Large commercial construction projects will undoubtedly include various types of insurance including commercial general liability, workers’ compensation, automobile liability insurance, umbrella and excess liability insurance, professional liability insurance, pollution liability insurance, builders risk insurance, railroad protective policy, etc. Contractors and subcontractors know the importance of insurance. This article gives some insight into the specifics of three types of insurance policies with respect to construction projects in Pennsylvania, including recommendations to reduce risk and possibly insurance premiums.
Commercial General Liability Insurance – These policies cover bodily injury and property damage caused by an occurrence that takes place in the coverage territory. All businesses, particularly contractors, should have this type of insurance. Independent construction contractors and home improvement contractors in Pennsylvania are required by law to carry a minimum coverage of $50,000.1 In the event of serious bodily injury carrying only the minimum required coverage would leave a contractor woefully underinsured. We recommend carrying at least a $2 million general aggregate limit with a $1 million single occurrence limit unless a higher limit is required by the contract, required by law, or justified by the nature of the work.
Workers’ Compensation – This is the insurance that covers workers who sustain an injury on the job or a work related illness. It provides for the payment of medical expenses, wage-loss compensation, and death benefits for dependant survivors for work-related deaths. The Pennsylvania Workers’ Compensation Act requires all Pennsylvania employers to insure their workers’ compensation liability with either the State Workers’ Insurance Fund, a private insurance carrier or by qualifying as a self-insured entity. Contractors are reminded of the Construction Workplace Misclassification Act which became effective on February 10, 2011 making it a crime to not properly classify an individual as an employee. Follow this link for more information on this Act.
Builders Risk Insurance – This is a form of property insurance designed to cover the property in the process of construction. It can be purchased by the owner or by the contractor. Many practitioners recommend that the owner purchase the coverage since the owner generally has the greatest interest in the property. Owners may also purchase delayed opening coverage and other forms of coverage that may only be available if the owner purchases the insurance directly.
Recommendations to reduce risk and to possibly lower insurance premiums:
- Maintain a dialogue with your carrier(s). Ask if they offer educational programs to reduce premiums. Ask if they offer contract review services.
- Verify and obtain copies of insurance coverage from all subcontractors.
- Use industry standard contracts where possible. Be advised that the AIA-2007 (Standard Form of Agreement Between Contractor and Subcontractor) now requires the subcontractor to add the contractor, owner, architect and architect’s consultants as additional insureds on the subcontractor’s CGL coverage for claims caused in whole or in part by the subcontractor’s negligent acts or omissions during the subcontractor’s operations. As part of a growing trend, some insurance carriers have created additional insured endorsements that specify that additional insured coverage applies only to the liability arising out of the named insured’s negligence. Parties to these contracts need to make sure that they fully understand the obligations they are undertaking and the coverage available.
- Avoid having to indemnify owners and other contractors. Have your attorney and insurance carrier review the indemnification clause if this is unavoidable.
- Include a mediation or arbitration clause in your contracts.
- Recommend that an owner purchase its own Builders Risk Insurance policy for the reasons discussed above. Also, recommend that the owner waive its subrogation rights against you (the contractor) for property damage caused by the contractor’s negligence to the extent the loss is covered by the builders risk policy.
When it comes to insuring potential catastrophic losses, perhaps the Pennsylvania Supreme Court said it best when it said “a single act of negligence…might create a liability which a lifetime of successful business could not repay.” Contractors and subcontractors must be careful in reviewing all contractual provisions involving insurance, indemnity, subrogation waivers, and waivers on final payment which can have significant impacts on their legal rights. Contact me at wmartin@reageradlerpc.com for more information on the services we offer including, construction contract review services, litigation and litigation avoidance services, and alternative dispute resolution services.