Year-End Insurance Review: Common Coverage Oversights

On construction projects, carrying adequate insurance is a critical risk management tool for developers, builders, and designers.  Yet, the important intricacies of coverage are too often overlooked at the time of contracting as the parties deal quickly to get a project moving forward.  Deferral to simplistic insurance certificates, reliance on informal broker assurances, and reluctance to wade through the swamp of policy “endorsements” that act to exclude particular claims can too often lead to future coverage denials at the exact time the parties have the greatest need for the insurance coverage they thought they’d secured.  To mitigate that danger, what follows are some of the more common insurance coverage oversights and potential corrective measures to keep in mind the next time you’re reviewing coverages or claims.

• Oversight #1 - Parties fail to obtain adequate proof of insurance. Traditionally, parties rely on stock contract terms requiring each party to produce a Certificate of Insurance or ACCORD Certificate. However, these certificates can be largely worthless as evidence of coverage because they typically do not specify the endorsements excluding coverage (e.g., for multi-family dwellings, condominiums, mold, and cross-suits by one insured against another). Corrective measures - To confirm project-specific coverage, obtain copies of the actual policies, double-check all endorsements, and use an insurance rider to the contract specifying that particular endorsements are not included.
• Oversight #2 - An insured delays reporting a claim. Most policies, and especially claims-made policies, have prompt reporting requirement language in the ISO forms requiring reporting and cooperation within a specific or reasonable time. Delays in recognizing and reporting claims can result in complete denial of coverage. Corrective measures - Review your policies annually for applicable reporting requirements or ask your broker or attorneys to identify the specific timelines therein. Ensure your project leads are aware of the deadlines and practice prompt reporting of claims.
• Oversight #3 - Despite spending significant time negotiating contract rights and obligations, a party fails to address the contractual liability exclusion, thereby potentially negating coverage for obligations assumed in a contract or agreement. Corrective measures - Ensure the contractual liability exclusion is modified to account for specific contractual liabilities and/or expressly include contractual liabilities in the project-specific insurance rider.
• Oversight #4 - Unintended consequences of naming 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 an insured sues another insured. Corrective measures - Remove any cross-suit exclusion from the policy and analyze any potential consequences of naming multiple parties as additional insureds.
• Oversight #5 - Insurance tracking protocols. After expending considerable effort at the contracting stage to secure correct insurance, the parties neglect to track insurance during construction and for the duration of the applicable statute of repose. When a claim arises several years after project completion, evidence of policies and coverage is hard to locate and determine. Corrective measures - Compile policy copies (or at least the certificates) in a separate electronic file for each project labeled “Insurance” rather than leaving the certificates in each designer’s or builder’s 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 one-page spreadsheet that lists each project participant and its policy numbers, limits, and notable exclusions for each year of construction and for each year following project completion.

Complex construction projects carry complex issues regarding insurance coverage that require time to carefully think through and mitigate the risk of potential oversights in coverage. Ensure periodic reviews of insurance policy language (including all endorsements), utilize tracking protocols, and double-check your policies on specific projects to make certain coverage is not excluded. While the law of unintended consequences mandates that all parties to a project will likely face problems, disputes, or potential claims, with some foresight and the right questions of insurance brokers, attorneys, and each other, the parties can be best prepared for any potential coverage issues when they arise.

“Year-End Insurance Review: Common Coverage Oversights” was originally published by the Daily Journal of Commerce on November 18, 2016.