In negotiating contracts based on the AIA’s widely-used construction industry forms, construction owners and contractors will soon start seeing the AIA’s new seven-page Insurance “Exhibit A,” which requires a more comprehensive and detailed discussion of insurance issues. Given the form’s many blanks, its detailed provisions concerning coverages and exclusions, and checklists to be completed, the new Exhibit A feels like a lot more paperwork. But while it might initially appear daunting, the inclusion of the exhibit is a good change that in the long run should result in clearer insurance requirements, coverage that is better tailored to each particular project, and the avoidance of duplication and unnecessary expense. When disaster strikes, no owner or contractor wants a two-front war—arguing simultaneously with the other parties on the project and with the insurance carriers. If properly used, the new Exhibit A will go a long way to minimizing that risk.
In April 2017, the AIA released new versions of its widely-used construction agreements. These new versions substantially change the insurance provisions contained in prior AIA forms by incorporating a new Exhibit A. Unlike the generalized discussion of insurance issues contained in older AIA forms, Exhibit A defines with greater precision what is meant to be covered and not covered by the required kinds of property and liability insurance, while also giving the contracting parties a template or checklist of insurance coverage options that might be relevant to their project. This has proven necessary because over the past two decades there has been a proliferation of new insurance forms and endorsements. Thus, the addition of the Exhibit A to the new AIA forms provides a template for owners and contractors to meaningfully discuss their insurance needs and responsibilities prior to entering an agreement and commencing work.
Under the 2007 versions of the owner-contractor agreements, the parties were required only to identify the types of insurance and bonds that the contractor was required to purchase and the dollar limits for insurance liability and bonds. The 2007 version of the A201 general conditions provided some additional details, but it still spoke in general terms. While the parties were free to modify these forms to provide greater specificity, they often chose not to, believing the default language to be sufficient; or if they did, they had to take care to ensure that the coverage specified was something that was actually available in the insurance marketplace.
The generality of these past insurance requirements was based on an assumption of relative uniformity among the kinds of insurance coverage available. Over the past two decades, however, insurance products, particularly those available to owners and contractors, have grown more complex and diverse. At one time, for example, a reference to a commercial general liability or CGL policy described a relatively well-settled scope of coverage. But with increasing frequency, insurers are now issuing such policies with unpredictable modifications and exclusions taken from the ever-increasing inventory of ISO-endorsed forms and endorsements. To fill the coverage gaps created as exclusions expand and proliferate, new products have become available. For instance, a market for separate pollution liability policies has arisen in the wake of ever-expanding pollution exclusions. Currently, ISO offers more than 100 exclusionary endorsements, many affecting coverage in ways that are material to the construction industry. Likewise, property insurance, although never as standardized as CGL coverage, has also become more complex with a wider variety of options, exclusions, and endorsements.
On the owner’s side, the new Exhibit A requires the purchase of property insurance covering the contractor’s work, unless the parties select the option of having the contractor provide this insurance. Exhibit A requires that the property policy be written on a builder’s risk “all risks” form and that it covers the total value of the project on a replacement-cost basis. It specifies that the property insurance must include the contractor and its subs as additional insureds. Importantly, Exhibit A precludes the exclusion of certain risks (such as fire, theft, and vandalism) and requires coverage for ensuing losses and resulting damage from errors, omissions, or deficiencies in construction methods, design, workmanship, or materials. It specifies that the policy must cover damage to falsework and other temporary structures, and if the project involves the remodeling of or an addition to an existing structure, the coverage must extend to the existing structure as well. Exhibit A also prompts the parties to agree on dollar sub-limits for specific causes of loss and additional coverages.
Exhibit A also gives the parties a checklist of other extended and optional coverages that the owner should consider. These include several kinds of insurance covering loss of use, business interruption, and delays in completion—losses for which the owner bears the risk of loss under the AIA’s general conditions—as well as insurance for cybersecurity and privacy breaches.
On the contractor’s side, Exhibit A requires that the parties agree to the per occurrence and aggregate policy limits of the contractor’s CGL policy, and it also enumerates the kinds of claims that the CGL policy must cover. More importantly, it also lists the kinds of exclusions or restrictions that the policy must not contain. Exhibit A also requires the contractor to purchase automobile liability insurance and employer’s liability policies at agreed amounts; workers’ compensation insurance at statutory limits; and if the work requires such activities, insurance coverage for work on navigable waterways and maritime risks, performance of professional services, transportation or release of pollutants, and use of manned or unmanned aircraft. Exhibit A also contains an optional checklist addressing insurance for work near railroad property, asbestos abatement liability, and other kinds of risks.
Exhibit A allows the contractor to secure the required limits of liability through a combination of primary and excess insurance, provided that the excess policies do not require the exhaustion of the underlying limits through actual payment by the underlying insurers. Exhibit A also requires the contractor to disclose to the owner any deductible or self-insured retentions applicable to any of the required insurance policies.
As the new Exhibit A defines the kinds of insurance required in such detail, the insurance provisions in Article 11 of the AIA’s new A201 general conditions form are relieved of this task, and Article 11 has been simplified accordingly. There are, however, some new and noteworthy additions. For example, Article 11 now sets forth a process for the adjustment and settlement of insured losses. It also explains the consequences for a contractor’s failure to give notice of the cancellation of required liability insurance or the owner’s failure to purchase the required property insurance.
The AIA’s new Exhibit A and its other revised 2017 forms reflect significant changes. It requires owners and contractors to have more detailed and informed discussions about a project’s insurance needs at the outset of the project.