Among the many concerns and considerations project owners/developers and general contractors must face when beginning a particular construction project is ensuring they are adequately insulated from liability when a project goes awry. Large and small construction projects alike possess the inherent risk of potential bodily injury and property damage. Properly planned and administered insurance programs are the way in which owners and general contractors can ensure that when someone is injured, or property is damaged (including the project itself), only the insurance companies pay.
Construction Insurance Policies
Construction projects can involve many players (e.g., owners, general contractors, subcontractors, architects, engineers and construction managers), and each of these players should have liability insurance. In construction, the most common insurance policy is a commercial general liability (CGL) policy. Under a standard CGL policy, insurers are, essentially, obligated to defend and indemnify the insured in connection with claims arising out of bodily injury or property damage, subject to certain construction-related, and other, policy exclusions.
Project professionals, such as architects, engineers and construction managers, carry professional liability insurance policies, which include some key distinctions from CGL policies, such as how and when such policies are triggered. Many times, however, in construction defect litigation, the focus tends to be on the pursuit of coverage under CGL policies, not professional liability policies. Other types of insurance in construction include excess liability and workers’ compensation (and employers liability) insurance, and first-party property insurance coverage such as builders risk insurance.
Ultimately, there is more than one way to ensure adequate liability insurance for a construction project, including 1) the traditional approach, which involves, among others things, the owner’s and the general contractor’s liability insurance, together with additional insured rights for the owner and the general contractor under subcontractors’ insurance policies; and 2) a project-specific, consolidated insurance program (commonly referred to as an OCIP or a CCIP, or a wrap-up or a wrap).
Traditionally, project owners seek to transfer the risk of liability for bodily injury and property damage to the general contractor through contractual indemnity and insurance requirement provisions. The general contractor, likewise, seeks to transfer the risk for such liability downstream to the project subcontractors by requiring the subcontractors to defend and indemnify the owner and the general contractor in connection with any bodily injury or property damage claims.
Subcontractors are also required to procure and maintain primary CGL insurance, and sometimes excess liability insurance, to cover the subcontractors’ duty to defend and indemnify the owner and the general contractor. Most importantly, the owner and the general contractor are required to be named as additional insureds under the subcontractors’ policies, giving both the owner and the general contractor direct rights against the insurers issuing such policies.
In theory, the traditional approach can ensure adequate protection for the owner and the general contractor; however, in practice, it can be extremely difficult to ensure subcontractors have the proper insurance in place for a given construction project. Depending on the size of a general contractor, proper oversight of subcontractors’ insurance may require a general contractor to obtain and review certificates of insurance from a large number of subcontractors on numerous projects over the course of many years, even after projects are completed.
Moreover, additional insureds are not typically given notice regarding the cancellation or exhaustion of insurance policies, and certificates of insurance do not guarantee that the required terms of insurance (e.g., additional insured status and coverage for claims arising after operations are completed) are actually included in the subcontractors’ policies.
A consolidated (wrap) insurance program, on the other hand, is, generally, a CGL policy specific to a single construction project, separate from an owner’s or a general contractor’s regular, primary CGL policy. Wraps typically include workers’ compensation insurance, and can include other types of coverage as well. The key difference between a wrap and the traditional approach is the inclusion of a majority of the parties involved in a construction project as insureds under a single insurance policy or program, including the owner, the general contractor and properly enrolled subcontractors.
Wraps are controlled (or sponsored) by a single party; either the owner or the general contractor, hence the acronyms OCIP (owner controlled insurance program) and CCIP (contractor controlled insurance program). Wraps can be wholly separate policies for each project intended to be covered by the sponsor, or the sponsor may have a general wrap policy to which specific projects are added by endorsement.
In addition to removing the burden of oversight of subcontractors’ insurance found in the traditional insurance context, wraps have other benefits. Importantly, wraps can reduce overall project cost. The cost of insurance can be reduced because of the savings that can result from pooling multiple parties. Also, if wrap premiums vary based on actual claims, sponsors are motivated to ensure safety to reduce claims; and safety can prevent project delays and litigation.
No matter which approach is chosen for a particular project, owners and general contractors should be mindful that the rules of construction and interpretation of the insurance policy itself do not differ between approaches. Insurers will deny coverage under a wrap just as they would under a traditional CGL policy if they do not believe a certain claim falls within the coverage afforded by such policies.
For example, perhaps the most contentious construction-related insurance coverage issue involves the contention that property damage to a project itself, caused by defective construction or faulty workmanship, is never covered under a CGL policy. Fortunately for construction-related CGL policyholders with policies subject to Connecticut law, the Supreme Court of Connecticut recently found in their favor on this issue. See Capstone Building Corp. v. American Motorists Insurance Co., 308 Conn. 760 (Conn. 2013).
In any event, owners and general contractors should work with their insurance brokers and attorneys regarding which approach best suits their needs, and to obtain the most favorable policy language and provisions possible.¢