The American Institute of Architects (AIA) publishes perhaps the most widely used contract forms in the construction industry. In April 2017, AIA released an update to its main set of general conditions between owner and contractor. The previous update was in 2007. This article will address only the insurance terms in the 2017 conditions.
The new form may set the stage for the parties to discuss insurance before entering into any construction contract, and those discussions may help minimize disputes when claims arise. The new conditions may also leave several potentially important questions unanswered, in particular whether the construction and insurance industries will adopt these new terms in practice. Any company involved in construction as a project owner, architect, contractor or subcontractor should familiarize itself with the new AIA insurance terms and carefully consider the insurance coverage for any project it will undertake.
I. AIA A201-2017 Article 11
As in the 2007 version, the A201 contract form includes Article 11, titled “Insurance and Bonds.” There are several key points to Article 11, including:
1. The contractor must have commercial general liability (CGL) insurance and name the owner, architect, and architect’s consultants as additional insureds under the CGL policy. 2. The owner must have property insurance, such as builder’s risk, to cover the property of all the project participants while that property is on the construction site. 3. The parties and their insurers must waive subrogation rights against one another.
All of these points were included in the 2007 version of Article 11, but in somewhat greater detail. The 2017 version moves many of the details, along with some additional requirements, to a new Exhibit A that the parties are supposed to prepare and attach to the contract. By keeping the basics in Article 11, at least some insurance requirements will remain in every AIA contract even if the parties fail to include Exhibit A. Nevertheless, the 2017 revisions encourage the parties to discuss insurance requirements and agree upon the appropriate levels of coverage.
II. AIA A101–2017 Exhibit A
Exhibit A is a new addition to the AIA contract forms, and it deals exclusively with insurance. The parties are supposed to complete several blanks and check certain boxes on Exhibit A and then attach it as part of the contract. That process can facilitate discussion between the parties and make them think more carefully about insurance before they finalize the contract. Some items in Exhibit A may conflict with existing practice in the construction and insurance industries, and it remains to be seen how those conflicts will be addressed in the marketplace and potentially in the courts.
A. Owner’s Insurance
1. Article A.2.3 – Owner’s Required Insurance
Unless the parties provide in Article A.184.108.40.206 for the contractor to purchase property insurance, Article A.2.3 places that obligation on the owner, which must obtain builder’s risk or equivalent insurance to cover the total value of the entire project on a replacement cost basis, or at least the contract sum. The owner is responsible for payment of any deductible or self-insured retention. The owner’s builder’s risk policy must be kept in place until substantial completion of the work, and then the owner must maintain property insurance on the project for an additional period – usually one year – that Article 12.2 of the main contract form provides for correction of the work. The owner’s property policies must insure the owner, the contractor, and all subcontractors. Article A.2.1 requires the owner to provide evidence of the coverage (most likely in the form of a certificate of insurance) and, upon the contractor’s request, provide a copy of the property policy.
Article A.220.127.116.11 requires some particular coverage in the owner’s builder’s risk policy, but it is not clear that project owners currently can, want to or do purchase policies with these specific terms.
a) Article A.18.104.22.168 requires that the builder’s risk policy must not exclude the risks of fire, explosion, theft, vandalism, malicious mischief, collapse, earthquake, flood or windstorm. At a minimum, project owners will need to consider reviewing policies they already have or are contemplating because such policies actually may exclude some of these risks, in conflict with the AIA contract form.
b) Article A.22.214.171.124 states that the builder’s risk policy must provide coverage for ensuing loss or resulting damage from error, omission or deficiency in construction methods, designs, specifications, workmanship or materials. This could usher in a dramatic reallocation of the risk of such construction defects. Currently, if the owner’s property is damaged during the course of the project, the owner would likely make a liability claim against the CGL policies held by the contractor (and subcontractors) and possibly the architect. The CGL insurers often deny coverage because they contend that construction defects do not constitute an insured “occurrence” and, even if they are an occurrence, fall within an exclusion for “your work,” that is, the work of the contractor or design professional.
The new requirement of Article A.126.96.36.199 could avoid that problem by having the defective construction covered by the owner’s builder’s risk insurance. Note that this potential solution exists only while the required insurance is in place, which will generally be during construction plus one year after substantial completion. Thus, these new insurance requirements do not address coverage for latent defects that are discovered long after construction is complete. Even for the period of construction through substantial completion and the one year following, it remains to be seen whether project owners can or will purchase property insurance with the AIA-required terms.
2. Article A.2.4 – Parties Can Choose to Require Owner to Purchase Other Types of Insurance
In Article A.2.4, the parties are given a list of other types of insurance that may be available to the owner. If the parties want to require the owner to purchase any of these other coverages, they need only check the boxes next to the descriptions of the applicable policies. This section of the AIA form may help educate the parties about these other insurance products that may be appropriate for some projects.
B. Contractor’s Insurance
1. Article A.3.1 and A.3.2 – Contractor’s Required Insurance
Article A.3.2 lists several types of insurance that the contractor must purchase, and there are blanks for the parties to fill in the limits they agree to require for each policy. All of the required policies must be maintained until expiration of the period for correction of the work, which is usually one year after substantial completion. The types of policies required of every contractor are CGL, automobile liability, workers’ compensation, and employers’ liability. Depending on the nature of the work, the contractor must also purchase insurance for Jones Act and Longshore & Harbor Workers’ Compensation Act liabilities, professional liability, pollution liability, maritime liability and aircraft liability. That list in the AIA form may help the parties think about the nature of the work and whether these other types of insurance are appropriate in addition to CGL, auto, workers’ compensation and employers’ liability.
For all policies, Article A.3.1 requires the contractor to provide certificates of insurance to the owner prior to commencement of the work, upon any renewal or replacement of the policy, and upon the owner’s written request. The certificate must show that the owner is an additional insured on the contractor’s CGL and any excess or umbrella liability policies.
The additional insured requirements are actually greater than what must be shown on the certificate.
a) The contractor must make the owner an additional insured under the contractor’s CGL policy, both for ongoing and completed operations, in other words both during and after construction. This additional insured coverage under the contractor’s CGL policy must be primary and non-contributory to the owner’s general liability policies, meaning that the contractor’s insurer cannot seek any contribution from the owner’s insurer.
b) Article A.3.1 also provides that the contractor must make its CGL policy include the architect and architect’s consultants as additional insureds, but only for ongoing operations, that is during construction, and without necessarily being primary and non-contributory. Thus, the additional insured coverage that the contractor must provide for the architect and architect’s consultants can be more limited and can leave the architect and architect’s consultants needing to rely on their own insurance policies to some extent.
c) Article A.3.1 states that, “[t]o the extent commercially available, the additional insured coverage shall be no less than” that provided by three specific forms published by the Insurance Services Office (ISO). Interestingly, the listed ISO forms were published in 2004, and ISO updated each of those forms in 2013. Moreover, ISO publishes dozens of additional insured forms. Further, not all insurance companies use ISO forms. All of these factors may complicate the questions of whether the additional insured coverage obtained by the contractor is “no less than” what would be provided by the specified ISO forms and, if not, whether something more was “commercially available.” These questions could be implicated if the contractor’s insurance company denies a claim for additional insured coverage on behalf of the owner, architect, or architect’s consultant.
Article A.3.1 also requires the contractor to disclose any deductible or self-insured retention applicable to any of its required policies. Unlike Article A.2.3, which specifies that the owner must pay any deductible or self-insured retention on its property policies, Article A.3.1 does not address which party is to pay the deductible or self-insured retention on the contractor’s liability policies.
Article 3.2 goes on to detail more specific requirements for the contractor’s CGL coverage. Every contractor should carefully review its CGL policy, especially if it is not based on a current ISO form, to make sure it complies with the specifications before entering into a contract using the new AIA insurance exhibit.
2. Article A.3.3 – Parties Can Choose to Require Contractor to Purchase Other Types of Insurance
In Article A.3.3, the parties are given a list of other types of insurance that may be available to the contractor. If the parties want to require the contractor to purchase any of these other coverages, they need only check the boxes next to the descriptions of the applicable policies. Most notably, if the parties choose to require the contractor rather than the owner to purchase property insurance for the project, they would make that election by checking the box at Article A.188.8.131.52, and they can specify further details about the property insurance, including whether to make the contractor rather than the owner responsible for paying any deductible or self-insured retention. The parties also have the option to require the contractor to purchase other types of insurance such as railroad protective liability and asbestos abatement liability.
The new AIA contract terms for insurance may raise several important questions to be answered in the marketplace, if not in the courts, including:
1. Will insurers offer and will project owners purchase builder’s risk policies that cover the “ensuing loss or resulting damage” from construction defects? 2. Who must pay any deductible or self-insured retention under contractors’ and subcontractors’ liability policies, especially when those policies are supposed to provide “additional insured” coverage to the owner, architect and upstream contractors? 3. Will insurers continue to offer and will contractors purchase “additional insured” coverage that is “no less than” that provided by the 2004-era forms published by the ISO?
Even if the parties to a construction contract do not focus on these particular questions, the new AIA insurance terms may help encourage the parties to pay more attention to insurance issues during the contracting process. All participants can benefit from reviewing the AIA terms, reviewing their existing insurance programs for compliance with those terms, and negotiating with the other parties about the insurance requirements for each particular project.