By Kenneth M. Gorenberg*
The American Institute of Architects (AIA) publishes perhaps the most widely used contract forms in the U.S. construction industry. In April 2017, AIA released an update to its main set of general conditions between owner and contractor. The previous update was in 2007. This article will address only the insurance terms in the 2017 conditions.
The new form presents significant changes in both the format and the substance of the insurance requirements. Most importantly, the new form imposes important obligations on both the owner and the contractor to purchase and maintain specific insurance policies, and it identifies several optional policies for the parties to consider. These new terms may encourage the parties to discuss insurance before entering into any construction contract, and those discussions may help minimize disputes when claims arise.
On the other hand, the new conditions may leave several potentially important questions unanswered. In particular, it remains to be seen whether the U.S. construction and insurance industries will adopt these new terms in practice because existing insurance policy forms may not satisfy some portions of the new AIA requirements. Any company involved in U.S. construction as a project owner, architect, contractor, or subcontractor should familiarize itself with the new AIA insurance terms and carefully consider the insurance coverage for any project it will undertake.
I. AIA A201-2017 Article 11
As in the 2007 version, the A201 contract form includes Article 11, titled “Insurance and Bonds.” Some of the requirements in Article 11 are unchanged from the previous version, and some have been placed into a new exhibit that also adds new requirements. There are several key points to Article 11, including:
The contractor must have commercial general liability (CGL) insurance and name the owner, architect, and architect’s consultants as additional insureds under the CGL policy. In general, CGL insurance covers bodily injury and property damage suffered by third parties. Being additional insureds may allow the owner, architect, and architect’s consultants to use the contractor’s CGL policy in the event of a third-party claim; for example, if a neighboring property owner alleges that its facility was damaged by some defect in the project in question or if a subcontractor’s employee is injured on site.
The owner must have property insurance, such as builder’s risk, sufficient to cover the total value of the entire Project on a replacement cost basis and such insurance must include the interests of the contractor and subcontractors in the Project. Regardless of whose interest is lost or damaged, the owner is charged with a fiduciary responsibility to submit the claim to the insurance company, receive payment from the insurance company, and distribute the payment to the party or parties whose interest was affected.
|3.||The parties and their insurers must waive subrogation rights against one another. This can help minimize disputes among the parties and their insurers as to who is most at fault for anything that is covered by insurance.|
All of these points were included in the 2007 version of Article 11, the Insurance and Bonds section, but in somewhat greater detail. The 2017 version moves many of the details, along with some additional requirements, to a new Exhibit A to the main contract form (e.g., the A101 or A102 form) that the parties are supposed to prepare and attach to the contract. By keeping the basics in Article 11, at least some insurance requirements will remain in every AIA contract even if the parties fail to include Exhibit A.
II. AIA A101–2017 Exhibit A – Insurance
Exhibit A is a new addition to the AIA contract forms, and it deals exclusively with insurance. Exhibit A includes the details that previously were found in Article 11 of the main contract form, but it is more specific and adds new requirements and options for the parties to consider. The parties are supposed to complete several blanks and check certain boxes on Exhibit A and then attach it as part of the contract. That process can facilitate discussion between the parties and make them think more carefully about insurance before they finalize the contract.
Some items in Exhibit A may conflict with existing practice in the construction and insurance industries, and it remains to be seen how those conflicts will be addressed in the marketplace and potentially in the courts. Below is a summary of some of the details included in Exhibit A, which includes subsections referred to as articles.
1. Article A.2.3 – Owner’s Required Insurance
Unless the parties provide in Article A.126.96.36.199 (discussed below in Section B) for the contractor to purchase property insurance, Article A.2.3 places the obligation on the owner, which must obtain builder’s risk or equivalent insurance to cover the total value of the entire project on a replacement cost basis, or at least the contract sum. If there are any sub-limits for certain causes of loss or details of coverage, they are supposed to be noted in the form within Article A.2.3 . The owner is responsible for payment of any deductible or self-insured retention. The new form states the owner’s builder’s risk policy must be kept in place until substantial completion of the work, and then the owner must maintain property insurance on the project for an additional period—usually one year—that Article 12.2 of the main contract form provides for correction of the work. The owner’s property policies must insure the owner, the contractor, and all subcontractors. Also, Article A.2.1 requires the owner to provide evidence of all the required coverage (most likely in the form of a certificate of insurance) and, upon the contractor’s request, provide a copy of the property policy.
Article A.188.8.131.52 requires some particular coverage in the owner’s builder’s risk policy, but it remains to be seen whether insurance companies will offer or whether project owners will want to purchase policies with these specific terms. These questions may arise regarding at least two important specifications in Article A.184.108.40.206:
First, the builder’s risk policy must not exclude the risks of fire, explosion, theft, vandalism, malicious mischief, collapse, earthquake, flood, or windstorm.
At a minimum, project owners will need to consider reviewing policies they already have or are contemplating because such policies actually may exclude some of these risks, in conflict with the AIA contract form.
Second, the builder’s risk policy must provide coverage for ensuing loss or resulting damage from error, omission, or deficiency in construction methods, designs, specifications, workmanship, or materials. This could usher in a dramatic reallocation of the risk of such construction defects. Currently, if the owner’s property is damaged during the course of the project, the owner would likely make a liability claim against the contractor (and subcontractors) and possibly the architect. Those contractors and design professionals typically tender the claim to their CGL insurers.
The CGL insurers often deny coverage because they contend that construction defects do not constitute an insured “occurrence” and, even if they are an occurrence, fall within an exclusion for “your work” – that is, the work of the contractor or design professional. Such denials by CGL carriers often result in the owner having to look solely to the contractors or design professionals, which may or may not have the financial resources to defend themselves, let alone pay any judgment if their work is found to be defective. The new requirement of Article A.220.127.116.11 could avoid some of those disputes by having the defective construction covered by the owner’s builder’s risk insurance, even if it is not covered by the contractors’ and design professionals’ CGL policies. And because the parties and their insurers are supposed to waive subrogation, the property insurer should not be able to make a liability claim against the contractors and design professionals. Note that this potential solution exists only while the required insurance is in place, which will generally be during construction, plus one year after substantial completion.
Thus, these new insurance requirements do not address coverage for latent defects that are discovered long after construction is complete. Even for the period of construction through substantial completion and the one year following, it remains to be seen whether project owners can or will purchase property insurance with the AIA-required terms to cover ensuing loss or resulting damage from error, omission, or deficiency in construction methods, designs, specifications, workmanship, or materials.
2. Article A.2.4 – Parties Can Choose to Require Owner to Purchase Other Types of Insurance
In Article A.2.4, the parties are given a list of other types of insurance that may be available to the owner. If the parties want to require the owner to purchase any of these other coverages, they need only check the boxes next to the descriptions of the applicable policies. Some of these options are business interruption, ordinance or law, and civil authority insurance. The parties can also specify policy limits or other conditions if they choose to require the owner to have cyber security insurance or some other type of insurance that is otherwise not listed in Article A.2.4. Simply by listing a number of additional types of insurance, this section may help the parties learn about other insurance products that may be appropriate for their projects.
1. Article A.3.1 and A.3.2 – Contractor’s Required Insurance
Article A.3.2 lists several types of insurance that the contractor must purchase, and there are blanks for the parties to fill in the limits they agree to require for each policy. All of the required policies must be maintained until expiration of the period for correction of the work, which is usually one year after substantial completion. The types of policies the form requires of every contractor are CGL, automobile liability, workers’ compensation, and employers’ liability. Depending on the nature of the work, the contractor must also purchase insurance for Jones Act and Longshore & Harbor Workers’ Compensation Act liabilities, professional liability, pollution liability, maritime liability, and aircraft liability. Once again, the list of additional types of insurance may help the parties think about the nature of the work and whether they want to require these other types of insurance for a particular project.
For all policies, Article A.3.1 requires the contractor to provide certificates of insurance to the owner prior to commencement of the work, upon any renewal or replacement of the policy, and upon the owner’s written request. (Unlike Article A.2.1 regarding the owner’s property policy, there is no requirement to provide an actual copy of the policy if the other party requests.)
The certificate must show that the owner is an additional insured on the contractor’s CGL and any excess or umbrella liability policies. In general, being an additional insured means that if a third party makes a claim against the owner, the owner can seek coverage under the contractor’s CGL policy before or in lieu of the owner’s own CGL policy. By having the additional insured coverage and the certificate, the Owner can turn directly to the contractor’s insurance company(ies) in the event of a third-party claim.
Importantly, the additional insured requirements are actually greater than what must be shown on the certificate:
The contractor must make the owner an additional insured under the contractor’s CGL policy, both for ongoing and completed operations – in other words, both during and after construction. This additional insured coverage under the contractor’s CGL policy must be primary and non-contributory to the owner’s general liability policies, meaning that the contractor’s insurer cannot seek any contribution from the owner’s insurer.
|b)||Article A.3.1 also provides that the contractor must ensure its CGL policy includes the architect and architect’s consultants as additional insureds, but only for ongoing operations – that is, during construction – and without necessarily being primary and non-contributory. Thus, the additional insured coverage that the contractor must provide for the architect and architect’s consultants can be more limited and can leave the architect and architect’s consultants needing to rely on their own insurance policies to some extent.
|c)||Article A.3.1 states that, “[t]o the extent commercially available, the additional insured coverage shall be no less than” that provided by three specific forms published by the Insurance Services Office (ISO). Interestingly, the listed ISO forms were published in 2004, and ISO updated each of those forms in 2013. Moreover, ISO publishes dozens of additional insured forms. Further, not all insurance companies use ISO forms. All of these factors may complicate the questions of whether the additional insured coverage obtained by the contractor is “no less than” what would be provided by the specified ISO forms and, if not, whether something more was “commercially available.” These questions could be implicated if the contractor’s insurance company denies a claim for additional insured coverage on behalf of the owner, architect, or architect’s consultant. In that circumstance, the owner, architect or consultant may contend that the contractor breached its obligation to obtain the required insurance and therefore must pay what the insurance should have covered.|
Article A.3.1 also requires the contractor to disclose any deductible or self-insured retention applicable to any of its required policies. Unlike Article A.2.3, which specifies that the owner must pay any deductible or self-insured retention on its property policies, Article A.3.1 does not address which party is to pay the deductible or self-insured retention on the contractor’s liability policies. While it may seem obvious and appropriate that the contractor must therefore pay its own deductible or self-insured retention, the question can be much more complicated and important when the owner, architect or architect’s consultant seeks coverage as an additional insured under the contractor’s CGL policy.
Several courts have held that the contractor’s failure to pay the deductible or self-insured retention will deprive the owner, architect and architect’s consultant of additional insured coverage. Article A.3.1 does not expressly provide a remedy for this situation, which could be particularly troublesome if the contractor lacks the financial capacity to pay the deductible or self-insured retention, let alone the potentially much larger amount that the insurance company might otherwise have paid under the additional insured coverage.
Article 3.2 goes on to detail more specific requirements for the contractor’s CGL coverage. Most of these provisions are consistent with ISO forms of CGL policies. However, every contractor should consider carefully reviewing its CGL policy, especially if it is not based on a current ISO form, to make sure it complies with the specifications before entering into a contract using the new AIA insurance exhibit. Article 3.2 also states that the contractor can use excess or umbrella policies to reach the dollar limits that the parties choose for the CGL and automobile liability coverages. The excess or umbrella policies must not be “narrower” than the primary. This requirement may come into focus in the event that an excess or umbrella carrier denies a claim covered by the primary. In that circumstance, perhaps the owner would contend that the contractor breached its obligation under Article 3.2, and conceivably the contractor may have to pay a judgment to the extent it exceeds what the CGL insurer pays.
2. Article A.3.3 – Parties Can Choose to Require Contractor to Purchase Other Types of Insurance
In Article A.3.3, the parties are given a list of other types of insurance that may be available to the contractor. If the parties want to require the contractor to purchase any of these other coverages, they need only check the boxes next to the descriptions of the applicable policies. Most notably, if the parties choose to require the contractor rather than the owner to purchase property insurance for the project, they would make that election by checking the box at Article A.18.104.22.168, and they can specify further details about the property insurance, including whether to make the contractor rather than the owner responsible for paying any deductible or self-insured retention. The parties also have the option to require the contractor to purchase other types of insurance, such as railroad protective liability and asbestos abatement liability.
The new AIA contract terms for insurance may raise several important questions to be answered in the marketplace, if not in the courts, including:
|1.||Will insurers offer and will project owners purchase builder’s risk policies that cover the “ensuing loss or resulting damage” from construction defects?
|2.||Who must pay any deductible or self-insured retention under contractors’ and subcontractors’ liability policies, especially when those policies are supposed to provide “additional insured” coverage to the owner, architect, and upstream contractors?
|3.||Will insurers continue to offer and will contractors purchase “additional insured” coverage that is “no less than” that provided by the 2004-era forms published by the ISO?
|4.||Will insurers offer and will contractors purchase excess or umbrella policies that are not “narrower” than primary CGL and auto policies?|
Even if the parties to a construction contract do not focus on these particular questions, the new AIA insurance terms may help encourage the parties to pay more attention to insurance issues during the contracting process. All participants can benefit from reviewing the AIA terms, reviewing their existing insurance programs for compliance with those terms, and negotiating with the other parties about the insurance requirements for each particular project.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
*Kenneth M. Gorenberg is a partner at Barnes & Thornburg LLP. A versatile litigator, Mr. Gorenberg is a member of the firm’s Insurance Recovery and Counseling, Commercial Litigation, Construction, Toxic Tort, and Appellate practice groups.