Mitigate Risk with a Construction Project Insurance Checkup

Originally published by the Daily Journal of Commerce on November 14, 2024

As we approach the end of 2024, prudence dictates a checkup on one of the most critical risk management tools for developers, builders and designers – insurance. With multiple acronyms out there such as OCIP, CCIP, OPPI, GL, PL and SDI, defining the right insurance program for a project can be daunting. Common mistakes leading to coverage denials include deferring to “standard” insurance forms (hint: nothing is “standard”), misplacing reliance on informal broker assurances (get it in writing), and being reluctant to wade through the swamp of policy “endorsements” that exclude certain claims. To mitigate the danger of lacking or losing coverage, consider the following general rules and best practices when reviewing coverages or claims.

Checkup no. 1: Obtain adequate proof of insurance. Traditionally, parties rely on stock contract terms requiring each party to produce only a certificate of insurance or an ACORD certificate. Unfortunately, these certificates can be largely worthless as evidence of coverage when a claim arises because they typically do not specify the endorsements excluding coverage (e.g., exclusions for multifamily 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 specifically disallow in one’s contract any insurance endorsements that don’t fit one’s needs.

Checkup no. 2: Enforce insurance requirements downstream. As a transactional attorney and a litigator, I’ve seen a key subcontractor performing a material or risky portion of work carrying only its standard $1 million coverage. Or, on a project with potential soil or site condition problems, the geotechnical engineer carries only a $1 million policy – or worse, a contractual limitation of liability to the amount of its fee.

Best practices: Specify requirements in prime contracts for the prime contractor and architect to ensure certain insurance levels for their subs. Also, consult an insurance broker early to gain independent written confirmation of the appropriate types and limits of coverage for the project.

Checkup no. 3: Use insurance tracking protocols. Despite efforts 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 and COI copies in a separately labeled electronic file. Calendar out regular intervals following project completion to reconfirm policy limits and any change in policy providers. 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 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.

Checkup no. 4: Know the time frame within which to report a claim. Many policies require claims reporting and cooperation within a specific or reasonable time. Delays in recognizing and reporting claims can risk denials of coverage.

Best practices: Review policies annually for applicable notice requirements and claim deadlines 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.

Checkup no. 5: Consider whether to name additional insureds. Standard ISO endorsements are available to provide additional insured or “AI” status to various classes of entities on construction projects. 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.

Best practices: Remove any cross-suit exclusion from the policy and specifically analyze the risks of naming multiple parties as additional insureds.

Complex construction projects carry complex insurance coverage issues that require detailed analysis to mitigate potential oversights in coverage. Ensure periodic reviews of insurance policy language and endorsements, utilize tracking protocols, and double-check policies on specific projects to ensure coverage is not excluded. While the law of unintended consequences mandates that all parties to a project will likely face risks and potential claims, with some foresight and consultation with insurance brokers and attorneys, the parties should be best prepared for any potential coverage issues when they arise.