Should builders risk policies cover nonowner entities as insureds? You bet, and here is why.
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.)
American Institute 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, 2007.
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 payee.…
Source: EJCDC Form C–700, Standard General Conditions of the Construction Contract, EJCDC, 2007.
Design-Build Institute 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 , 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.)
Recent Article with Contrary Position
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.1The 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 from subrogation.
In support of their position, they detail some of the problems that nonowner insureds can cause. These include:
Voidance of the policy through acts of fraud or increasing the hazard at risk
Modification or cancellation of the policy
Binding the owner to an increase in premiums or adding new locations
Complicating the claims process
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 subrogated against.
Does the Contrary Position Hold Water?
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.
Severability of Interests
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 policy.
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 Matter.
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 for claims.
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 ACT.
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 to deny.
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.
1 Bell, 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 2011).
3 Stein, Steven G.M., The American Institute of Architects Legal Citator, LexisNexis (2007).
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