By C. Andrew Gibson
Carrying adequate insurance is a critical risk-management tool for developers, builders and designers. Yet parties too often focus on commencing work and overlook the important intricacies of coverage. Future coverage denials can result from deference to “standard” insurance forms, reliance on informal broker assurances and reluctance to wade through the swamp of policy “endorsements” that exclude particular claims, among other oversights. To mitigate the danger of lacking or losing coverage, keep in mind some of the more common insurance-coverage mistakes and best practices the next time you’re reviewing coverages or claims.
Failure to obtain adequate proof of insurance
Traditionally, parties rely on stock contract terms requiring each party to produce only a Certificate of Insurance, or ACCORD Certificate. These certificates can be largely worthless as evidence of coverage when a claim arises, however, because the certificates typically do not specify the endorsements excluding coverage (e.g., exclusions for multifamily projects, condominiums, mold and/or cross-suits by one insured against another).
Best practices: To confirm project-specific coverage, obtain copies of the actual policies by contractually requiring production, double-check all endorsements and include in the contract an insurance clause that specifies particular insurance endorsements that shall be included or excluded.
Failure to ensure insurance downstream
Too often, a key subcontractor performing a material or risky portion of work carries only its standard $1 million coverage. Coverage of $1 million may not be adequate for some jobs, especially if the policy is meant to cover all projects of the insured and not only the project. Moreover, some sub-trades, such as geotech consultants, frequently add a limitation of liability for substantially less than the policy limits, preventing access to the majority of the policy when it is needed.
Best practices: Specify requirements in prime contracts for the prime contractor or architect to ensure certain insurance levels for their sub-trades. Consider project-dedicated insurance policies for high-risk trades, and avoid or negotiate more reasonable limits of liability whenever possible. Consult an insurance broker from the outset to gain independent written confirmation of the appropriate types and limits of coverage for the project, including endorsements to obtain or avoid.
Failed insurance-tracking protocols
After expending considerable effort at the contracting stage to secure the right insurance, parties often neglect to track insurance during construction and for duration of the applicable statute of repose. Consequently, when a claim arises several years after project completion, evidence of policies and coverage is hard to locate and determine.
Best practices: Compile policy copies (or at least the certificates) in a separately labeled electronic file. Calendar regular intervals following project completion to reconfirm policy limits, and obtain information on any change in policy providers. In some cases, one can request and be automatically provided with Certificates of Insurance upon annual renewal, prompting review of the new policies and endorsements. If a contracting partner is out of business, determine whether there is need to take separate action to insure interests. Finally, use an insurance tracking log or similar one-page spreadsheet that lists each project participant and their policy numbers, limits and notable exclusions each year during construction and in each year following project completion.
Failure to timely report a claim
Most policies have prompt reporting requirements in the ISO forms, requiring reporting and cooperation within a specific or reasonable time period. Delays in recognizing and reporting claims can result in partial (pre-notice) or complete denial of defense and indemnity coverage.
Best practices: Review policies annually for applicable reporting requirements or ask a broker or attorneys to identify the specific timelines therein. Ensure project managers are aware of the deadlines and practice prompt reporting of claims.
Failures regarding additional insureds
Standard ISO endorsements are available to provide additional insured status to various classes of entities on construction projects, and it can be routine to do so. Endorsements can limit AI coverage for only ongoing operations, however, and may prohibit coverage altogether via a cross-suit exclusion for coverage where one insured sues another insured under the same policy.
Best practices: Seek both ongoing and completed operations AI coverage, remove any cross-suit exclusion from the policy and ask a broker or attorneys to review the AI endorsements for other potential risks.
Construction projects carry complex insurance coverage issues that require detailed and timely analysis to mitigate the risk of coverage oversights. Ensure periodic reviews of insurance policy language (including all endorsements), use tracking protocols and double-check policies on specific projects to ensure that needed coverage is not excluded. While the law of unintended consequences suggests that all parties to a project will likely face risks and claims, a little foresight and planning will help parties to get the most out of the insurance assets covering their projects.
C. Andrew Gibson is a partner and member of the construction and design practice group in the Portland, Oregon office of Stoel Rives.