Contractor Insurance Requirements – A Primer

When risk management department is assigned to focus on the major project, including construction, with particular attention to the insurance requirements to be imposed on the general contractor and any subcontractors, it’s very important not to make the insurance requirements so onerous that contractors are discouraged from bidding on the project.For those of us, who has not been involved in such projects before, let’s review insurance requirements from different projects and how those may affect our company (let’s call it ABC company – the one who impose insurance requirements).

Outdated Insurance Terminology
What may strike us about the old insurance requirements is the insurance terminology used. There is reference to “comprehensive general liability insurance” including endorsements listed as “broad form property damage,” “broad form blanket contractual liability,” “cross liability,” “XCU” and “additional named insured.” The limits are also listed as split limits – one applicable to bodily injury, and another lesser limit applicable to property damage.Similarly, the auto insurance requirement refers to “comprehensive auto liability” and workers’ compensation insurance includes the “broad form all states endorsement.” Further, all of the requirements are to be evidenced by a certificate of insurance that provides certificate holder a 30 days advance notice of cancellation. It becomes readily apparent that these requirements are so outdated as to be virtually useless – the coverage, endorsements and limits listed are obsolete and are no longer available. We must start from the beginning.

Learning the Scope of Insurance and Risk Analysis
After a substantial amount of research, including acquiring an understanding of the scope of today’s most common insurance policies, we can summarize the risks confronting ABC company’s and conclude that our goal is to write the insurance requirements to provide broad protection, while at the same time ensuring the requirements are both reasonable and understandable to the contractors. We’ll use today’s insurance terminology, including requiring policy form numbers, in order to be specific and make it easier for both ABC company and the contractors to determine if the required coverage is being purchased.

As a general matter, we want the contractors to have limits more in keeping with today’s custom and practice, and includes ABC company as an additional insured. In fact, when considering the order she wants the contractor’s policy to respond, we know it is important to make sure the insurance requirements clearly state that the liability policies on which ABC company will be an additional insured will respond first – the contractor’s policies will respond before our own liability policies – and that the contractor’s liability insurance must agree to not seek contribution from our own policies – the oft-mentioned “primary and noncontributory” order of coverage.

With respect to workers’ compensation insurance, our first concern is to make sure all persons that are or could be covered by the contractor’s workers’ compensation insurance are in fact covered. We’re well aware that ABC company might have to pay the state statutory workers’ compensation benefits of the contractor’s or subcontractors’ employees if they have not purchased the state-required workers’ compensation insurance. Finally, the principle of subrogation and how it differs from contribution will require the contractor’s insurers to waive their rights of subrogation against us.

The Resulting Insurance Minimum Requirements
Now we can write the following insurance requirements as basic requirements applicable to all contractors, subcontractors and sub-subcontractors for consideration by ABC’s legal counsel in drafting the bid specifications as well as the resulting construction contracts:

 All insurance must be written with an insurance company authorized to do business in the state in which the project is located and shall be placed with insurers with an A.M. Best rating of A- VIII or better.

General Liability
Commercial General Liability insurance using ISO’s CG 00 01 or its substantial equivalent with ABC as an additional insured using ISO’s CG 2038 or CG 2010 or its substantial equivalent for ongoing operations and ISO’s CG 20 37 or its substantial equivalent for completed operations with the following limits:

Contractor’s workers’ compensation and employers’ liability policy will list the state of the project in item 3A of the policy’s Information Page and will list on Part Three – Other States Insurance item 3C of the policy’s Information “all states except the states listed in 3A or any monopolistic state.” Further, contractor’s workers’ compensation and employers’ liability policy is to include a waiver of subrogation endorsement using NCCI’s WC 00 03 13 or its substantial equivalent.ABC reserves the right, prior to acceptance of the contractor’s bid, to either require additional types of workers’ compensation or employers’ liability coverage or require greater employers’ liability limits based on the nature of the operations being performed by the contractor.

Umbrella or Excess Liability
In addition, contractor shall provide umbrella or excess liability insurance providing in excess of the underlying Commercial General Liability, Business Automobile Liability and Employers’ Liability insurance above, with the following minimum limits:

Such umbrella or excess liability policy shall provide substantially the same coverage as the underlying Commercial General Liability (including ABCe as an additional insured), Business Automobile Liability or Employers’ Liability insurance and shall expressly provide that the umbrella or excess policy will drop down over a reduced or exhausted aggregate limit of the underlying insurance. The umbrella or excess policy shall also be primary insurance to ABC (including primary insurance to ABC’s own Commercial General Liability and Umbrella policies) and contractor’s umbrella insurer agrees not to seek contribution from ABC’s insurance.ABC reserves the right, prior to acceptance of the contractor’s bid, to require greater limits based on the nature of the operations being performed by the contractor.

Any subcontractors engaged by the contractor shall comply with all of the above requirements.

Conclusion
Now we have a very keen sense of the difficulty in writing insurance requirements that protect our employer but are also reasonable, clear and specific for the contractor. We also understand that regardless of what is contained in the insurance requirements, a contractor or subcontractor may not comply and therefore ABC must be prepared to bend when it is reasonable to do so. Thus, it is our recommendation to the owner to remain diligent in overseeing and enforcing the insurance requirements and to keep in mind the absolute importance that those persons actually handling the enforcement have a strong understanding of insurance and its role in the construction project.