Insuring Construction Risks Through Commercial General Liability Policies

By: Ellen M. Chapelle, Gould & Ratner LLP

In most construction projects, the general contractor traditionally takes control of the site and is responsible for its means and methods of construction, and, therefore, should bear primary liability for damage arising from construction operations.

MOST CONSTRUCTION CONTRACTS REQUIRE THE GENERAL contractor to purchase commercial general liability (CGL) coverage to assure that the contractor has a means to pay for liability arising out of its construction operations. Owners and subcontractors, however, may be liable for their own negligence, as well as jointly and severally liable for some or all of the damages resulting from the general contractor’s construction operations. CGL insurance provides a way to manage the risks for all participants in a project. Insurance is not one-size-fits-all, and the variations in policy terms may leave gaps in coverage. This article describes the risks covered by the CGL policy and how to specify in a construction contract the insurance to be obtained so that coverage for construction risks is maximized.

Risks Covered by Standard CGL Policies

Understanding CGL coverage is easy, except when it is not. Coverage A, “Bodily Injury or Property Damage,” under the standard Insurance Services Office, Inc. (ISO) CGL policy can easily be understood to cover the insured’s liability to third parties for bodily injury and property damage arising out of an occurrence within the policy period and up to coverage limits. It is not as easy to define the exceptions to that coverage. For example, the CGL policy does not cover an insured’s liability for bodily injury to the insured’s own employees (which is insured through workers’ compensation insurance), but in some states the CGL policy covers the insured’s indemnification obligation for liability arising out of injury to its own employees. It usually covers the insured’s liability for bodily injury to the employees of other contractors, subcontractors, and third parties, but state court interpretations of the CGL policy may preclude that coverage. The CGL policy also covers damage to property of third parties, but has exclusions limiting coverage for damage to the contractor’s own work (although the exceptions to that rule are the subject of significant litigation).

Risks Excluded from Standard CGL Policies

While a CGL policy generally indemnifies the insured for its liability to third parties for bodily injury and property damage, various exclusions limit that coverage. The standard ISO CGL form CG 00 01 includes standard exclusions, including the following described below.

Contractual Liability

Many older forms of insurance specifications in construction contracts require contractual liability coverage to ensure the contractor’s financial ability to pay the contractor’s indemnity obligations undertaken in the construction contract. Although contractual liability is a standard exclusion, its exceptions swallow the rule, making coverage for indemnification agreements a standard part of ISO form CGL policies. The contractual liability exclusion does not apply to liability assumed by the insured in an insured contract, usually defined to include the agreement to assume liability that the insured would have in the absence of the indemnity agreement. In other words, if the indemnity is limited to the vicarious liability imposed on the indemnitee as a result of the contractor’s actions (which is exactly how the standard indemnity in AIA^® Document A201™—2017 (Construction Contract General Conditions, Sample Form), Section 3.18 is written), then the CGL policy will cover the contractor’s indemnity obligation. For this reason, it is not necessary to specify that the general liability policy include coverage for contractual liability. It is better practice to specify that the insured must purchase a standard ISO form CG 00 01 policy.

To read the full practice note in Lexis Practice Advisor, follow this link.

Ellen M. Chapelle is a partner and co-chair of the Construction Practice at the Chicago-based law firm of Gould & Ratner LLP. She has a wide range of experience that spans both the litigation and corporate sides of representing construction clients. In the corporate arena, Ellen negotiates and drafts contracts, including construction contracts. Ellen advises clients concerning risk avoidance in the contracting process, including the importance of identifying gaps in insurance specifications and indemnity provisions. With respect to insurance coverage matters, Ellen has represented clients in disputes with their insurers for coverage under property, general liability, and builders risk policies. In addition, she has litigated cases seeking insurance coverage for property damaged by construction defects

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