Insuring Construction Risks Through Commercial General Liability Policies
 

Insuring Construction Risks Through Commercial General Liability Policies

Posted on 06-22-2018

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.

If the indemnity in the construction contract extends beyond vicarious liability arising from a contractor’s negligence, then the CGL policy will not cover all of the liability assumed through the indemnity clause. If, for example, the indemnity requires the contractor to indemnify the owner for liability resulting from the owner’s negligence (which requirement would render the indemnity clause unenforceable under the anti-indemnity statutes in many states), the CGL policy would not extend coverage to the contractor for that liability. A better way to provide coverage for the owner’s own negligence is through the additional insured endorsements, as discussed below in Coverage for Owners under Contractor’s CGL Policy.

Other liability often assumed in the indemnity clause includes liability for infringement of intellectual property rights, fines and penalties for violations of law, and mechanics liens. CGL carriers generally do not cover these risks.

It is important to note that the definition of an insured contract does not cover indemnification of a railroad for bodily injury or property damage arising out of construction or demolition activities within 50 feet of any railroad property. That is why some insurance requirements will state that an exclusion for “50’ railroad” will not be allowed. The carve-out from the definition of insured contract for indemnification of a railroad may be removed by endorsement. If construction work is within 50 feet of a railroad, consider not only requiring the exclusion to be removed, but also whether Railroad Protective Liability Insurance is advisable or required by the railroad as a condition for access.

Employer’s Liability

The standard CGL policy excludes the insured’s liability for injury to its employees as well as damages payable to an employee’s family members due to injury to an employee. Obviously, those risks are generally covered under a workers’ compensation or employer’s liability policy. State workers’ compensation laws often limit an employer’s liability for injuries to its employees to statutorily mandated coverage limits

However, it is standard for a construction contractor to indemnify the owner of a project for liability imposed on the owner because of injuries to the contractor’s employees. In other words, by agreeing to indemnify the owner, the contractor waives the statutory workers’ compensation cap on its liability for injuries to its employees. However, state court interpretation of an insured contract in CGL policies along with state workers’ compensation, contribution, and antiindemnity statutes may limit the CGL policy’s coverage of this risk in some jurisdictions, leaving the contractor potentially exposed to uncovered liability. Additionally, the definition of an employee may be interpreted expansively to include employees of downstream subcontractors, extending the impact of the exclusion beyond injuries to the contractor’s own employees. In states where there is doubt about whether the CGL policy will cover liability for injuries to the contractor’s employees or the employees of downstream parties, it is best to specify that the coverage will be obtained by the contractor and to consult with a qualified broker about products available in the jurisdiction to adequately address the risk.

Pollution

An exclusion for pollution is standard in CGL policies. Determining what is a pollutant and the application of the exclusion is fact-intensive and varies from jurisdiction to jurisdiction. The pollution exclusion may be the most litigated portion of the CGL policy. Coverage for liability arising out of many common construction activities may be barred by this exclusion, depending on the jurisdiction (e.g., some jurisdictions hold that damages from Chinese drywall are covered, while others hold that they are not). It is particularly important to evaluate coverage for these risks if the contractor will bring pollutants to the site (e.g., chemicals) and if the contractor risks disturbing pollutants already on the site (e.g., asbestos-containing materials and lead-based paint are often implicated in remodeling projects).

It should be noted that contractor’s pollution liability policies are becoming more commercially available to cover at least some of the risk, but even these policies may need to be modified by endorsement to address specific risks (e.g., asbestos, lead-based paint, mold, fungi, and bacteria such as legionella).

Owner-purchased policies may also be available to address the pollution risks for all participants in the construction project. Each policy should be reviewed carefully to determine the scope of its coverage.

Automobiles, Aircraft, and Watercraf

CGL policies generally do not extend coverage to damages from automobiles, aircraft, or watercraft. Thus, loading and unloading a truck may fall within the auto coverage rather than the CGL policy. Moreover, the CGL policy will not cover the use of a lift on a bucket truck or a barge brought to the site to assist in operations. Those risks are better addressed through auto and marine insurance.

Mobile Equipment

Generally, the use of mobile equipment, such as a forklift or bulldozer, on the construction site is covered by the CGL policy, but its transportation to the site is not. That transportation risk should be covered by an auto policy.

Contractor’s Work or Product Exclusions

The extent to which a CGL policy will cover damage to the contractor’s own work is another of the most litigated issues relating to CGL coverage for construction activities. CGL carriers generally will not modify or remove these exclusions by endorsement. However, in some cases, the exclusions may be removed from the policy when an owner purchases an ownercontrolled insurance program.

Electronic Data

The loss of use or corruption of electronic data is excluded from CGL coverage. Projects using building information modeling may have special risks that will not be covered by a CGL policy

Risks That Can Be Excluded by Endorsement

Caution may be required to assure that particular risks are not excluded from the CGL policy by endorsement, particularly by non-admitted or surplus lines insurers. Some exclusions that raise concerns and may inappropriately limit coverage include those discussed below

Insured vs. Insured

The standard CGL policy allows for suits by one insured against another (e.g., an additional insured owner against a named insured contractor). Some insurers may modify that provision by endorsement. It is best practice to specifically disallow any such endorsement.

Prior Work

Although a standard CGL policy covers personal injury and property damage that occur during the policy period, some insurers modify coverage to provide that there is no coverage for work that was done prior to the current policy period. The construction contract should not allow this endorsement as it completely undermines the completed operations coverage.

Particular Types of Work Excluded

Some insurers in certain markets eliminate coverage for particular types of work by adding an endorsement to their policies. Any endorsement that excludes coverage for residential or multi-family projects should not be allowed if the work involved falls into those categories. Likewise, there should be no exclusion allowed for roofing work or an exterior insulation and finish system if the work involved includes either of these risks.

Earth Subsidence or Movement

Some insurers endorse the CGL policy to eliminate coverage for property damage caused by earth subsidence or movement. When a contractor is performing work that might be implicated, especially when performing foundation work, it is particularly important to specify that this exclusion will not be allowed.

Explosion, Collapse, or Underground

Some insurers modify the CGL by endorsement to eliminate coverage for explosion, collapse, or underground (known as XCU) risks. Specifically, it excludes property damage arising out of blasting or explosion (but not burst pipes, machinery, or power transmitting equipment), collapse of a structure or structural damage, and damage to underground property (e.g., pipes, sewers, wires). If those risks are implicated in a project, it is good practice to specify that the XCU endorsement will not be allowed.

Specifying Contractor’s Coverage under CGL Policies

Specifying general liability insurance to be carried by the general contractor requires more than simply specifying limits of insurance to be maintained. The following are important points to address:

  • Occurrence policies. CGL policies are generally written on an occurrence basis rather than a claims-made basis. Occurrence policies cover all liability imposed for occurrences during the policy period, regardless of when a claim is made. Claims-made policies only cover claims actually made within the policy period for events that occurred after a date certain, which leaves potential gaps in coverage. Although claims-made CGL policies are rare, it is a good practice to specify that the policy will be an occurrence policy. It is helpful to specify the ISO form as there may be manuscript forms sold by insurers in certain markets, particularly to smaller or higher risk contractors.
  • Size and rating of carrier. It is common to require that the contractor obtain coverage from a carrier properly licensed in the jurisdiction where the project is located and to specify the size and rating of an acceptable carrier. The size and rating to be specified depends upon the project and marketplace where the project is located.
  • Products and completed operations coverage. Products and completed operations covers bodily injury and property damage arising out of the contractor’s work after it is put to its intended use. Occasionally, an insurer will sell a policy that does not cover this risk. It is best practice to specify that the contractor obtain this coverage and to specify the limits to be purchased. The period of time for which the coverage should be maintained after completion should correspond to the construction statute of repose in the jurisdiction where the project is located.
  • Per project limits. Coverage limits should be on a per project basis. This ensures that the amount of insurance available for losses relating to the project are not eroded by losses relating to other projects.
  • Excess and umbrella coverage. It is often helpful to specify that the limits may be achieved through a combination of CGL and excess or umbrella coverage. This allows the contractor greater flexibility in structuring its insurance program. In that event, it is important to specify that the excess and umbrella coverage shall follow the form of the underlying coverage.
  • Allowable deductibles and self-insured retentions. A self-insured retention (SIR) is an amount that must be paid by the insured before the insurance policy will apply to a covered loss. A deductible, however, is an amount the insured is required to pay after the insurance policy pays. Consider stating that self-insured retentions will not be allowed and setting limits on the amount of deductible allowed so that a contractor’s inability to fund the SIR or deductible will not prevent coverage by the insurer.
  • Notice of cancellation. It is common to specify that the policies shall not be cancelled or modified without notice from the carrier to the owner. In most cases, the policy will need to be endorsed to provide for direct notice to the owner. Generally, 30 days’ notice of cancellation, and 10 days’ notice for cancellation for non-payment, can be obtained through an endorsement. In some cases, insurers will not offer that notice or have not obtained regulatory approval to provide such notice.
  • Subcontractor coverage. It is a good idea to require the contractor to extend the construction contract’s insurance requirements to its subcontractors. However, subcontractors do not generally carry limits as high as general contractors unless they are engaged in a high-risk trade. For this reason, many insurance contracts include limits that vary according to the risk associated with various trades.
  • Certificates of insurance. Most construction contracts require contractors to supply a certificate of insurance on an Association for Cooperative Operations Research and Development form evidencing that coverage is in place in compliance with the contract’s requirements. Certificates of insurance do not create any obligation on the part of the insurer to actually extend the coverage reflected therein, but rather only provide evidence of the existence of coverage at a particular point in time. Nevertheless, they are commonly accepted to substantiate coverage. Periodic updates of those certificates should be required on or before the expiration of any required policies. It is a good practice to require the contractor to supply copies of all relevant endorsements and to reserve a right to request copies of any policies required by the construction contract to confirm coverage, if necessary.

Coverage for Owners under Contractor’s CGL Policy

Additional Insured Endorsement Forms

Contracts often require the general contractor and its subcontractors to name the project owner as an additional insured on the CGL policy, the general contractor requires its subcontractors to name the general contractor and owner as additional insureds on the CGL policy, and so on down the line. Additional insured endorsements may vary widely in the extent of coverage they provide to upstream parties. Older ISO forms (e.g., CG 20 10 11 85) have been interpreted to provide coverage for liability incurred as a result of the additional insured’s own negligence. Later, the forms provided coverage for the additional insured’s own negligence, but two endorsements were required to cover both ongoing (CG 20 10 10 01) and completed (CG 20 37 10 01) operations. Subsequent editions of those two forms narrowed the scope of coverage provided to additional insureds.

Some insurance companies sell manuscript endorsements that define the scope of coverage provided to additional insureds based upon the endorsement required by the construction contract. Thus, if the contract specifies the CG 20 10 11 85 endorsement, the insurer will provide the coverage described therein. If, on the other hand, the contract does not specify a particular additional insured endorsement or specifies an endorsement without identifying the endorsement date, then the insurer will provide significantly narrower coverage to the additional insured. It is advisable to specify the older forms, either CG 20 10 11 85 or both CG 20 10 10 01 and CG 20 37 10 01, and to verify the coverage by requesting copies of the endorsement purchased by the contractor. An owner should consider whether to adjust its own general liability coverage based upon the extent to which its status as an additional insured will or will not cover the owner’s own liability for its own acts and omissions.

Coverage Limits Applicable to Additional Insureds

It is also important to note that the trend is for additional insured endorsements to provide coverage to additional insureds only up to the limits specified in the construction contract even if the contractor purchases higher limits for itself. Thus, the limits required should be carefully reviewed and specified

Primary and Non-contributory

CGL policies provide insurers with a right to recovery from other valid and collectible insurance policies. To make a contractor’s insurance policy respond first, it is generally accepted practice to require the contractor’s insurance to be “primary and not seek contribution from” other insurance available to the additional insured.

It is also a good practice to specify that any umbrella or excess insurance bought by the contractor shall be primary and not seek contribution from other insurance available to the additional insured, as some excess carriers may seek contribution from the additional insured’s own policies before they will contribute to the loss.

Waiver of Subrogation

It is accepted practice in construction contracts to require a waiver of subrogation in favor of the additional insureds. The waiver of subrogation prevents the insured’s insurance carrier from seeking recovery from the additional insureds for liability for which the additional insureds are deemed at fault. While it may seem repetitive of the additional insured requirement, it particularly comes into play when the additional insured endorsements do not extend coverage to the additional insured for liability arising out of the additional insured’s own negligence. In that case, the insurer cannot seek subrogation to recover such damages imposed on the contractor and paid by the insurer even if the contractor has a right to contribution from the additional insured.

Another waiver of subrogation to consider including in the construction contract is the owner’s waiver of subrogation rights for losses covered by its own property insurance. This impacts CGL coverage because that waiver of subrogation quarantines the loss with the property insurer and eliminates the possibility for claims that might erode the CGL policy’s limits available to respond to liability claims.

Owner’s CGL Coverage

Most of the risk of loss in a construction contract should fall on the contractor, who manages the site, as well as its subcontractors who are likewise responsible for their own means and methods. However, claims against the owner for its own negligence are not infrequent. The owner does not have a right to indemnity for its liability arising out of its own negligence under the contractor’s CGL policy unless it is named as an additional insured using the broadest additional insured endorsement (either CG 20 10 11 85 or both CG 20 10 10 01 and CG 20 37 10 01), although it may be entitled to a defense from the contractor’s insurer even under the narrowest additional insured endorsements, depending on how the claim is stated. Despite the possibility of coverage under a broad additional insured endorsement, it is good practice for the owner to purchase its own CGL policy to cover itself in the event of a claim alleging that the owner is negligent.

In some cases, the owner will purchase CGL coverage for the contractor and subcontractors through an Owner-Controlled Insurance Program (OCIP). OCIP coverage, and particularly its exclusions, should be reviewed carefully to make certain that it extends coverage commensurate with the coverage provided by traditional CGL policies purchased separately by the project’s participants.

Project participants should be keenly aware of how the CGL policy operates to provide—and disclaim—coverage in the unfortunate event of a claim in order to understand how to mitigate against the risks up front. The construction contract should carefully specify the characteristics of the CGL policy to be procured by contractors and subcontractors in order to protect all of the project participants.


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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