"The Heiles argue that the policy exclusions relied on by State Auto do not apply here. Indeed, the policy is riddled with definitions, exclusions, exceptions, exceptions to the exclusions and exclusions to the exceptions." Heile v. State Auto. Mut. Ins. Co. (1999), 136 Ohio App.3d 351, 353.
In interpreting an insurance policy, the court in the case above came to a simple conclusion that we all know: insurance policies are confusing! While the policies themselves may be replete with exceptions, exclusions and exceptions to the exclusions, the fundamental concept behind insurance does not need to be so confusing. Insurance is simply a tool to manage and transfer risk and it is an important part of the risk management strategy for any construction project.
An Internet search will reveal many different definitions of the term “insurance.” Essentially, insurance is a contract by which one party (the insurer), in exchange for consideration (i.e., money or a premium) promises to make payments upon the destruction or injury of something in which the other party (the insured) has an interest. See Couch on Insurance (3rd ed. 2009), Section 1:6. In construction contracts, the owner, contractor and design professional each seek protection from loss or harm related to the construction project through insurance policies. Each party is responsible for providing different types of insurance that offer protection during construction and after construction is complete.
Types of Insurance Coverage
Liability insurance and property insurance are the two common types of insurance coverages available and carried by most owners, contractors and design professionals. Property insurance protects the owner or user of physical property and equipment from losses due to covered perils such as fire or explosion. Liability insurance, on the other hand, protects the insured from claims arising from damage or hazards caused by the insured. It is common on most construction projects for the owner to provide property insurance while the contractor and design professional will provide liability insurance. The construction contract should define the types of coverage required of each party, the limits of coverage and any project-specific requirements applicable to the insurance that each party is to provide. For this reason, owners should consult with their legal counsel and insurance carriers to determine the appropriate types of coverages that should be carried on a project as well as the appropriate policy limits for each type of insurance.
Types of Liability Insurance
Most prudent business owners carry insurance that protects the business against accidents and injuries that might happen both on and off the business premises and other exposures related to conducting business. Liability insurance provides protection to the insured for damages resulting from property damage and bodily injury incurred by a third party and includes medical expenses related to the occurrence. For construction owners, contractors and design professionals, liability insurance will typically come in the following forms: (1) commercial general liability insurance; (2) professional liability insurance; (3) workers’ compensation insurance; and (3) automobile liability insurance.
Commercial General Liability Insurance
Commercial general liability insurance, or CGL insurance, is provided by the contractor and covers the costs that the contractor is legally obligated to pay for causing bodily injury or property damage arising out of “occurrences” with the contractor’s operations.
"Occurrence" is defined under the policy of insurance (or the insurance contract) to include "accidents". The "accident" may or may not be the result of the contractor’s negligence. For example, if one of the contractor’s employees drops a hammer from a scaffold and hits a car parked below causing damage to the car, the property damage to the car would be covered by the contractor’s CGL policy. If a pedestrian tripped over a toolbox left out by one of the contractor’s employees and suffered an injury, the pedestrian’s bodily injury damages would generally be covered under the contractor’s CGL policy.
Note that judicial interpretation of the definitions of "occurrence" and "accident" varies, as you might expect, and hinges upon the facts of the situation and policy language. Much has been written on the subject, which again points out the importance of understanding the coverages required and those actually provided by the policies of insurance applicable to the construction project.
Professional Liability Insurance
Professional liability insurance provides coverage for those providing a professional service and, in the case of a construction project, protects design professional services against liability incurred as a result of their errors and omissions. Professional liability insurance should be required of all design professionals working on a project. This would include architects and engineers working on a project; however, it may also include some contractors. For example, if the contractor is engaged in design of any aspect of the project (e.g., HVAC, electrical or structural systems), requiring some professional liability insurance to cover errors and omissions related to the design services provided by the contractor may be prudent.
Professional liability insurance is a separate policy from CGL or other liability insurance products. The characteristics of a professional liability policy are much different from CGL insurance policies. For example, professional liability policies are written on a claims-made basis, meaning the claim must be asserted during the policy term or during a specific retroactive term specified in the policy. The policy must be in place at the time the claim is made for coverage to be available. This is as compared, on the other hand, to an occurrence-based policy, which provides coverage for an injury or loss that occurred during the policy period but can be asserted at any time (i.e., the policy does not need to be in effect for the coverage to be available under the policy of insurance).
Another difference in the coverage provided by professional liability insurance is that the defense costs of the insured are deducted from the policy limits. The result is that the amount available to use for claims is depleted by the insured’s legal costs related to the claim.
Workers’ Compensation Insurance
Workers’ compensation coverage provides protection for claims from injured workers on the project site and is mandated by statute in Ohio. A company may opt out of the state program in certain circumstances and be self-insured for workers’ compensation claims. Workers’ compensation insurance pays damages for medical and disability claims for employees who are injured or become ill on the job or for the employee’s work-related illness. Evidence of coverage, in either situation, is provided through a certificate issued by the Ohio Bureau of Workers’ Compensation. The owner should obtain the contractor’s current certificate and require updated certificates showing that coverage is in place during the course of the project.
In addition to workers’ compensation insurance, the construction contract may require employer’s liability coverage or, in states such as Ohio, stop gap employer’s liability coverage. Employer’s liability insurance or stop gap employer’s liability insurance protects the contractor in some circumstances when its employee’s injury or illness is not covered by workers’ compensation coverage and the employer/contractor may be liable to the employee or the employee’s spouse for damages related to the employee’s injuries or illness. For instance, employer’s liability is often the source of coverage for defense of intentional tort claims by injured workers. Employer’s liability coverage is typically excluded from commercial general liability coverage.
With the presidential campaign in full swing, the only thing that may rival the massive volume of campaign ads on television is the equally large number of automobile insurance commercials. Automobile insurance is a standard requirement for contractors to cover motor vehicles driven and operated by their employees during the course of the project. The typical requirement is stated as “owned, non-owned, and hired vehicles used in connection with the Work.” The intent is to cover vehicles used by the contractor and its employees that are both owned by the company and/or rented for use during the construction of the project. As with CGL coverages, coverage limits are typically described in terms of individual limits for bodily injury (including death) and property damage, limits per person and limits per occurrence.
Most construction contracts, either in the standard language or in the supplement, require that the contractor name the owner as an additional insured under the contractor’s CGL policy. The contractor may also require that its subcontractors name it as an additional insured under their CGL policies. What does being named as an additional insured mean? Being named as an additional insured gives the named party additional protection in the event that it is sued as a result of something done by the insured. For an owner, in particular, the intent is to obtain extended coverage in the event that there are damages for which insurance coverage may apply after construction ends (i.e., completed operations coverage).
Additional insured status must be provided by endorsement. Simply being named as an additional insured on a certificate of insurance provided by the contractor is probably not enough to create a binding change to the underlying insurance policy. Be sure to check with your insurance adviser to ensure that the appropriate endorsement is included in the contract insurance requirements and also that additional insured coverage can be provided.
Builder’s Risk Insurance
The most common form of property insurance carried on construction projects is builder’s risk insurance. Builder’s risk insurance covers damage to the project on account of covered perils such as fire, tornado, wind damage, etc… The key aspect of builder’s risk insurance is that it covers damage to the construction project itself (i.e., the work that is being put in place by the contractor). You may recall that that CGL policies cover property damage; however, it is only in certain narrowly defined circumstances for which that property damage will include the newly constructed work itself. Builder’s risk policies are typically written on an “all-risk” or equivalent policy form with policy limits in the amount of the initial contract sum plus the value of subsequent modifications and change orders.
The specific risks should be examined in whichever form of construction contract is used to be sure that (1) the responsible party is aware that it is to provide the insurance and (2) the appropriate coverages are obtained. “All-risk” implies that the insurance will protect the owner against loss or damage to the property from any cause; however, the exclusions included in the builder’s risk policy may limit the coverage available. Either the owner or contractor may purchase the builder’s risk insurance for the project. In any event, the party responsible for purchasing and maintaining the insurance, as well as the parties covered by the insurance, should understand the risks covered by the builder’s risk insurance policy.
Insurance is a crucial risk management tool. Careful thought must be given to the requirements to be stated in the contract and to the coverages provided by each party. During the planning stages of the construction project, it is important to identify the risks that are being covered through insurance, determine if coverage is available and define the appropriate limits. Insurance advisers for both the owner and the contractor should be involved in reviewing the requirements, coverages and limits proposed.