When drafting your construction contract, it is important to pay attention to insurance and indemnity provisions. These provisions are used to plan for, transfer, and insure project risk.
Once you understand the various risks that face a project (e.g. personal injury; property damage; business interruption; government shutdown; professional liability; pollution liability), you can allocate responsibility among the parties to seek and maintain coverage that insures against the identified risks.
What to Consider when Drafting Insurance and Indemnity Provisions for Construction Contracts
A construction company should consider including an Indemnity Clause during contract writing to prevent potential loss liability associated with the project.
When transferring the risk with an Indemnity Clause, it is important that you consider several different factors.
During this process, you should consider the following seven questions:
Who is responsible for what coverage?
Generally, insurance coverage can be divided into two categories: first-party and third-party. First party coverage protects an entity’s own physical assets. For instance, an Owner’s existing property insurance policy or a builder’s risk insurance policy are common examples of first-party insurance coverage.
Third-party coverage is commonly known as liability or casualty insurance and covers the insured’s liability for third-party claims. For example, if someone slips and falls on the project site and sues the Contractor and/or Owner this is a third-party claim.
Typically, the Contractor will procure third-party coverages, while the Owner will procure first party coverage protecting the Work itself and in the case of a renovation – the existing structure. With that said, who procures what coverage is a matter of contract and should be closely examined on a case-by-case basis.
Is the policy an occurrence or claims made policy?
When the parties allocate responsibility for procuring coverage, they should also agree on whether the policies will be occurrence vs. claims made. Occurrence policies are triggered when damage or loss covered by the policy occurs during the policy period. Alternatively, claims-made policies are triggered by a claim made against the insured during the policy period, regardless of when the loss or damage occurs.
How long must the insurance remain in place?
Will there be an extended reporting period? Does the duration of the policy coordinate with the applicable statute of limitations periods? Drafters should consider these questions and answer them with clear contractual language.
What are the insurance limits?
Insurance limits are frequently written on both a per occurrence and aggregate basis. A per occurrence limit is the most a carrier will pay for loss or damage resulting from a single occurrence or claim. The aggregate limit is the highest amount the carrier will pay under the policy regardless of the number of occurrences or claims during the policy period.
Parties, with their attorneys and insurance advisors, should consider what limits of insurance are appropriate for each project and whether project specific insurance will be required.
Should there be a waiver of subrogation?
Subrogation occurs when a party’s insurer pays for a loss that is caused by or the responsibility of another party. The paying insurer then “steps into the shoes” of its insured and is “subrogated” to the rights of its insured. The paying insurer then can pursue a direct action against the responsible party.
Often, subrogation claims are waived in construction contracts. The rationale behind these provisions is to avoid litigation and expedite claim payment. You should discuss with counsel whether a subrogation cause is appropriate or should be accompanied by a policy endorsement.
Who is insured?
Insurance policies have different categories of insureds: named insureds; first named insureds; additional named insureds; and additional insureds. Contracts most commonly deal with additional insureds. Additional insured status provides the additional insureds with certain coverages depending on the provisions negotiated on a case-by-case basis.
Additional insured status is generally accomplished by endorsement or a general description of an additional insured in the policy (e.g. all members of the company). What insurance protections and rights you have depends on your status under the policy. When determining who should be listed as an additional insured it is important to consider your indemnity obligations and to whom those obligations extend.
What is contractual indemnity?
A contractual indemnity clause is a transfer of risk between parties to prevent loss or compensate for a loss which may occur as a result of a specified event. Indemnity clauses are separate from insurance obligations. The scope of the indemnity to be provided should be negotiated with insurance coverage in mind.
Although many indemnity provisions reach beyond insurable risks, to the extent possible counsel should try to limit your indemnity obligations to available insurance. The parties must also consider whether there are applicable anti-indemnity statutes that limit the extent to which a party can transfer the risk pursuant to a contractual indemnity clause.
In addition to the foregoing, parties should also consider drafting clauses that address minimum insurer ratings; notice of cancellation, termination, or nonrenewal; flow-down to applicable subcontractors and requirements for subcontracts; which coverages are primary and noncontributory; and responsibility for adjusting property insurance losses.
By Jaime Paoletti, Garcia & Milas, P.C.
Jaime Paoletti is an attorney at Garcia & Milas, P.C. who represents contractors, owners, developers, subcontractors, and design professionals. She routinely drafts and negotiates construction contracts to meet the needs of each project and helps her clients navigate key contractual provisions such as indemnification and insurance.
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.
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