other party is financially unable to reimburse you, or if the indemnification clause in the contract is set aside by a court, you want to have a provision in the contract and the policy allowing you the ability to pay the self-insured retention in order to obtain coverage.
The most important provisions are those which allow you to verify that the insurance procured is in accordance with the contract. You should require that the contractors and subcontractors provide you with endorsements and insurance policies throughout the life of the contract that name you and your officials, employees, and volunteers as additional insureds. In most states, a certificate of insurance listing you as a named insured is insufficient to establish additional insured status.
The last, and most important, tip is not a provision in your insurance procurement clause – it is an action. Verify, verify, verify. You may have the best insurance procurement clause in the world, but unless the policy actually provides that coverage, you don’t have that coverage. Verifying the coverage before the work begins and holding the other party accountable for any failure to meet the insurance requirements could make the difference between you paying for the loss yourself, or being covered.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2019 Brouse McDowell. All rights reserved.