Top Ten Gaps in Contractors Insurance Coverage

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Top Ten Gaps inContractors Insurance Coverage

• Michael J. ONeill, CPCU, ARM
• Executive Vice President
• American Contractors Insurance Group, Inc.

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Top Ten Gaps

• In todays presentation, I am going to review and
  discuss the top ten gaps in contractors insurance
  coverage and provide some guidance on how to fill
  the gaps.

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Top Ten Gaps

• Builders Risk
• This policy provides the foundation on which to
  build a contractor insurance program.
• Provides first party coverage (no need for
  negligence)

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Top Ten GapsBuilders Risk

• Key Ideas
• No standard policy form
• Who is covered
• Everyone on the project
• Need for waivers of subrogation
• Note Failure to get the waiver exposes the
  contractor to a G/L claim.

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Top Ten GapsBuilders Risk

• Valuation
• Actual cash value
• Replacement cost
• Perils Covered
• Named perils (e.g., fire, wind, etc.)
• All risk
• Make special note of windstorm, flood, tsunami
  and earthquake perils

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Top Ten GapsBuilders Risk

• Optional Coverages
• Soft costs
• Delay of use and occupancy
• Off-site locations
• Transit

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Top Ten GapsBuilders Risk

• Term of Coverage
• Term of the construction
• Consent to occupy
• Punchlist term
• Testing both hot and cold
• Note Make sure that the testing includes both
  hot and cold.

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Top Ten GapsBuilders Risk

• Owner Provided Coverage
• Limits (sublimits)
• Term
• Deductible
• All-Risk vs. Named Peril
• Waiver of Subrogation

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Top Ten GapsDifferences in Conditions (DIC)
Coverage

• A contractor may elect to protect his own
  financial interest in the construction project by
  purchasing a Differences in Condition coverage.

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Top Ten GapsDifferences in Conditions (DIC)
Coverage

• As the name implies, this policy is used to fill
  the gaps in coverage that are in an owner
  provided builders risk policy.

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Top Ten GapsDifferences in Conditions (DIC)
Coverage

• A DIC coverage form can also be used to buy-down
  the deductible exposure under the owners builders
  risk.
• Example 100,000 deductible in owners builders
  risk is bought down to 10,000 via the DIC.

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Top Ten GapsWorkers Compensation

• Insures employee injuries arising out of and in
  the course of their employment.
• A standard workers compensation policy form is
  used by all insurance companies.
• Policy form published by the National Council on
  Compensation Insurance (NCCI).

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Top Ten GapsWorkers Compensation

• However, there may be some unique exposures that
  require special endorsements on modifications.

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Top Ten GapsWorkers Compensation

• Coverage A
• Statutory benefits as prescribed in the state
  workers compensation statute.
• Coverage B - Employers Liability
• In the event the employee elects to sue his
  employer rather than take the statutory benefits.

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Top Ten GapsWorkers Compensation

• Special Exposures
• Employees working in, on or around a navigable
  water way.
• USLH Coverage (Federal Coverage)
• Jones Act - Master or member of a crew
• Outer Continental Shelf - applies to certain
  operations off-shore
• Defense Base Act - for work on foreign U.S.
  defense bases

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Top Ten GapsWorkers Compensation

• Special Exposures
• Temporary or Leased Employees
• Employees provided by a staffing firm to meet
  peak loads and seasonable requirements.
• Need written agreement
• Who provides the insurance
• Alternate employers endorsement

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Top Ten GapsGeneral Liability

• Provides liability protection to the named
  insured (contractor and other parties, e.g.,
  project owner) for injury to non-employees and
  damage to non-owned property, including loss of
  use, caused by the negligence of the insured
  arising from ongoing operations and completed
  operations.

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Top Ten GapsGeneral Liability

• There is a standard policy form published by the
  Insurance Services Office (ISO).
• Endorsements are used to restrict or broaden the
  standard coverage (ISO).
• Carriers utilize manuscript endorsements to
  modify coverage.

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Top Ten GapsGeneral Liability

• The general liability coverage for contractors is
  written on an occurrence policy form.
• This is much preferred to the claims-made
  policy form used to provide professional
  liability coverage.

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Top Ten GapsGeneral Liability

• Joint Ventures, Partnerships
• and Limited Liability Companies
• The ISO policy excludes joint ventures,
  partnerships or LLCs, unless named on the policy.

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Top Ten GapsGeneral Liability

• Joint Ventures, Partnerships
• and Limited Liability Companies
• Active Projects
• Coverage for active joint ventures, partnerships
  and LLCs are typically provided by a separate
  general liability policy for ongoing operations.

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Top Ten GapsGeneral Liability

• Joint Ventures, Partnerships
• and Limited Liability Companies
• Past Projects
• Coverage for past joint ventures, partnerships or
  LLCs can be provided by endorsement to the
  contractors general liability policy.
• Blanket Completed Operations
• Coverage is excess over any other policy covering
  the joint venture, partnership or LLC

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Top Ten GapsGeneral Liability

• Typical Exclusions
• Mold, Fungi or Bacteria
• Exterior Insulation Finishing Systems (EIFS)
• Professional Liability

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Top Ten GapsGeneral Liability

• Possible Solutions
• Mold, Fungi or Bacteria - covered under a
  contractors pollution liability policy.
• EIFS - attempt to limit the exclusion or at
  least have a sublimit of 100-250K per
  occurrence.

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Top Ten GapsGeneral Liability

• Possible Solutions
• Professional liability under the general
  liability policy.
• Add CG 2279 07-98 to provide coverage for means,
  method techniquesin your capacity as a
  contractor.

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Top Ten GapsGeneral Liability

• Possible Solutions
• Professional Liability
• Add CG 22 80 07 98
• Professional liability exclusion with an
  exception for your operations in connection with
  construction work by you or on your behalf.

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Top Ten GapsGeneral Liability

• Owner Controlled Insurance Program (OCIPs)
• If you are working under a OCIP, the owner will
  want you to provide a credit for the general
  liability premiums since they are providing the
  coverage.
• The OCIP will provide the general liability for
  ongoing operations and for a specified period for
  completed operations.

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Top Ten GapsGeneral Liability

• Owner Controlled Insurance Program (OCIPs)
• Three Major Issues
• Limits to be shared by ALL insured parties.
• Coverage provided for all parties.
• Length of extended completed operations.

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Top Ten GapsGeneral Liability

• Owner Controlled Insurance Program (OCIPs)
• Possible Solutions
• Modify the contractors general liability policy
  to provide coverage excess of the OCIPs limits.
• Modify the contractors general liability policy
  to provide Difference in Conditions - effectively
  wrapping around the OCIP general liability
  coverage.
• Modify the contractor general liability policy to
  provide completed operations coverage once the
  OCIPs coverage is terminated.

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Top Ten GapsOCIPs Limits
General Contractors General Liability Excess
Limits
25,000,000
OCIP Limits
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Top Ten GapsOCIPs Coverage
OCIP Coverage
DIC Coverage
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Top Ten GapsOCIPs Completed Operations
Contractor Completed Operations to the Statute
OCIP 3 Year Completed Operations
OCIP Ongoing Operations
1998
2000
2003
2008
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Top Ten GapsGeneral Liability

• Damage to Work
• Exclusion L. Damage to Your Work
• Property Damage to your work arising out of
  it or any part of it and included in the
  completed operations hazard.

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Top Ten GapsGeneral Liability

• Damage to Work
• Exception to the Exclusion
• This exclusion does not apply if the damaged work
  or the work out of which the damage arises was
  performed on your behalf by a subcontractor.

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Top Ten GapsGeneral Liability

• Damage to Work
• Look out for a CG 22 94 10-01 exclusion that
  removes the subcontractor exception.

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Top Ten GapsGeneral Liability

• Residential Operations Definition
• Underwriters are narrowing and in some cases
  excluding coverage for residential projects.
• CNAs definition of residential - all single or
  multi family housing properties including
  apartments, custom single family homes, tract
  housing, condominiums, town houses, military
  housing, school dormitories, retirement
  communities and nursing homes.

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Top Ten GapsGeneral Liability

• Residential Operations Definition
• Sample Definition
• The term residential construction shall mean
  the construction or renovation of any for-sale
  unit, including single or multi-family homes,
  condominiums, row-houses or town-homes. It does
  not include apartment buildings, assist living
  facilities (unless units are made available for
  sale to individuals), hotel construction,
  dormitory housing, military housing or other
  habitational dwellings that are not made
  available for sale to individuals.

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Top Ten GapsGeneral Liability

• Additional Insured Goals for General Contractors
• Deliver the product to the Owner
• Primary risk transfer mechanism
• Quick resolution of defense/indemnity obligations

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Top Ten GapsRisk Transfer Illustration
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Top Ten GapsRisk Financing Illustration
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Top Ten GapsCG 20 10 11 85 - Liability Arising
out of Your Work

• One hurdle - Your Work
• No trigger of negligence
• Includes completed operations
• Broadest form around was widely used and is
  still quoted as a requirement

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Top Ten GapsCG 20 10 10 93 Liability Arising
out of Your Ongoing Operations

• One hurdle - Your Ongoing Operations
• No trigger of negligence
• No completed operations
• Widely provided

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Top Ten GapsCG 20 10 10 01 / CG 20 37 10 01

• Forms often used together
• Provides ongoing operations on 20 10
• Provides completed operations on the 20 37

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Top Ten GapsCG 20 10 07 04 / CG 20 37 07 04

• Similar to 10 01 forms above for grant of
  coverage
• Provides ongoing operations on 20 10
• Provides completed operations on the 20 37
• Requires showing that liability was caused by
  the subcontractor

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Top Ten GapsUmbrella Liability

• Covers multiple lines of coverage.
• General Liability
• Auto Liability
• Excess Liability
• True umbrella forms included coverage for losses
  not covered by the underlying policies.
• There is no standard umbrella liability form.
  Each insurer develops their policy form and there
  are major differences amongst the insurers.

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Top Ten GapsUmbrella Liability
25,000,000 Umbrella
2,000,000 Auto Liability
2,000,000 General Liability
1,000,000 Excess Liability
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Top Ten GapsUmbrella Liability

• The recent trend in the umbrella liability market
  is to reduce coverage and not provide broader
  than primary coverage.

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Top Ten GapsUmbrella Liability

• In many cases, the umbrella provides less
  coverage than the primary policies.
• Contractors limitations endorsement are different
  from carrier to carrier.
• Key exposures to review
• Professional Liability
• OCIPs
• Joint Ventures, Partnerships and LLCs

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Top Ten GapsUmbrella Liability

• Quick Checklist
• Mold
• Terrorism
• EIFS
• Construction Defects
• Damage to Your Work
• Professional Liability
• Joint Ventures, Partnerships and LLCs
• OCIPs
• Additional Insured

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Top Ten GapsAutomobile Liability

• Coverage for third party bodily injury and
  property damage, including loss of use caused by
  the negligence of the insured arising out of the
  ownership, maintenance or use of a covered
  automobile.

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Top Ten GapsAutomobile Liability

• Uninsured and Underinsured Motorist
• Provides coverage if the negligent part is
  uninsured or underinsured as respects the dollar
  value of the injury or property damage.
• Recommend purchase due to the number of uninsured
  and underinsured drivers. All the escalating
  cost of medical care.

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Top Ten GapsAutomobile Liability

• There is a standard auto liability policy form
  published by the Insurance Services Office (ISO)
  and used by insurers.
• Policy form can be modified by the attachment of
  endorsements.

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Top Ten GapsAutomobile Liability

• Use of symbols to define the types of automobiles
  that are covered.
• Symbol 1 Any auto - broadest
• Symbol 2 Owned auto
• Symbol 8 Non-owned auto
• Symbol 9 Hired auto
• Recommendation The auto liability coverage
  should be provided using Symbol 1 any auto to
  avoid any uninsured vehicles.

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Top Ten GapsAutomobile Liability

• Insured parties expanded by endorsement
• Employer as Insured (CA 99 33)
• Broad Form Driver Other Car (CA 99 10)
• Exclusions modified by endorsement
• Contractual - Railroad Operations (CA 20 70)
• Broader Pollution Coverage (CA 99 48)
• MCS-90 to meet federal requirements

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Top Ten GapsContractors Pollution Liability

• Since the general liability policy is not
  designed to provide coverage for pollution
  conditions arising out of a contractor
  operations, many contractors purchase a separate
  contractors pollution liability policy.
• There is no standard contractors pollution
  liability policy. Each insurer has their own
  unique manuscript policy form.

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Top Ten GapsContractors Pollution Liability

• Key Issues
• Who is insured?
• Contractor
• Newly acquired or formed organizations
• Joint ventures
• Named joint ventures only
• Blanket joint ventures (preferred)
• Executive officers, stockholders and employees

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Top Ten GapsContractors Pollution Liability

• Policy Limit
• Each pollution incident 2,000,000
• Annual aggregate 4,000,000
• Project aggregate 2,000,000
• Defense inside or outside the limit. (Preferred
  approach is outside the limit.)

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Top Ten GapsContractors Pollution Liability

• Coverage Trigger
• Occurrence (preferred)
• Claims-made
• Sudden and accidental only

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Top Ten GapsContractors Pollution Liability

• Coverage Territory
• Anywhere in the world (preferred)
• U.S., its territories and Canada

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Top Ten GapsContractors Pollution Liability

• Covered Operations
• Blanket coverage (preferred)
• Designated activities
• Subcontractors operations on insured behalf
  (recommend for all general contractors)
• Remediation operations
• Completed operations

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Top Ten GapsContractors Pollution Liability

• Covered Damages
• Bodily injury and property damage
• Loss of use of damaged property
• Clean-up costs
• Contractual liability
• Fines and penalties
• Specific coverage for mold (recommend for all
  general contractors)

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Top Ten GapsContractors Pollution Liability

• Covered Damages
• Asbestos
• Lead
• Auto, watercraft, aircraft or rolling stock
• Underground storage tanks
• Off-site disposal of waste

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Top Ten GapsContractors Professional Liability

• Properly endorsed the contractors general
  liability policy will provide limited coverage
  for losses arising out of professional errors and
  omissions.
• Active bodily injury and property damage only
  no coverage for efficacy, output performance or
  other potential losses.
• There is no standard contractor pollution
  liability policy form. Each carrier develops
  their manuscript policy form.

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Top Ten GapsContractors Professional Liability

• Key Issues
• Coverage Form
• Claims-made
• Occurrence (preferred)
• Retro active date
• Insuring Agreement
• Pay on behalf (preferred)
• Indemnity
• Legal Standard
• Negligence not a condition of coverage
  (preferred)
• Negligence is a condition of coverage

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Top Ten GapsContractors Professional Liability

• Key Issues
• Duty to defend
• Duty to defend all covered claims (preferred)
• Duty to defend where deductible has been met
• No duty to defend

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Top Ten GapsContractors Professional Liability

• Key Issues
• Policy territory
• Worldwide (preferred)
• U.S., its possesions and Canada
• Person Insured
• Named insured and spouse
• Joint venture
• Blanket coverage (preferred)
• As named
• Officers, directors and employees
• Former employees, partners

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Top Ten GapsContractors Professional Liability

• Key Issues
• Limits of liability
• Per claim limit 5,000,000
• Aggregate limit 5,000,000
• Defense
• Covered outside the limit (preferred)
• Covered inside the limit
• Services
• Performed by insured
• Performed by others (subconsultant on insureds
  behalf) (recommend for all general contractors)

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Top Ten GapsSummary

• Developing a comprehensive insurance program for
  a general contractor will involve
• Standard Forms
• Workers Compensation - NCCI
• General Liability/Auto Liability - ISO
• Standard Forms Modified by Endorsements
• General Liability
• Auto Liability
• Carrier Specific Manuscript Forms
• Builders Risk
• Umbrella Liability
• Contractors Pollution Liability
• Contractors Professional Liability
• Matching up the contractors exposure with the
  proper insurance coverage requires a high degree
  of technical expertise to avoid common coverage
  gaps.