Avoiding Construction Contract Claim Disputes

 
 

construction risk contracts

Any risk manager knows that the wording of a contract is important. Yet construction contracts are often completed without a thorough analysis of the underlying insurance requirements, or a review of the terms of the insurance coverage expected to cover losses arising from the project.

As a result, when insurance claims are filed months later, organizations are forced to deal with the consequences of coverage issues that were not sufficiently reviewed during contract negotiations, including:

  • Disputes among owners, contractors and subcontractors as to whose insurance is responsible for indemnifying a loss, and whether proper notice was provided with respect to all potential sources of insurance
  • Disputes regarding whether the entity that suffered a loss is covered under the policy’s definitions of “named insured” or “additional insured”
  • Disputes regarding the applicability of unexpected exclusions and restrictions in the policy terms and conditions
  • Disputes regarding “gaps” in coverage when primary insurance policies and excess insurance policies have different terms and conditions
  • Disputes among parties to the contract because insufficient insurance was purchased

Addressing the following basic issues during the construction agreement and insurance review process will help all parties avoid such disputes:

1. Wrap-up policies or individual insurance? A wrap-up policy, commonly referred to as an owner-controlled insurance program (OCIP) or contractor-controlled insurance program (CCIP), provides general liability coverage for numerous parties involved in the construction project (owner, general contractor and subcontractors) under one policy. These policies are also available for builder’s risk coverage. Alternatively, each individual party on the project can provide insurance through its own policies.

Wrap-up policies provide a number of distinct advantages in dispute resolution. For instance, issues about who caused the damage or injury often do not need to be resolved because the policy provides insurance for all parties. Often, issues regarding the costs arising from  damage or injury are also more easily resolved. Wrap-up policies allow most issues to be resolved through discussions with a single insurer, rather than multiple carriers with conflicting interests when individual party insurance is at issue. Difficult and expensive disputes regarding the scope and application of “additional insured” coverage can also be avoided. In addition, total premium costs for all parties may be lower than those paid for individual policies.

Potential disadvantages of wrap-up policies include program administration costs, the challenges of maintaining quality control on the project, controlling disagreements regarding funding and claim administration that can impact the change order process, and requirements for up-front premiums.

2. Allocation of risk and additional insureds. All construction contracts contain detailed indemnity provisions that clarify which parties have the risk of loss under different circumstances. These provisions often address the transfer of ownership of portions of a project when partially completed areas or equipment are put to “beneficial use” while the rest of the project remains under construction. Companies should make sure that insurance coverage for the project matches the allocation of risk in the construction contract.

3. The scope of coverage required. Parties often complete construction contracts without fully discussing whether to purchase business interruption (or business income) coverage and completed operations coverage, even though these are both areas of potentially significant loss. Parties should also consider specialized lines of insurance such as environmental, flood and cyber coverage.

4. Exclusions and restrictions. Perhaps the most frustrating circumstance for parties is finding out after a loss event that the insurer is denying coverage due to an exclusion or restriction in the relevant policy. To prevent such surprises, it is critical to fully understand and review concepts such as “your work” and “your product” exclusions, “ensuing loss” coverage, effective policy dates, deductibles and sub-limits, and the multitude of other provisions in these complex agreements up front.

5. Certificates of insurance. In most states, certificates of insurance do not provide adequate evidence of the purchase and existence of coverage. Whenever practicable, get copies of both your policies and the policies on which you are an additional insured and obtain proof of purchase.

 
Barry Fleishman

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About the Author

Barry Fleishman is a partner at Kilpatrick Townsend & Stockton.

 
 
 

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