Construction projects are inherently risky ventures, as accidents or other unexpected events at a worksite can result in significant losses or liabilities to an owner or contractor. Parties therefore routinely turn to construction insurance policies to protect themselves against such risks and to help ensure that the benefits of undertaking a project are not outweighed by its potential costs. While it is well-known that insurance is available to parties on construction projects, it may be less clear what specific risks are covered by each of the various types of available policies, and, more importantly, what specific risks are not covered by such policies. Construction insurance is not "one size fits all", and being able to distinguish the coverage provided by the different types of construction-related policies will allow a party to build a framework of insurance for a particular project that is specifically suited to its needs.
Although there are many different kinds of insurance policies that provide coverage relevant to construction projects, five key types of construction-related insurance are (1) Commercial General Liability Insurance, (2) Property Insurance, (3) Builders' Risk Insurance, (4) Professional Liability Insurance, and (5) Wrap-Up Insurance. The goal of insuring any project is to employ these various policies in a way that creates a seamless net of complementary coverage for all chosen risks without overlap. Each of these types of policies will be reviewed in turn.
1. COMMERCIAL GENERAL LIABILITY INSURANCE
Commercial General Liability (CGL) insurance is designed to respond to liability resulting from damage caused by the insured to third parties. As a liability policy, it does not cover damage to the insured's own person or property, but instead covers claims made against the insured by other parties who have suffered loss or damage as a result of some event for which the insured is responsible. In order for CGL coverage to apply, this liability event must be caused by an "occurrence", which is generally defined in the policy simply to mean an "accident". The term "accident" has been held to refer to any unlooked-for mishap or occurrence which is not expected or designed, including liability events arising out of the insured's negligence.
CGL insurance generally covers the insured's legal obligation to pay compensatory damages to a third party for loss or damage falling within the following defined categories: (1) Property Damage (defined as physical injury to, or the loss of use of, tangible property); (2) Bodily Injury (defined as physical injury or distress to a person caused by an external force, including associated medical expenses); or (3) Personal Injury (which is distinguishable from Bodily Injury in that it is limited to an enumerated list of offences, such as malicious prosecution, libel, slander and false imprisonment, which do not involve direct physical harm but instead involve intangible injuries). Some CGL policies also cover Tenants' Legal Liability for limited types of property damage (e.g. fire) to premises rented to or occupied by the insured.
There are numerous exclusions in a standard CGL insurance policy that significantly narrow the scope of an insured's coverage under the policy. Common CGL exclusions include those that prevent coverage for damage caused by the insured's intentional acts, for employment-related injuries otherwise covered by Workers' Compensation, for liability arising out of the use or ownership of a motor vehicle, and for pollution liability, among others. However, three of the most critical exclusions in a Commercial General Liability Policy are those that preclude recovery from the insurer for property damage to the insured's own products, property and work.
The "your product" exclusion in a CGL policy excludes coverage for property damage to the insured's own products (i.e. anything that is not real property in which the insured generally trades or deals) that arises out of some fault or defect in the products themselves as opposed to some external force. The "own property" exclusion bars coverage for property damage (1) to all property owned by the insured, (2) to real property on which the insured is performing operations if the damage arises out of those operations, and (3) to that part of any property that must be repaired or replaced during the course of performance of the insured's work because the insured's work is incorrectly performed on it. The "your work" exclusion bars coverage for property damage to the insured's own work where the damage arises out of the work itself (i.e. not from some external force) and where the work has been completed. In the case of all three of the above exclusions, if the damage to the insured's product, property or work leads to resultant damage to other property, this resultant damage will be covered by the CGL policy; however, particularly in the case of the "your work" exclusion, if the scope of a contractor's work covers the entirety of a project or structure, damage to any or all of that structure resulting from one defective part of it will likely not be considered resultant damage and will still be caught by the exclusion.
The rationale behind all three of these key exclusions is similar, and it helps explain the main purpose behind a Commercial General Liability policy. CGL insurance is not meant as a guarantee of the merchantability of the insured's products and is not meant to render the insurer the guarantor of the insured's deficient work or the guardian of its property; rather, the policy is strictly meant to cover liability for physical damage to other persons or property, apart from the work itself, that is caused by the insured or its work.
2. PROPERTY INSURANCE
While CGL coverage is triggered by liability to pay compensatory damages to third parties, property insurance coverage is triggered by physical loss or damage to the insured's own property resulting from an insured peril. Commercial property policies are intended to protect the insured against damage to its own property arising from a variety of risks, including intentional damage to the property by third parties but excluding damage caused by the insured itself. In order for a particular loss to be covered under a property policy, the insured property must be physically altered and damaged by a peril falling within the scope of the policy, and the loss or damage must be fortuitous -- that is, accidental, out of the ordinary or unexpected. Unlike CGL insurance, which deems the loss of use of tangible property to be "property damage", property insurance only responds to direct physical loss or damage to the insured property, such that, absent accompanying physical injury or destruction, the mere loss of use of the property (as well as any other intangible, indirect or strictly economic losses) will generally not trigger coverage under a property policy.
Property insurance comes in many different forms: the insured can select a policy that protects against certain types of perils only (e.g. fire or hail), or it can obtain "all-risks" coverage that protects its property against all types of physical loss or injury arising from any external cause unless specifically excluded. In such a policy, if the insured's loss is an accident caused by the intervention of negligence or by adverse or unusual conditions (as opposed to normal wear and tear), it will be covered, subject to policy exclusions. However, these exclusions can be far-reaching and can severely restrict the scope of an "all-risks" policy.
Property insurance exclusions differ between policies but can exclude coverage for damage to the insured's property arising from a wide range of sources (e.g. pollution, arson, mould, vandalism, temperature changes, settlement and earth movement, among others). In addition to these types of exclusions which limit the types of external damage to property to which the policy will respond, property policies also include a number of exclusions that preclude coverage for internal defects in the insured property; these latter exclusions are intended to prevent the policy from becoming a warranty that the products purchased by the insured are properly designed and manufactured. Two examples of "internal defect" exclusions commonly found in property policies are the exclusions for faulty materials, workmanship or design and for latent defect or inherent vice.
The faulty materials, workmanship or design exclusion states that property polices do not insure the cost of making good faults or defects in the internal design or composition of the insured's property; this exclusion will apply if the risk that caused the loss was in any way foreseeable and thus preventable if the property had been properly designed or built. Resultant damage done to other insured property arising out of such faulty materials, workmanship or design is covered under a property policy, but if one component of a larger integrated structure is defective and causes damage to the whole structure, this loss will likely not be considered resultant damage and the exclusion will bar coverage. Property insurance policies also exclude coverage for loss or damage caused by latent defect and/or inherent vice, although resultant damage to other property arising out of these defects is again covered. A latent defect is a weakness or problem with the property which is not readily observable and not discoverable on an examination by a reasonably skilled person; an inherent vice is an intrinsic condition in the insured property which causes it to be damaged when exposed to normal conditions. These two concepts are interrelated and serve to exclude property coverage for losses resulting from the internal decomposition of the property or from some quality within the property itself which brings about its own injury or destruction.
3. BUILDERS' RISK INSURANCE
Builders' risk insurance is a specialized type of property insurance that is employed by contractors in the construction industry to protect against liability for direct physical loss or damage to a structure or project which they have contracted to build. Such policies are often purchased for a specified project and are necessitated by the fact that CGL policies generally exclude from coverage damage to the insured's own work through the "your work" exclusion. A builders' risk policy is often referred to as "course of construction" insurance because it usually only remains in effect while a project or structure is in the process of being built and expires when construction is completed and the project is first used or occupied. The policy generally covers all property on a project in the course of construction, installation or repair, as well as temporary property located on-site such as scaffolding or forms.
In order for there to be coverage under a builders' risk policy, an insured must incur liability arising out of its work on a project, and, as with the more general types of property policies discussed above, the liability must relate to direct, physical and fortuitous loss or damage to the insured property. Thus accidents that occur on an insured's project site and that damage the project are covered, whereas wilful and knowing violations of contract specifications by a contractor are not. The concept of "direct physical loss" has been expanded to cases where there is no tangible structural damage to a project but where, for example, the property is flooded or filled with mud such that remedial work is required to restore its condition; however, economic losses arising out of delays in construction or losses of merchantability still fall outside the scope of coverage. Builders' risk coverage usually also extends to losses relating to the insured's equipment on site.
As one might expect, the exclusions in a builders' risk policy substantially overlap with the exclusions found in a property policy set out above. Common exclusions include those for faulty materials, workmanship or design, latent defect and/or inherent vice, wear and tear or gradual deterioration and extreme weather events or temperature changes. Certain course of construction policies may also exclude coverage for losses arising due to the collapse of a building, due to excavation or shoring activities or due to theft at the project site. As previously discussed, while there is an exception to the faulty materials, workmanship or design exclusion for resultant damage to other insured property, this exception has been interpreted restrictively and has been held not to apply to the other portions of an insured structure that are damaged by a defective component of it. This narrow construction of the exception gives the exclusion far-reaching effect in the construction context, as it will encompass all damage to an insured project or structure that can be tied to faulty design or workmanship, even if the fault or defect in question is limited to a very small portion of the overall structure. The law in Canada in this regard is much stricter than that of some other common law jurisdictions.
4. PROFESSIONAL LIABILITY INSURANCE
As its name suggests, professional liability insurance protects against liability that results from an error, act or omission in the insured's performance of professional services which leads to a loss. It is commonly known as Errors & Omissions (E&O) insurance and tends to be highly specialized and tailored to the particular profession that is the focus of the policy. Professional liability policies are separate and distinct from more general liability (CGL) policies because the risk insured under an E&O policy -- the liability that a professional faces for filing to exercise the required degree of care and skill in the provision of services -- is very different from the standard commercial risks covered by CGL insurance. For that reason, liability arising out of the performance of professional services is usually expressly excluded from CGL coverage.
In the construction context, professional liability insurance is often obtained by architects or engineers acting as consultants on a project to shield them from liability for any negligent acts or omissions arising out of the work performed in their professional capacity. However, not every act performed or error made by an architect, engineer or other professional will be captured by an E&O policy: in order to attract coverage, the error in question must constitute the performance of a professional service. The test for whether a particular activity will be considered a "professional service" requires an analysis of whether the service provided constitutes both a mental or intellectual exercise within a recognized discipline and an application of specialized skill, knowledge and training to the situation in question. If a professional performs a service that can be performed by a non-professional, that service is not a "professional service" for the purposes of E&O coverage. This analysis is a factual one based on the circumstances of each case, but in all cases the activity alleged to be a professional service must be performed by a professional person in his or her professional capacity.
The exclusions in a professional liability policy can be divided into three categories: (1) exclusions for liabilities relating to activities separately insured (e.g. an exclusion for loss or damage arising out of the insured's non-professional activities); (2) exclusions for liabilities for moral risks (e.g. an exclusion for dishonest, fraudulent, criminal or malicious acts or for libel, slander, assault or battery); and (3) exclusions for liabilities for extraordinary risks (e.g. an exclusion for liabilities arising out of an express contractual warranty or guarantee provided by the insured). This last exclusion is generally applied broadly and without regard to the specific causes of a breach of warranty or guarantee by the insured; thus, for example, where the insured warrants that a project will be completed for a stipulated cost and it is not, the exclusion would apply to bar coverage for any such liability regardless of the reasons for the overrun.
5. WRAP-UP LIABILITY INSURANCE
As an alternative to having each party on a construction project obtain separate liability insurance policies or having the contractor add the owner and consultants as additional insureds to its CGL policy, the owner or the contractor can take out a single project-specific policy that covers the liability of all the parties directly involved in the construction project. This global liability policy is known as a "wrap-up" policy and generally provides coverage for the owner, contractor and all subcontractors and consultants for Commercial General Liability, Professional Liability and Employers' Liability, among other types of liability risks. Wrap-up policies are typically placed for a term encompassing the period of construction of a project plus an additional number of years after completion to deal with any issues arising during the warranty period.
Standard CGL insurance policies state that they will have no application where a wrap-up policy provides overlapping coverage, so one trade-off of employing a wrap-up program is that each party's individual liability policy will no longer be available to respond to project claims that are subject to the global policy. However, since all parties are covered by a single policy, the use of wrap-up insurance tends to result in contractors having access to higher policy limits at a lower cost, and the fact that the policy extends for an additional length of time after project completion means that the owner is ensured some security and stability in coverage.
One notable downside to wrap-up insurance is that it usually excludes coverage for damage to the project itself during construction. Although the parties can obtain separate property policies to protect against this risk, the exclusions in such policies (such as the faulty materials, workmanship or design exclusion) can result in a gap in the overall coverage for a project. While this same gap is present if the parties to a project obtain individual liability policies to supplement their property policies (since CGL policies exclude coverage for damage to the insured's own work or property), the gap is narrower with non-wrapup liability policies because these policies cover liability for resultant damage done by an insured's work to other property, which includes damage to the work of other contractors on site. Such resultant damage would not be covered by a wrap-up policy. At times, this difference in coverage can be substantial.
This is only a basic overview of the scope and exclusions of common types of insurance policies employed in construction projects. Every policy is different, and each policy has to be reviewed in light of the particular project for which it is being used. If parties know what types of policies they need to protect themselves for a specific job, and if they make themselves aware of the exact terms of their policies before beginning work on a project, this will go a long way in avoiding insurance-related claims and disputes as the project progresses. Risk on a project may be unavoidable, but with the right insurance coverage it can be successfully managed.