Melanie C. Kalmanson is an associate in the Tampa office of national law firm Quarles & Brady. Opinions are the author’s own.
In construction, it is standard practice for a general contractor to ask a subcontractor for proof of insurance before starting work on the project — and likewise for subcontractors hiring sub-subcontractors. That proof is usually provided by a standard form known as a “certificate of insurance.”
If the project goes smoothly, the COI will likely sit in a file without being reviewed again. But when an issue arises (a notice of a construction defect, for example), the COI is one of the first documents located for purposes of identifying the insurers involved in the project and submitting claims.
Companies often assume that having a COI on file means there is insurance coverage. We urge GCs (and subcontractors) to question, and even challenge, this assumption. In reality, the COI only tells a part of the story and does not guarantee coverage.
Just because a subcontractor has tendered a COI does not mean the subject policy will cover that damage or injury arising from the work performed. The COI may not accurately describe the subject policy, and coverage limitations or exclusions in the underlying policy could result in a denial of coverage. In fact, the standard COI document, the ACORD form, includes disclaimers to this effect:
THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. THIS CERTIFICATE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE CERTIFICATE HOLDER.
This risk makes it even more important for contractors to fully and properly vet subcontractors before signing a contract and starting work.
So what can the contracting party do to confirm that subcontractors are appropriately insured?
Determining the best options depends on several variables, including the value of the contract, the size of the project, the relationship with the subcontractor and the resources the contractor is willing to invest. The contracting party should consider the list below to hedge against the risk of no coverage.
Add the scope of contracted work to the COI
At minimum, the contractor should insist that the description of work section of the COI is consistent with the scope of work in the contract controlling the parties’ relationship. Doing so gives information regarding the intended work to allow review before signing the COI.
While the standard disclaimer above indicates that the COI is not a contract for insurance, one should still review the scope of work details in the COI before .
Include contract language requiring coverage
The contracting party might consider including language in the contract that requires the subsigning contractor to maintain certain types and amounts of coverage and to name the owner, the GC and all other interested parties as additional insureds on the underlying policy.
This language creates a contractual obligation related to the insurance coverage and, thereby, creates grounds for a breach of contract claim in the event that the subcontractor fails to maintain the specified coverage. Of course, a breach of contract claim may be worthless if the subcontractor is insolvent. Without actual insurance coverage, achieving any actual recovery could be jeopardized.
Ask for the policy
The contracting party should ask for copies of the entire policies — including endorsements and addenda — from the insured (i.e., the subcontractor) at the outset of the engagement for review, or include a contractual requirement for the subcontractor to provide the policies upon request. Understanding the scope of coverage is important, and often requires reading the actual policies.
For example, commercial general liability policies typically cover bodily injury and property damage claims, but often contain many nuanced exclusions.
Obtain a OCIP or CCIP
One way to avoid confusion and gaps in insurance coverage between project participants is to obtain a controlled insurance program to cover all liability and losses during an entire construction project. These programs are generally referred to as “wrap-up” insurance policies or programs. A controlled insurance program covers all project parties, including the owner, GC, subcontractor and sub-subcontractors. The types of policies are generally procured with larger projects where their higher cost is justified.
The GC usually purchases a contractor-controlled insurance program, while the owner tends to purchase an owner-controlled insurance program. Both programs typically cover general liability coverage (including umbrella/excess liability), and provide coverage from claims arising from death, bodily injury and property damage. These programs can include a completed operations tail that provides coverage until the statute of limitations has expired.
Finally, these programs can be expanded to include builder’s risk, workers’ compensation (depending on the jurisdiction), professional liability and subcontractor default insurance, in addition to other types of coverage.
Because all project participants are insured under the controlled insurance program (whether CCIP or OCIP), the issues surrounding an inaccurate or deceptive COI become less relevant. However, it is important to keep in mind that a controlled insurance program may not provide certain coverages, such as automobile coverage. For those coverages that are not part of the controlled insurance program, it is important to secure a proper COI. Consult with your broker and legal counsel to ensure no coverage gaps exist.
Finally, while a controlled insurance program may offer many advantages, there are some disadvantages. Consider if such a program is appropriate at the early stages of the project before bidding commences, as these policies will impact overall project pricing.
Obtain subcontractor default insurance
Another insurance consideration for a project is whether subcontractor performance will be bonded, and if so, whether subcontractor default insurance is a better solution than a performance bond. Although SDI is slightly different from traditional insurance coverage — such as commercial general liability or professional liability coverage — SDI can be part of a controlled insurance program.
However, it is important to keep in mind that many jurisdictions do not permit SDI for public projects, in which case traditional performance bonds will need to be used.
SDI protects the GC against losses incurred due to the default of a subcontractor. While performance bonds require three parties (GC, subcontractor and a surety company), SDI involves only the insurer and the insured GC (who usually requires its subcontractors to enroll in the GC’s SDI program). In the event of a covered subcontractor default, the SDI insurer directly indemnifies the GC for any costs related to the subcontractor’s default. Under a performance bond, the surety investigates the claim, which can create costly delays on a time-sensitive project. Likewise, SDI adds additional expense to a project which may already have thin profit margins.
There are a variety of options to help reduce the risk of uncovered losses by subcontractors and other vendors. At minimum, the COI should include the scope of work to be performed by the subcontractor or vendor, and the insurance coverage provided should be verified. Depending on the risk exposure, additional insurance products can be procured.
Of course, consulting with your legal and insurance professionals — before a claim occurs — may be the most important choice.
Quarles & Brady attorneys Benjamin B. Brown and Charles W. Cousland contributed to this article.