What Your Contracts Need

Disclaimer: This article is for informational purposes only and not for the purpose of providing legal advice.

A construction site is a complex, dynamic environment where contractors and subcontractors construct the vision of the developer, investors and owners, as well as the plans of architects, engineers and other professional consultants.

The construction site environment is not just physically or logistically complex, but also is complex by way of the contractual relationships that exist among the parties responsible for construction. Certainly, all parties participating in any development want to be properly and fully insured for all potential risks or exposures, but even when everyone is insured, accidents happen. It is important to know that any time there is an injury or accident during construction, be it a workers’ compensation, builders’ risk or injury to the general public, the insurance companies look to the signed contracts to see who will pay it.

Therefore, you must understand the general principles of contracts and insurance coverage for developers, owners, investors and general contractors, in addition to what to look for in specific policy lines like workers’ compensation, general liability and professional liability.

Remember that all owners want their contractors to be insured, and all contractors want work, so owners do have the upper hand. During construction, it’s great to see the construction proceed, and the owner can dream about the facility and its increased production capabilities, but in the event something goes wrong, who is there to protect the owner? The owner certainly has insurance, but the owner doesn’t want to pay for accidents and injuries to the contractor’s employees. What happens if a newly built wall collapses and there is a lot of property damage? What about injuries? If your contracts are not constructed properly, you will participate in the outcome financially.

A Strategic View

It will be helpful to review some key insurance concepts that should be incorporated, or accounted for, in all contracts among the parties to any construction project. We find that the standard set of the American Institute of Architects (AIA) or similar documents used to get projects off the ground, do not sufficiently address the insurance issues discussed here. ConsensusDocs does a better job, however, they still fall short in many areas.  Either set of construction documents you choose may not equally protect all parties involved in the construction project and generally require additional language to successfully protect those who are truly not responsible for injuries and accidents.

First, here are definitions for a few terms you may have heard and know are insurance related, but may not have a good understanding of.

  • ­Hold harmless clauses – These clauses are intended to protect owners from any and all losses, payments, claims, damages, liabilities, etc., including court costs and attorneys’ fees, arising out of a contractor’s performance of services under an agreement.
  • Additional insured – This important item gives one entity insurance status on another’s policy, so that the contractor’s insurance carrier will “stand in on behalf” of the owner in event of a loss or claim including insurance defense.
  • Waiver of subrogation – Owners should ensure that the construction contract includes a waiver of subrogation so the contractor’s insurer cannot sue the owner for losses that it has to pay out on behalf of the contractor.
  • Primary and non-contributory – The goal here is to prevent the owner’s insurance carrier(s) from participating in a claim. All insurance policies can “share” claims with other insurance policies. This clause makes the contractor’s insurance pay out its limits before seeking assistance other insurance policies.
  • Survivability – Key contractual protections should survive beyond the contract’s term so that the owner can seek protection from a contractor’s mistake years after the construction is complete.
  • Certificates of insurance – A certificate of insurance is simple proof that you have insurance and you have the insurance that the owner requires. Most construction companies are familiar with required certificates of insurance. This issue seems simple, but, in practice, we have seen it trip up parties at all levels, including insurance agents. The owner should request certificates of insurance from the contractors, making sure that such certificates note that the owner is an additional insured and held harmless, subrogation has been waived and that the insurance is primary. If any of these certificates don’t honestly reflect the insurance coverage in force, the party issuing the inaccurate certificate can be held responsible

As we know, injuries and accidents inevitably occur in life and business. The issue becomes who bears responsibility and carries any claims or losses forward in their business’ loss history, which impacts the availability, rates and coverage conditions of future insurance policies.

If you include some simple language into your contracts, you can increase the chances that your company – and its bottom line – will be better protected in the event of an accident or injury.

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