Have you ever read an insurance policy? Do you know the difference between an insurance policy and a bond written by an insurance company? Is the difference important?
Is anyone in your organization charged with reading the bonds and insurance policies you obtain from entities working for you on a project?
In a series of short articles, we will discuss some of the more normally occurring mistakes with insurance policies and bonds and the problems that arise as a result.
Additionally, we will address the conflict in coverage and difference between insurance and bonds.
Common Insurance Mistakes
We will review a list of the most common mistakes that business owners make when it comes to insurance coverage and bonds.
The Problem with Duplicate Coverage
The first most common with insurance policies is the issue of duplicate coverage.
First, this causes you to pay greater premiums than necessary to get the proper insurance coverage.
Second, duplicate coverage most often causes a gap in coverage. This issue also is the most technical because it requires a coordination between commercial general liability policies (CGL) and the builder’s risk or property damage policies.
The distinctions between the policies are relevant to this discussion and must be considered in any analysis of coverage.
Difference Between CGL Insurance and Bond
The major distinction between the policies is that a CGL policy is triggered by an accident or negligence.
Under a builders risk policy no one has to be at fault, one simply has to experience a covered loss.
Most often, the trigger is defined as an “occurrence” under the terms of the CGL policy.
A problem arises under certain American Institute of Architects (AIA) contract forms because the CGL policy is generally defined as the primary policy – or the first policy considered when adjusting a loss.
When an overlap or duplication of coverage exists, insurance companies often raise the issue to take the benefit of the policy with the more draconian limits of insurance, which most often is the builder’s risk policy.
The limits may also define the nature and extent of claims that can be recovered.
For example, the most often used limitation arises in the form of recoverable damage. With respect to a builders risk policy that damage is often limited to the difference between the replacement cost and the acquisition cost, less depreciation.
At this point, one also has to consider the extent and coverage of the performance bond. The performance bond is the guaranty by the surety that if the contractor or principal does not perform, the surety will perform under the contract.
Courts and the public at large often confuse insurance and bonds.
A performance bond essentially assures the owner or obligee that the contractor will perform under the contract or the surety will provide a substitute contractor or pay to complete performance of the contract.
The amount the surety pays is normally the difference between the contract price and the total cost of completion.
When is a Bond Relevant?
The bond only becomes active if the contractor defaults and the Owner follows the terms of the bond exactly.
The terms of the policies define coverage. Neither the CGL policy or the Builder’s Risk policy depend on the contract to define coverage.
If someone has not checked the policies against the requirements of the insurance provisions of the contract then its possible that there will not be the contractually required coverage.
The failure to provide the contractually required coverage could be a breach of contract and may be the basis for a bond claim.
In summary, it is critical that when procuring insurance to tell the agent all the requirements based on the terms of the contracts and an assessment of potential risk.
The agent should be warned and asked about potential duplication which should be avoided.
However, remember that the agent is most often compensated by a percentage of the premiums so he/she is disincentivized to reduce the cost of insurance.
The contract should be consulted to determine which policy is primary and if none is identified as such then an effort should be made to determine which policy has the broader coverage and make that the primary policy.
In the next instalment, the critical elements of the bond and insurance policies will be discussed.
In addition, a future article will discuss coverage issues that arise from the conflict between CGL and Builder’s Risk insurance.
Justin J. Garcia
Justin J. Garcia advises and represents corporations, associations, owners, general contractors and subcontractors in his commercial and construction law practice, franchisees in his franchise law practice and individual plaintiffs with contract and tort based claims.
Mr. Garcia was named to the New England Rising Stars list as one of the top attorneys in New England in 2018 and 2019.
Before joining Garcia & Milas, Justin practiced law in Chicago and the surrounding counties for four years. Mr. Garcia's experience in both civil and criminal law brings a wealth of court litigation skills to Garcia & Milas Law Firm.
This publication is for general information purposes only and is not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
Construction & Business Law Firm in New Haven, CT
Garcia & Milas Law Firm has the top Construction and Business Lawyers in New Haven, Connecticut. We have handled many of the highest profile construction cases in the region and we continue to represent owners, contractors, design professional and sureties in many of the most significant construction cases.
Our complex litigation practice has involved many high stakes cases involving multiple parties, complex legal, factual, and technical issues, and many millions of dollars.
Garcia and Milas lawyers regularly represent clients in cases involving mechanic’s liens, wrongful termination, performance and payment bond claims, loss of productivity claims, delay claims, change order disputes, equitable adjustments, insurance coverage issues relating to construction claims and defenses, warranty and workmanship issues, design defect claims, and payment disputes.