Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on November 19, 2020.
Carrying adequate insurance is a critical risk management tool for developers, builders, and designers. Yet, too often parties focus on commencing work and overlook the important intricacies of coverage. Future coverage denials can result from deferring to “standard” insurance forms, reliance on informal broker assurances, and reluctance to wade through the swamp of policy “endorsements” that exclude particular claims, among other oversights. To mitigate the danger of lacking or losing coverage, what follows are some of the more common insurance coverage mistakes and best practices to keep in mind the next time you’re reviewing coverages or claims.
- Mistake #1 – Failure to obtain adequate proof of insurance. Traditionally, parties rely on stock contract terms requiring each party to only produce a Certificate of Insurance or ACCORD Certificate. However, these certificates can be largely worthless as evidence of coverage when a claim arises because the certificates typically do not specify the endorsements excluding coverage (e.g., exclusions for multi-family projects, condominiums, mold, and/or cross-suits by one insured against another).
Best practices: To confirm project-specific coverage, obtain copies of the actual policies by contractually requiring production, double-check all endorsements, and use an insurance clause in your contract which specifies particular insurance endorsements that shall be included or excluded.
- Mistake #2 – Failure to ensure insurance downstream. Too often a key subcontractor performing a material or risky portion of work carries only its standard $1MM coverage. Coverage of $1MM may not be adequate for some jobs, especially if the policy is meant to cover all projects of the insured and not only your project. Moreover, some subtrades, like geotech consultants, frequently add a limitation of liability for substantially less than the policy limits, preventing your access to the majority of the policy when it is needed.
Best practices: Specify requirements in prime contracts for the prime contractor or architect to ensure certain insurance levels for their subtrades. Consider project-dedicated insurance policies for high-risk trades and avoid or negotiate more reasonable limits of liability whenever possible. Consult your insurance broker from the outset to gain independent written confirmation of the appropriate types and limits of coverage for your project, including endorsements to obtain or avoid.
- Mistake #3 – Failed insurance tracking protocols. After expending considerable effort at the contracting stage to secure the right insurance, parties often neglect to track insurance during construction and for the duration of the applicable statute of repose. Consequently, when a claim arises several years after project completion, evidence of policies and coverage is hard to locate and determine.
Best practices: Compile policy copies (or at least the certificates) in a separately labeled electronic file. Calendar regular intervals following project completion to reconfirm policy limits and obtain information on any change in policy providers. In some cases, you can request and be automatically provided with Certificates of Insurance upon annual renewal, prompting you to review the new policies and endorsements. If a contracting partner is out of business, determine whether you need to take separate action to insure your interests. Finally, utilize an Insurance Tracking Log or similar one-page spreadsheet that lists each project participant and their policy numbers, limits, and notable exclusions each year during construction and in each year following project completion.
- Mistake #4 – Failure to timely report a claim. Most policies have prompt reporting requirements in the ISO forms, requiring reporting and cooperation within a specific or reasonable time period. Delays in recognizing and reporting claims can result in partial (pre-notice) or complete denial of defense and indemnity coverage.
Best practices: Review policies annually for applicable reporting requirements or ask your broker or attorneys to identify the specific timelines therein. Ensure project managers are aware of the deadlines and practice prompt reporting of claims.
- Mistake #5 – Failures regarding additional insureds. Standard ISO endorsements are available to provide additional insured or “AI” status to various classes of entities on construction projects, and it can be routine to do so. However, endorsements can limit AI coverage only for ongoing operations and may prohibit coverage altogether via a cross-suit exclusion for coverage where one insured sues another insured under the same policy.
Best practices: Seek both ongoing and completed operations AI coverage, remove any cross-suit exclusion from the policy, and ask your broker or attorneys to review the AI endorsements for other potential risks.
Construction projects carry complex insurance coverage issues that require detailed and timely analysis to mitigate the risk of coverage oversights. Ensure periodic reviews of insurance policy language (including all endorsements), utilize tracking protocols, and double-check your policies on specific projects to ensure that needed coverage is not excluded. While the law of unintended consequences suggests that all parties to a project will likely face risks and claims, a little foresight and planning will help you get the most out of the insurance assets covering your projects.