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Should builders risk policies
cover nonowner entities as insureds? You bet, and here is why.
Steven A. Coombs
In many respects, builders risk policies are structured to satisfy
the insurance requirements set forth in the construction contracts
governing a project. Nearly all construction contracts will specify
those required to be protected by the builders risk insurance, typically
the owner, general contractor, and subcontractors. This usually
involves "naming" them in the builders risk policy in some way.
Keep in mind that builders risk policies are not standardized. Most
insurers have their own policy forms. As a result, they add parties
as insureds in a variety of ways, based on how they word their policies
and the internal underwriting guidelines they follow.
The four most common standardized construction contracts illustrate
the variations in which interests are to be covered. Sample standard
requirements outlining which parties are to be covered are listed
below. (All italicized sections are for emphasis only.)
of Architects (AIA)
11.3.1 … This insurance shall include
the interests of the Owner, the Contractors,
Subcontractors and Sub-subcontractors in the Project….
Source: AIA Document A201–2007, General Conditions
of the Contract for Construction, 16th ed., AIA, 2007.
21.4.1 … This insurance shall also name the
Constructor, Subcontractors, Sub-subcontractors,
Material Suppliers and Designers as named insureds.…
Source: ConsensusDOCS 300, Standard Form of Tri-Party
Agreement for Collaborative Project Delivery, ConsensusDOCS LLC,
Engineers' Joint Contract
Documents Committee (EJCDC)
5.06.A … This insurance shall … include
the interests of Owner, Contractor,
Subcontractors, and Engineer, and any other individuals or
entities identified in the Supplementary Conditions,
and the officers, directors, members,
partners, employees, agents, consultants, and subcontractors of
each and any of them, each of whom is deemed to have an insurable
interest and shall be listed as a loss
Source: EJCDC Form C–700, Standard General Conditions
of the Construction Contract, EJCDC, 2007.
of America (DBIA)
5.3.1 … The property insurance obtained by Owner
shall … include as additional insureds
the interests of Owner, Design-Builder,
Design Consultants and Subcontractors of any tier.
Source: DBIA Document No. 535, Standard Form of
General Conditions of Contract Between Owner and Design-Builder,
2d ed., DBIA, 2009.
As is clear, there is variability as to which party is to be
protected and on what basis. AIA leaves it open as to how to "include
the interests" of the stated parties. ConsensusDOCS requires "named
insured" status; DBIA specifies named parties be "additional insureds";
and EJCDC mandates protected parties be listed as "loss payees."
Four different standardized construction contracts seemingly take
four different approaches. However, the general consensus of the
construction insurance world (including the authors of
The Builders Risk Book,
IRMI, 2010) is to protect the designated parties by naming them
as insureds or additional named insureds. General reasons for this
approach are (1) to afford direct coverage to the project stakeholders,
(2) to avoid subrogation actions following a loss, and (3) to comply
with the contract documents. (It should be noted that insurers will
not necessarily agree to protect all the parties listed in standardized
contracts. Underwriters commonly refuse to add architects, engineers,
and material suppliers as insureds.)
An article recently appeared in
The Construction Lawyer, a
highly respected publication, that takes an opposing view on naming
parties, other than the owner, as named insureds or additional insureds.1
The authors point out that they are approaching this issue
from the standpoint of a project owner, so their comments must be
viewed accordingly. They contend that providing named insured status
to anyone other than the owner is wrong because the acquisition
of rights by others can spell trouble for the owner, construction
contracts often require the owner to act as a fiduciary to other
named insureds, and being a named insured does not immunize one
In support of their position, they detail some of the problems
that nonowner insureds can cause. These include:
The conclusion reached is that, in lieu of granting insured status
to others, the contract documents should be prepared to protect
subcontractors' interests, ensure payment to subcontractors (both
before and after a loss), mutually waive subrogation rights against
each other, and ensure that the subrogation waiver is recognized
in the builders risk policy. The authors feel this will provide
certainty to subcontractors and suppliers that they will not be
The contrary view is one step forward and ten steps backward.
This view does put forth some arguments for refining builders risk
policies to better protect the owner against adverse actions or
inaction by other insureds (named or otherwise). That is positive
and worthy of consideration when designing and implementing builders
risk insurance policies. More on that later.
The builders risk policy is the risk transfer tool that allocates
the risk of accidental physical damage loss to the project to a
single source, the builders risk insurer. The builders risk policy
is there to protect the project and provide funding for repairs
and reconstruction following a loss. This includes protecting the
owner, construction manager, general contractor, and subcontractors.
If stakeholders are not included as named insureds or additional
insureds (depending on the structure of the policy), the following
is likely to occur:
Breach of Contract—The owner will be in breach
of its contract if it is required to protect other
entities as insureds and fails to do so. Let's face
facts: Contractors and subcontractors are well versed
in the consequences of uninsured builders risk losses.
Contractors of all shapes and sizes want to be protected
by an insurance policy that shows them as an insured
instead of someone saying their "interests are protected
as they may appear."2
Construction Costs Will Increase—Contractors
want assurances that they will be insured against
accidental loss to the project. If they do not have
confidence that that is the case, they will supplement
their construction bids to include additional costs
for insurance premiums and deductibles.
Litigation Will Increase—We live in a day where
insurance companies look at every alternative to
recoup money against negligent third parties. Without
some form of "insured status" in favor of contractors,
it is inevitable that conflicts, claims, litigation,
and costs will result. And this often comes at a
time in the project when maximum cooperation is
needed between the parties to finish the work. Subrogation
cases involving builders risk policies are plentiful,
even in those situations where the parties have
contractually waived subrogation rights.
The American Institute
of Architects Legal Citator3
lists scores of cases involving litigation surrounding
subrogation provisions contained in AIA contracts.
While being an insured under a builders risk is
not a guarantee against subrogation by a builders
risk insurer, it comes close.
As mentioned previously, a positive takeaway from the referenced
article is that the actions of other named or additional insureds
under the builders risk policy can harm a project owner. Those designing,
underwriting, and negotiating builders risk policies should keep
this in mind and determine how a specified policy form responds
to some of the problems that may arise.
Some builders risk policies contain specific clauses meant to
address these issues. These may be called "severability of interest,"
"separation of insureds," "multiple insured clause," "non-vitiation,"
or "divisible contract clause." These clauses are intended to protect
innocent insureds from the excluded or fraudulent acts of coinsureds.
Examples of such clauses follow.
The Insurers undertake to each Insured that the
policy will not be invalidated as regards the rights and interests
of such Insured and that the Insurers will not seek to avoid liability
under this policy because of any act, neglect, error or omission
made by any other Insured including any failure by any other Insured
to disclose any material fact, circumstance or occurrence, any misrepresentation
by any other Insured or any breach or non-fulfilment by any other
Insured of any condition, warranty, or provisions contained in the
The insurers agree that no Insured shall be penalised
or prejudiced in any way by any unintentional or inadvertent misrepresentation,
non-disclosure, want of due diligence or breach of any declaration,
terms, condition or warranty, of this Policy (together "the Relevant
Matter"), but that this shall not apply as regards to the individual
Insured responsible for the Relevant Matter if that Insured fails
to notify the Insurers or the brokers through whom the Policy was
placed as soon as reasonably practicable after the management or
managers of that Insured become aware or are made aware of the Relevant
Source: International Underwriting Association,
IUA Circular 068/09.
The first Named Insured shown in A. above shall
be deemed the sole and irrevocable agent of each and every Insured
hereunder for the purpose of giving and receiving notices to/from
the Company, giving instruction to or agreeing with the Company
as respects Policy alteration, for making or receiving payments
of premium or adjustments to premium, and as respects the payment
Source: Zurich Declarations PBR 001–DEC–(9–07).
1. … This Policy shall apply as if a separate
policy had been issued to such party provided that the total liability
of the insurer to all parties collectively shall not exceed the
sums insured and limits and sublimits of liability specified in
the Schedule or elsewhere in the Policy or endorsed thereto.
4. In the event of a VITIATING ACT being committed
by REPRESENTATIVES of any INSURED PARTY, the insurer shall be entitled
to avoid liability to such INSURED PARTY and to claim from such
INSURED PARTY any loss or damage it may have suffered including
any sums it may have paid to any other INSURED PARTIES as a result
of loss or damage caused by or contributed to by such VITIATING
5. It is however agreed that (except as otherwise
provided in this Multiple Insureds clause), a VITIATING ACT committed
by one INSURED PARTY shall not prejudice the right to indemnity
of any other INSURED PARTY who has an insurable interest and who
has not committed a VITIATING ACT.
6. In the event of the Insurer's refusal to indemnify
an INSURED PARTY as a result of a VITIATING ACT, no other INSURED
PARTY shall be entitled to indemnity in respect of the same loss
or damage by assuming the rights or obligations of the INSURED PARTY
whose claim for indemnity the Insurer has denied or is entitled
Source: Lloyd's manuscript policy.
Builders risk insurance is mostly provided using coverage forms
drafted by individual insurers. These forms evolve over time, and
underwriters use different methods and wording to protect parties
under their policies. The preferable method for protecting organizations
continues to be on a "named insured" or "additional insured" basis
(depending on how a policy is organized and worded). However, each
insured should be protected against the excluded or fraudulent acts
of coinsureds. If the builders risk policy being considered does
not already contain a severability of interest clause or similar
provision, you should request an endorsement from the underwriter.
Don't be surprised if the underwriter does not know what you are
requesting or says that he or she would never exclude coverage for
an innocent insured. This is part of the education process for all
parties. Underwriters will generally respond to reasonable requests.
This certainly falls into that category.
1Bell, Mark M., Christopher
S. Dunn, and James H. Costner, "Confronting Conventional Wisdom
on Builders Risk: From Named-Insured Status to Concurrent Causation,"
The Construction Lawyer (Fall
2For additional information
on this phrase, see Coombs, Steven A., "Builders
Risk Insurance: 'As Their Interests May Appear,'" Expert Commentary—Builders
Risk, IRMI (July 2010).
3Stein, Steven G.M.,
The American Institute of Architects
Legal Citator, LexisNexis (2007).
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