THE AMERICAN INSTITUTE OF ARCHITECTS NEW APPROACH TO INSURANCE: THE 2017 INSURANCE EXHIBIT

Transcription

1 American Bar Association Forum on Construction Law THE AMERICAN INSTITUTE OF ARCHITECTS NEW APPROACH TO INSURANCE: THE 2017 INSURANCE EXHIBIT Patrick J. O Connor, Jr. Faegre Baker Daniels LLP Minneapolis, MN Presented at the Fall Program October 3-7, 2017 Westin Copley, Boston, MA 2017 American Bar Association

2 I. INTRODUCTION Most contract documents published by the American Institute of Architects (AIA) are on a ten-year drafting cycle. The principal owner-architect agreements, owner-contractor agreements, as well as the general conditions document, were last issued in Their replacements are due to be released at the AIA s National Convention in Orlando, April 27-29, One of the more significant changes from the 2007 documents has to do with how the documents treat the subject of insurance. Designing and constructing projects is a risky business. Mistakes can and do happen. One of the principal methods for addressing design and construction risk is via transference for a premium to third-party insurers. Requiring construction participants to procure one or more types of insurance is an old concept. Mandating insurance in one form or another has been a staple of AIA contracts from the very beginning. The 2017 documents, however, mark a significant departure from the past. With the introduction of an insurance exhibit 1, the AIA has raised the profile that insurance is likely to play in the contract formation process. The new insurance exhibit prompts parties to explore insurance as a risk-management device in greater depth than they might otherwise have undertaken. II. EVOLUTION OF INSURANCE AS A RISK-MANAGEMENT DEVICE UNDER THE AIA CONTRACT DOCUMENTS From the very beginning, the AIA addressed the subject of insurance in its contract forms. The 1888 Standard Form Owner-Contractor Agreement contained the following provision: The Owner shall effect insurance on said work, in his own name and in the name of the Contractor, against loss or damage by fire, in such sums as may from time to time be agreed upon with the Contractor, the policies being made to cover work 2017 Patrick J. O Connor, Jr. 1

3 incorporated in the building, and materials for the same in or about the premises, and made payable to the parties hereto, as their interest may appear. 2 This initial attempt to address insurance was expanded upon in 1911 with the issuance of the first General Conditions Document. In 1911, the insurance provision of the General Conditions Document stated: Unless specifically provided otherwise in the Agreement the Owner and the Contractor shall each protect his own interest against loss or damage by fire, pending full performance by the Contractor of the work hereunder and full payment therefor by the Owner. For the purpose of maintaining fire insurance as far as concerns this Contract the Owner s interest at any time shall be held to amount to the sum of all payments which he shall have made to the Contractor on account of this Contract. For the same purpose, the Contractor s interest shall be held to consist of any and all insurable value under and pertaining to this Contract not above defined as Owner s interest. Loss or damage by fire shall not affect the rights and obligations of either party under this Contract, except that in such event the Contractor shall be entitled to reasonable extension of time for the performance of this Contract, as provided under Article 28, Contractor s Claim for Extension of Time. The Contractor shall upon written notice from the Owner immediately proceed with the reinstallation of work damaged or destroyed, and the Owner shall make payments to the Contractor on account of reinstallation upon certificates of the Architect issued on the same principles as govern payments during its original construction as provided in the Agreement. Should the Owner and the Contractor fail to agree on the total amount thus to be paid, such amount shall be subject to arbitration. 3 Liability insurance made its debut in 1915, with the release of the Second Edition of the General Conditions Document: Liability Insurance. The Contractor shall maintain such insurance as will protect him from claims under workmen s compensation acts and from any other claims for damages for personal injury, including death, which may arise from operations under this contract. Certificates of such insurance shall be filed with the Owner, if he so require, and shall be subject to his approval for adequacy of protection. The Owner shall be responsible for his own contingent liability. 4 Between 1911 and 2007, the AIA General Conditions Document has gone through fifteen editions. 5 Since 1987, the revisions have occurred on a ten-year cycle. The insurance provisions reside at Article 11. This has been their home for the last several revision cycles Patrick J. O Connor, Jr. 2

4 Form contract documents, like automobiles, have a tendency to grow over time. The AIA s General Conditions Document was no exception. Article 11 of the 1976 General Conditions Document was one and one-half pages long and contained fifteen paragraphs. 6 By 1987, Article 11 consisted of nineteen provisions addressing insurance. The Article also was expanded to address the subject of performance and payment bonds. 7 Article 11 of the 1997 General Conditions Document addressed insurance in 22 paragraphs and introduced the optional coverage of Project Management Protective Liability Insurance. 8 The 1997 General Conditions Document also differed from the prior edition by assigning to the Owner losses within the deductible limits of required property insurance. The Owner directly obtains the benefit of lower premiums associated with higher deductibles and therefore should bear the loss within the deductible limit. The 2007 General Conditions Document made relatively minor changes to the insurance provisions of the prior edition. The AIA returned to the traditional additional insured coverage approach and abandoned Project Management Protective Liability Insurance. 9 The Contractor also was required to maintain completed operations coverage until the expiration of the period for correction of Work or for such other period for maintenance of completed operations coverage as specified in the Contract Documents. 10 While the AIA General Conditions Documents insurance provisions grew in number and complexity over the years, the contract formation process remained essentially the same. The parties were required to specifically address insurance in the Owner/Contractor Agreement forms. 11 The agreement forms only required the parties to set forth the limits of liability for the insurance required in Article 11 of the General Conditions Document. While the parties were free to modify Article 11 of the General Conditions Document or provide additional 2017 Patrick J. O Connor, Jr. 3

5 requirements in the Owner/Contractor agreement form, they were not required to do so in order to reach agreement with respect the insurance requirements governing the project. The AIA s contracting scheme with respect to insurance required nothing more from the parties than to set out the limits of coverage they deemed appropriate for general liability, automobile liability, and workers compensation/employer s liability insurance. In other words, the AIA s contract forms did not require much knowledge of insurance for the parties to reach agreement with respect to a project s insurance requirements. They simply had to set forth limits of the Contractor s required liability coverages. Simplicity is an important attribute in any contract document, and is particularly important with form agreements. The AIA contract forms are used by thousands on projects large and small. Insurance is a complex subject that is not well-understood by many of those using the AIA contract forms. The AIA s approach, therefore, has much to recommend it. The agreement form requires little from the parties in the way of substantive insurance knowledge and the General Conditions Document sets forth insurance requirements that are sufficiently thorough yet general to be appropriate for a broad range of projects. Why then, for 2017, has the AIA developed a new approach, one arguably more complex, to insuring the project? III. INSURANCE PRODUCTS BECOME MORE COMPLEX AND LESS UNIFORM Insurance products regularly used to insure against construction risks have grown more complex and diverse over the last twenty-five years. Nowhere is this more apparent than with commercial general liability insurance. The insurance industry developed the first standard general liability insurance policy in Before this time, the industry was characterized by a proliferation of policies specifically designed for particular businesses. 12 Prior to 1973, the responsibility for developing standard liability policy forms fell to the Insurance Rating Board, 2017 Patrick J. O Connor, Jr. 4

6 the National Bureau of Casualty Underwriters, and the National Bureau of Casualty & Surety Underwriters. More recently (beginning with the 1973 CGL form), the vehicle through which the industry develops standard general liability policy forms is the Insurance Services Office, commonly referred to as the ISO. The United States Supreme Court has described the function of the ISO as follows: ISO develops standard policy forms and files or lodges them with each State s insurance regulators; most CGL insurance written in the United States is written on these forms. For each of its standard policy forms, ISO also supplies actuarial and rating information: it collects, aggregates, interprets, and distributes data on the premiums charged, claims filed and paid, and defense costs expended with respect to each form, and on the basis of this data it predicts future loss trends and calculates advisory premium rates. Most ISO members cannot afford to continue to use [an ISO] form if ISO withdraws these support services. 13 The ISO was formed in The ISO CGL policy form, like the AIA standard documents, has been subject to revision over the years. Some of the major revisions occurred in 1973, 1985 (known as the 1986 policy form), and Between the 1973 and 1986 editions, the name of the CGL policy was changed from comprehensive general liability to commercial general liability in acknowledgement of the fact that the CGL policy was not truly comprehensive in scope. On occasion, revisions to the CGL policy tailored coverage in such a way to spawn additional insurance products. For example, the broadening of the pollution exclusion to its current form the absolute pollution exclusion has given rise to a thriving market for pollution liability policies. Notwithstanding periodic revisions to the standard CGL policy, it was still possible until the last decade or so to achieve a reasonably accurate idea of what was being provided where the contract called for a party to provide CGL insurance. This was the case whether one was focusing on coverage provided to the named insured or additional insureds Patrick J. O Connor, Jr. 5

7 Current trends in the insurance industry, however, make relying upon the uniformity of CGL insurance a dubious practice, at best. With increasing frequency, insurers are modifying ISO CGL forms. Perhaps surprisingly, a prominent source of disruption to uniform coverage is the ISO itself. The ISO has developed numerous endorsements which when appended to the basic ISO CGL policy form can significantly alter coverage. The ISO has issued more than 100 exclusionary endorsements. 14 Some of the more critical ISO exclusionary endorsements for the design and construction industry include: CG CG CG CG CG CG CG CG CG CG CG CG CG CG CG CG Products/Completed Operations Hazard Exclusion Designated Professional Services Exclusion Designated Work Exclusion Personal & Advertising Liability Exclusion Contractual Liability Limitation Exclusion Total Pollution Exclusion Exclusion Designated Ongoing Operations Exclusion Exterior Insulation & Finish Systems (EIFS) Exclusion Fungi or Bacteria Silica or Silica-Related Dust Exclusion Exclusion Engineers, Architects or Surveyors Professional Liability Hazardous Material Contractors Exclusion Contractors Professional Liability Limited Exclusion Contractors Professional Liability Exclusion Damage to Work Performed by Subcontractors Exclusion Damage to Work Designated Sites or Operations The proliferation of ISO-related exclusions to the CGL policy form has prompted one commentator to note: At the rate liability policy exclusions are being generated by insurers, there may come a day when some insurance products will mirror those of the past, covering primary slip-and-fall cases. This may be a slight exaggeration, but it is true that many of the coverages provided since 1986 are fast disappearing; even reference to the comprehensive general liability policy is long gone. While some insurers 2017 Patrick J. O Connor, Jr. 6

8 have manuscripted exclusionary endorsements of the kind discussed here and have been using them for quite some time, ISO is just now introducing them for use with its standard forms. Some of these exclusions, perhaps the majority, have been targeted at the construction industry, where the quality of workmanship has been slipping to an all-time low and where complaints over construction defects can be expected with some regularity. Since 1986 when the easy-to-read commercial general liability policy was introduced, providing automatically many of the coverages that previously had required endorsements the construction industry has seen an unprecedented number of new exclusionary endorsements. 15 Unlike CGL policies, property insurance traditionally has been written on tailored forms created by individual insurance companies. While there are common features to property coverage, the policies can vary materially from company to company. The 2007 AIA documents addressing builder's risk insurance describe the required coverage in some detail, yet they only address the costs associated with reconstructing the damaged property. Time element coverages, such as business interruption insurance, are not mentioned. 16 Nor is the common practice of limiting coverage through specific sublimits addressed. Property insurance policies, like many liability coverages, have become more complex and diverse over the years. As was the case with the comprehensive general liability policy, the all-risk property or builder's risk policy is allinclusive in name only. Property policies contain numerous exclusions, limitations, and conditions which can eliminate or materially restrict coverage. The pace of change to both liability and property coverages has accelerated to the point where waiting ten years to revise the contract documents to capture or respond to these changes is simply too long. One advantage of an Insurance Exhibit is that it allows the AIA to stay current with developments in the insurance industry without having to revise the General Conditions Document. IV. PROMPTING PARTIES TO DISCUSS INSURANCE COVERAGE OPTIONS A legitimate aim of a form contract document is to prompt parties and their advisors to explore subjects that they might not otherwise consider unless so prompted. Certain subjects, like sustainability and insurance, lend themselves naturally to such treatment. While it is 2017 Patrick J. O Connor, Jr. 7

9 certainly possible to set forth a basic level of insurance coverage that may well be appropriate for a broad range of projects, in many cases parties have numerous options available to them for insuring the project whether they realize it or not. An exhibit that identifies a number of these options may well be of benefit to the parties. Many of these options pertain to available property coverages. Historically, the AIA contract forms have only required basic builder's risk insurance. There are, however, numerous extended property covers available in the marketplace, including: Business Interruption; Extra Expense; Civil Authority; Ingress/Egress; Soft Costs; Expedited Costs; and Law or Ordinance Sometimes these coverage extensions are built into an insurer s basic policy form, whereas other companies provide the coverage by way of endorsement. Other decisions, such as the existence and extent of any self-insured retentions as well as sublimits on certain coverages also may merit consideration when exploring property coverage for construction undertakings. V. AVOIDING OVERREACHING REQUIREMENTS The process of developing an insurance exhibit involved visiting with numerous insurance professionals, including brokers and attorneys specializing in insurance coverage for the design and construction industry, as well as reviewing numerous examples of insurance provisions in use in today s construction contracts. Through these efforts, the drafters sought an 2017 Patrick J. O Connor, Jr. 8

10 understanding of common expectations for project insurance and the range of products available from insurers to protect against material design and construction risks. A review of insurance language commonly used in design and construction agreements revealed a number of instances where the requirements simply were not achievable through the use of standard insurance products or placed undue burdens on one or more of the contracting parties. Common examples of such provisions include: Requiring contractors and subcontractors to secure a commercial general liability policy providing products and completed operations coverage for a number of years after project completion. Allowing insurance to be secured via a practice policy but calling for liability limits on a per-project basis. Requiring all employees of a party to be named as additional insureds. Requiring the insurer provide written notice of policy cancellation to all insureds rather than only the named insured. Requiring the policy to respond to all contractual liability. Requiring builder's risk policy to cover all property at the site, while in transit or stored temporarily off site as well as during testing and commissioning phases. Requiring builder's risk policy to respond to all loss due to physical damage arising from faulty workmanship or materials rather than loss that ensues from such events. Requiring builder's risk insurance to be maintained long after project completion. Requiring umbrella coverage be written on follow form basis Patrick J. O Connor, Jr. 9

11 Requiring limits of liability under professional liability insurance policy that are far in excess of those customarily carried by design professionals involved in projects of the type at issue. Requiring tail or extended reporting periods beyond those customarily available from professional liability insurers. 17 VI. DEFINING WITH MORE SPECIFICITY THE TYPES AND EXTENT OF INSURANCE COVERAGE It is common for construction contracts to set forth required liability coverages in no greater detail than identifying the types of insurance (e.g., commercial general liability, workers compensation/employer s liability, automobile liability) and the limits of coverage. Indeed, it is more common for construction contracts to specify additional insured coverage in greater detail than the requirements and scope of the underlying coverage. 18 Many construction contracts will require additional insured coverage to be written on a primary and non-contributory basis and may also identify specific ISO additional insured endorsement forms. The contractual language mandating the underlying coverage is frequently described only as commercial general liability insurance with specified per-occurrence and aggregate limits. The 2007 AIA Owner and Contractor Agreements require the parties to identify the limits of liability for the types of insurance to be provided by the Contractor. The General Conditions Document, which automatically becomes part of the parties agreement, sets forth the coverages required of the Contractor and provides scope to the required liability coverages. Section describes the scope of coverage to be provided in terms of the types of claims to which the insurance must respond. Commercial general liability insurance, for example, must respond to: 2017 Patrick J. O Connor, Jr. 10

12 Claims for damages because of bodily injury, sickness or disease, or death of any person other than the Contractor s employees. Claims for damages insured by usual personal injury coverage. Claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom. 19 Claims for bodily injury or property damage arising out of completed operations. Claims involving contractual liability insurance applicable to the Contractor s obligations under 3.18 (the indemnity provision). 20 With the exception of claims arising out of completed operations, this language has been a part of the AIA General Conditions Document since Over the years, the language has become familiar to many in the industry responsible for drafting and negotiating contracts. It is the kind of familiarity that one develops after seeing contract language long enough without actually having to critically examine just what it means. Familiarity, however, is not necessarily equivalent to clarity. This is common with contract language involving insurance requirements. Take the case of completed operations coverage, which was first introduced into the AIA General Conditions Document in What does it mean to say that the CGL policy must respond to claims for damages arising out of completed operations? Does completed operations have a meaning outside of the definition of products-completed operations hazard set forth in the various editions of the ISO CGL policy? If not, does this contract requirement add anything more than what would be achieved simply by requiring commercial general liability insurance? Moreover, the CGL policy does not respond to all claims for bodily injury or property damage arising out of completed operations. 22 One of the primary purposes for distinguishing between completed operations claims from claims that occur before the 2017 Patrick J. O Connor, Jr. 11

13 insured s work has been completed or abandoned is to determine which exclusions apply to the loss. Damages which occur during the insured s ongoing operations are subject to certain exclusions, whereas injury or damage which arises after the insured s work is complete (i.e., completed operations) is subject to different exclusions. So why the need to expressly address completed operations coverage? Why not simply require the contractor to purchase and maintain a CGL policy and be done with it? On a related issue, does requiring the Contractor to provide completed operations insurance suggest a particular scope of insurance? Can a contractor comply with this language by securing a CGL policy that eliminates coverage for damage to or arising out of subcontractor work? 23 This policy language materially reduces the scope of coverage, particularly for general contractors and others that employ subcontractors. 24 Rather than speculate about what level of insurance coverage is mandated by the requirement the Contractor secure a policy responding to completed operations losses, the consensus of the drafting committee was that more clarity would be achieved by directly addressing common attempts to reduce completed operations coverage through the elimination of the subcontractor exception language. The 2007 General Conditions language describing the scope of coverage by way of claims to which the insurance must apply fails to address a number of the ways the insurance industry has developed to tailor coverage for property damage losses occuring over multiple policy periods. Such losses are not uncommon in the construction industry. Faulty construction that results in water infiltration can cause property damage over multiple years. Some insurers have sought to limit their exposure for such losses by crafting endorsements that exclude coverage where the damage arises out of work performed before policy inception (prior work endorsements) or where the injury began before policy inception, notwithstanding its 2017 Patrick J. O Connor, Jr. 12

14 continuation during the policy period (prior injury endorsements). 25 Contract language requiring CGL coverage for damages because of injury to or destruction of tangible property or damages arising out of completed operations does not directly address the use of endorsements seeking to eliminate coverage for certain property damage claims, depending upon when the work or injury commenced. Once again, the drafters concluded that the better approach was to directly address these issues by prohibiting such endorsements. In some cases, while the 2007 General Conditions language clearly indicates the scope of coverage required, again perhaps due to its familiarity, the language may not be as effective as it could be in avoiding policy language that unreasonably restricts coverage. Take the requirement that the CGL policy respond to bodily injury claims of any person other than the Contractor s employees. 26 This language has not always been sufficient to prohibit the practice by some insurers of enlarging the workers compensation or injury to employees exclusions to capture agents, independent contractors, and others. A policy that eliminates coverage for bodily injury to persons who are not employees of the insured creates a coverage void because employer s liability and workers compensation policies generally will not respond to injuries to such individuals. 27 The drafters concluded that the parties could benefit from language that straightforwardly prohibited exclusions or restrictions for bodily injury claims other than to employees of the insured. The AIA s Documents Committee also determined that parties could benefit from contract language that specifically prohibited exclusion of coverage for claims related to certain types of work (e.g., residential, roofing, exterior insulation finish systems, earth movement, explosion, collapse, and underground hazards) where the insured s work involves such activities. The use of exclusions or restrictive endorsements tailored to specific types of work is a growing 2017 Patrick J. O Connor, Jr. 13

15 development and has reached a point where the Committee believed it merited attention in the contract documents. Construction agreements seldom address requirements for excess or umbrella coverage. The new Insurance Exhibit does more than most by expressly permitting the contractor to achieve the required limits of coverage for commercial general liability and automobile liability through a combination of primary and excess or umbrella liability insurance, provided such primary and excess or umbrella insurance policies result in the same or greater coverage required by the contract documents. 28 The Exhibit s language expressly prohibits any excess or umbrella insurance from providing narrower coverage than the primary coverage. 29 Permitting limits to be achieved through a combination of primary and excess insurance is bowing to commercial reality. Securing liability limits greater than a few million dollars usually requires one to access the excess insurance market. Nevertheless, securing coverage through a combination of primary and excess insurance is not always equivalent to securing the same amount of coverage by way of only a primary policy. Excess policies, even those claiming to follow form, may actually provide lesser coverage. 30 Another issue that can arise involves the preconditions for excess coverage to attach. Some excess policies are written in such a way that they are triggered only where the primary policy is fully exhausted by way of payments actually made by the primary carrier. Other policies permit what is known as functional exhaustion, which permits the insured to make up the difference between what the primary carrier is willing to pay and the full policy limits. Actual exhaustion policies can make settlement very difficult if there is a legitimate coverage issue. The AIA s Insurance Exhibit expressly prohibits excess policies written on an actual exhaustion basis Patrick J. O Connor, Jr. 14

16 VII. INFORMATION EXPRESSLY REQUIRED TO BE PROVIDED BY THE PARTIES IN COMPLETING THE EXHIBIT The 2007 AIA Owner and Contractor Agreement forms call for the parties to identify the limits of liability for the liability insurance required under Article 11 of the General Conditions Document. 32 The General Conditions Document requires the Contractor to secure workers compensation insurance, employer s liability insurance, automobile liability insurance, and commercial general liability insurance. The limits for workers compensation are mandated by law. The Owner s property insurance is required to be provided in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis. 33 Therefore, the parties must only make decisions regarding the coverage limits for three types of insurance: employer s liability; automobile liability; and commercial general liability. As a general rule, parties specify limits for each occurrence or accident (a per-occurrence limit), as well as a total limit for all occurrences (an aggregate limit). 34 The 2017 Insurance Exhibit provides a much richer menu of potential coverages, durations, and limits. 35 While the Exhibit prompts the parties to consider numerous options for insuring the project, they need only address limits for: (1) commercial general liability ( A.3.2.2); (2) automobile liability ( A.3.2.3); (3) employer s liability ( A.3.2.6), where the Contractor s work does not involve (1) the transport, dissemination, use or release of pollutants; (2) the furnishing of professional services; or (3) maritime/aviation liability risks. If the Work implicates these risks, the parties are required to identify the limits for the applicable insurance addressing the particular risks at issue. 36 The parties are not required to insert any information into the Exhibit with respect to insurance coverage other than for specifying the liability limits for commercial general liability 2017 Patrick J. O Connor, Jr. 15

17 insurance, automobile insurance, employer s liability insurance, and where the work involves such risks, contractor s professional liability insurance, pollution liability insurance and insurance for maritime liability/aircraft liability risks. The parties need complete no other check box or fill point contained in the Exhibit if they wish. 37 In this regard, the completion of the Insurance Exhibit should not be materially more difficult than completing the insurance information required by the current AIA Owner and Contractor Agreement forms. This is not to suggest, however, that the parties need only attend to A.3.2 (Contractor s Required Insurance) in order to properly address the project s insurance requirements. While this is the only section where the parties must provide information with respect to insuring the project, there are other provisions which may well require the parties to secure specific insurance depending upon the nature of the work. For example, A requires the Owner to purchase and maintain insurance on an existing structure where the work involves remodeling that structure or constructing an addition to the existing structure. The parties are not required to fill out any information with respect to this insurance, but it is an obligation placed on the Owner in the event the work involves an existing structure. Therefore, the parties are well-advised to carefully review the entire Exhibit even though the parties only need to fill out the liability limits for the insurance called for under A.3.2. VIII. TAILORING COVERAGE BY EXERCISING OPTIONS AND SPECIFYING LIMITS AND DURATIONS The Insurance Exhibit permits the parties to make dozens of decisions with respect to insuring the project. They are not required to make any decisions except for the liability limits of the Required Contractor s Insurance, but the Exhibit serves as a guide for exploring additional coverages that may be appropriate in the particular case. Other provisions guide the parties with respect to providing greater specificity concerning required property coverage Patrick J. O Connor, Jr. 16

18 A. Required Property Insurance The Owner is required to secure property insurance covering the Contractor s work unless the parties select the option ( A ) of having the Contractor provide this insurance. Section A describes in general terms the builder's risk insurance required for the project. The Owner is required to purchase builder's risk all-risks insurance on a completed value or equivalent policy form. The limits of this insurance shall be sufficient to cover the total value of the entire project on a replacement cost basis. At a minimum, this should be no less than the amount of the initial Contract Sum plus the value of any subsequent modifications, materials supplied or installed by others, and furnishings, fixtures, and materials located at the project site. If the project involves construction performed by the Owner s separate contractors, this work also should be covered by the Owner s property insurance. While all-risks property or builder's risk insurance seldom covers all risks, the Exhibit prohibits certain exclusions (i.e., fire, explosion, theft, vandalism, malicious mischief, collapse, earthquake, flood, or windstorm). The property insurance shall also provides coverage for ensuing loss or resulting damage from error, omission or deficiency in construction methods, design, specifications, workmanship, or materials. 38 Where it is not possible or desirable to purchase the required property coverage for specific perils at limits of the total project value, the Exhibit permits the parties to sublimit certain coverages. Earthquake and collapse are coverages that on occasion are subject to sublimits. The Exhibit also requires the builder's risk policy to provide specific related coverages. For example, false work and other temporary structures are to be covered. 39 Debris removal and required demolition also are coverages required to be provided, as well as coverage for damage to building systems from testing and startup. The required property insurance also shall provide 2017 Patrick J. O Connor, Jr. 17

19 reimbursement for the services and expenses of the Architect and Contractor incurred as a result of the loss, including work spent in assisting in claim preparation. Some of these coverages, such as debris removal, frequently are subject to sublimits. As a consequence, the Exhibit provides an opportunity for the parties to specify applicable sublimits for these coverages. The Exhibit also identifies a number of optional extended property coverage extensions that the parties may wish to secure in connection with the project. These include: Loss of use, business interruption, delay in completion insurance. Ordinance or law insurance. Expedited cost insurance. Extra expense insurance. Civil authority insurance. Ingress/Egress insurance. Soft costs insurance. 40 These optional property coverage extensions include several common time-element coverages. In many cases, the Owner is well advised to secure business interruption insurance, as it bears the risk of such loss under 11.4 of the General Conditions Document. 41 Because most builder's risk or permanent property policies are written on a manuscript basis, rather than a standard industry form, it is not unusual for one insurer s standard property policy to provide types and scope of coverage different from another insurer s property policy. For example, one insurer s property policy may include extra expense insurance and soft costs insurance as part of the basic coverage package, whereas another company s policy will provide these by way of specific coverage extensions. The Exhibit permits the parties to reach a more detailed understanding regarding the nature and extent of the project s property coverage Patrick J. O Connor, Jr. 18

20 The Exhibit also prompts the parties to discuss whether first-party cyber security insurance is a coverage that is appropriate under the circumstances. 42 There also is an opportunity for the parties to identify additional insurance coverages to be provided by the Owner. 43 There are a number of additional coverages an Owner may wish to secure for the project. For example, under the 2007 edition of the A201 General Conditions Document, the Owner is required to purchase Boiler and Machinery Insurance required by the Contract Documents or by law. 44 Breakdown Insurance. This coverage is now more commonly known as Equipment This insurance protects electrical systems, air conditioning and refrigeration equipment, mechanical equipment, and modern office equipment, in addition to heating systems such as boilers. This insurance is provided in two basic ways: (1) on a monoline policy basis, separate from a property insurance policy; and (2) within a property insurance policy either embedded into the policy form or added by endorsement to the overall policy. Because the required builder's risk insurance must cover the entire project on a replacement cost basis, this coverage should be part of the builder's risk policy. Therefore, it was decided that a separate provision requiring such insurance was unnecessary. In the event that the builder's risk policy does not provide adequate protection for testing and startup of building systems, or the parties believe additional coverage for equipment breakdown is appropriate, they should specify such coverage under A B. Duration of the Contractor s Required Insurance Section A requires the Contractor to purchase and maintain the required insurance until the expiration of the period for correction of Work. Under of the General Conditions, the Contractor is obligated to correct Work not found to be in accordance with the Contract Documents within one year after the date of substantial completion of the Work. This one-year correction period is extended with respect to portions of the Work first performed after 2017 Patrick J. O Connor, Jr. 19

21 substantial completion, although it is not extended for corrective work performed during the correction period. 45 If the parties decide that the Contractor shall maintain insurance for a duration other than the expiration of the period for correction of Work, they may state that duration in the space provided at the end of A The Contractor s obligation to provide insurance for a specified duration of time should not be confused with the common, but problematic, requirement that the Contractor secure completed operations coverage for a specified term of years. Contractors do not purchase monoline completed operations coverage for multi-year periods. Occurrence-based CGL coverage, the only type permitted under the AIA documents, is not written in such a way that one can secure the equivalent of tail coverage (a common feature of claims-made professional liability policies). Completed operations coverage is simply a feature of the productscompleted operations hazard in the standard ISO CGL policy form, with the consequence that a separate exclusions apply to property damage that arises after the insured s work is complete or abandoned. Therefore, requiring a contractor to provide completed operations insurance for a specified period of years boils down to nothing more than a commitment to, in the future, purchase practice policies for the specified number of years. 46 While a Contractor may well agree to purchase insurance in subsequent years (and name the Owner as an additional insured under those policies), this is usually not what the Owner has in mind by such contract language as it requires more contract administration than many Owners are able to provide. C. Contractor s Optional Insurance Section A.3.3 of the Insurance Exhibit identifies a number of optional insurance covers that may be appropriate for the Contractor to secure for a given project. These include railroad protective liability insurance, asbestos abatement liability insurance, and property insurance covering loss to the Contractor s property as well as property located in off-site storage or in 2017 Patrick J. O Connor, Jr. 20

22 transit to the construction site. 47 There is also an opportunity for the parties to agree that the Contractor shall purchase and maintain the requisite builder's risk insurance. It is likely that the parties will set forth a number of terms and conditions that will apply in the event the Contractor secures the builder's risk insurance and the Exhibit allows for such customization. The Exhibit also expressly requires that the Contractor comply with all obligations placed upon the Owner were it to purchase the required property coverage, although the Owner is still responsible for adjusting and settling any insured loss. 48 The Exhibit also permits the parties to elect to require the Contractor to procure other specified types of insurance, such as cyber liability or other insurance appropriate for the project. 49 Where the parties elect to have the Contractor provide optional liability insurance, the form requires the parties to set forth the liability limits for such insurance. IX. INSURANCE REQUIREMENTS CONTAINED IN THE 2017 GENERAL CONDITIONS DOCUMENT The Documents Committee determined that it was appropriate to maintain in the General Conditions Document an Article 11 devoted to insurance and bonds. Although, upon initial reflection, it may seem odd to split the insurance requirements between the General Conditions Document and the Insurance Exhibit, this was done as a precaution in the event the parties failed to make the Insurance Exhibit part of their agreement. In such event, the General Conditions Document would govern the parties insurance obligations and provide the familiar waivers of subrogation to the extent the Owner has applicable property insurance even though none is mandated. Article 11 of the 2017 edition also maintains Loss of Use Insurance from the 2007 General Conditions Document. This provision provides the Owner the option to purchase insurance to protect the Owner against loss of use of its property due to fire or other causes of loss. This provision also contains a waiver by the Owner against all rights of action 2017 Patrick J. O Connor, Jr. 21

23 against the Contractor and Architect for loss of use of the Owner s property, due to fire or other hazards however caused. 50 Because many additional insured endorsements require there to be a written commitment to provide such coverage, Article 11 maintains such an obligation although the scope of that obligation is more clearly defined in the Exhibit. Additionally, Article 11 of the General Conditions Document sets forth the process for the adjustment and settlement of insured loss. 51 The consequences of the Contractor s failure to give notice of cancellation of required insurance, as well as the Owner s failure to purchase required property insurance, also are set forth in Article The Owner s obligations arising from the cancellation of the insurance it is obligated to provide is also addressed in Article X. SUMMARY OF MAJOR CHANGES In addition to the significant contract formation change brought about by the introduction of an additional document (i.e., the Insurance and Bonds Exhibit), the 2017 General Conditions Document and Insurance Exhibit contain a number of material changes from the 2007 documents. These include: Contractor s Insurance Coverages: Contractor s required insurance shall be maintained through the correction of work period rather than until the date of final payment. 54 Specifying the Contractor s obligation to provide additional insured coverage to Owner, Architect and Architect s consultants with more specificity than set forth in the 2007 General Conditions Document. 55 Requiring the Contractor to secure professional liability insurance where it is required to furnish professional services as part of the Work Patrick J. O Connor, Jr. 22

24 Requiring the Contractor to procure pollution liability insurance where the Work involves the transport, dissemination, use or release of pollutants. 57 Requiring the Contractor to purchase insurance for maritime liability risks and manned or unmanned aircraft risks where the Work requires such activities. 58 Expressly anticipating situations where the parties decide that the Contractor shall purchase and maintain the required property coverages and setting forth the process for accomplishing this in the Contract Documents. 59 Expressly prohibiting certain practices or policy language eliminating or restricting commercial general liability insurance, including: o o Prohibiting insured v. insured exclusions and the like; Prohibiting the deletion of the subcontractor exception to the work-performed exclusion; o o Disallowing broadly drafted employees or workers compensation exclusions; Prohibiting exclusions eliminating insurance for indemnity claims arising out of injuries to the Contractor s employees; o o o Prohibiting prior work endorsements; Prohibiting prior injury endorsements; Prohibiting residential or habitational exclusions where the Work involves such projects; o o Prohibiting roofing exclusions where the Work involves such roofing Work; Prohibiting exclusions related to exterior insulation finishing systems (EIFS) or similar exterior coatings where the Work involves such coatings or surfaces; 2017 Patrick J. O Connor, Jr. 23

25 o Prohibiting exclusions restricting or eliminating coverage for damages due to earth subsidence or movement; o Prohibiting exclusions or restrictions relating to explosion, collapse, underground hazards where the Work involves such hazards. 60 Contractor is required to disclose to the Owner any deductible or self-insured retentions applicable to any insurance required to be provided by the Contractor. 61 Contractor shall purchase insurance covering liability arising from the Jones Act and the Longshore & Harbor Workers Compensation Act where the Work involves hazards arising from activities on or near navigable waterways, including vessels and docks. 62 Where the Contractor chooses to secure the required limits of liability through a combination of primary and excess insurance, the excess policy shall not require the exhaustion of the underlying limits only through the actual payment by the underlying insurers (i.e., the excess policy must be written on a functional exhaustion basis). 63 The Contractor shall provide certificates of insurance to the Owner upon the Owner s written request (in addition to providing certificates prior to commencement of the Work and upon renewal or replacement of required insurance). 64 The requirement that the Contractor s insurance may not be cancelled or allowed to expire until at least thirty days prior written notice has been given to the Owner has been eliminated. The obligation to provide notice is placed upon the Contractor rather than insurer Patrick J. O Connor, Jr. 24

26 The certificates of insurance required to be provided to the Owner by the Contractor shall expressly identify the Owner as an additional insured on the Contractor s commercial general liability policy and excess or umbrella liability policy or policies. 66 Owner s Insurance Coverages: Setting forth a detailed process for settlement of insured loss. 67 The parties are prompted to set forth sublimits pertaining to specific causes of loss for which the builder's risk policy responds. 68 The parties are encouraged to set forth sublimits for specific required coverages where appropriate. 69 The required builder's risk insurance shall provide coverage for ensuing loss or resulting damage from error, omission, or deficiency in construction methods, design, specifications, workmanship, or materials (i.e., the policy shall contain the resulting loss or ensuing loss exception to the design and workmanship exclusion). 70 Where the Work involves remodeling an existing structure or constructing an addition to an existing structure, the Owner shall purchase and maintain until expiration of the period for correction of the Work all-risks property insurance protecting the existing structure against the same causes of loss to which the builder's risk insurance must respond. 71 The Owner s loss-of-use damages waiver extends to the Architect as well as the Contractor. 72 The parties are prompted to explore a number of optional property insurance covers including loss of use/business interruption/delay in completion insurance; ordinance 2017 Patrick J. O Connor, Jr. 25

27 or law insurance; expedited costs insurance; extra expense insurance; civil authority insurance; ingress/egress insurance; and soft costs insurance. 73 The parties are prompted to consider other optional insurance for the Owner to purchase and maintain, including cyber security insurance and such other insurance that the parties deem appropriate. 74 Applies to Both Owner and Contractor Insurance Coverages: Setting forth specific procedures and process for giving notice of cancellation of insurance. 75 XI. CONCLUSION The AIA s Insurance Exhibit is a significant development in the evolution of its Contract Documents. The Exhibit is an acknowledgement that insurance plays a pivotal role in managing design and construction risks. A separate Exhibit allows for a more rapid response to significant changes in the construction insurance environment. The Exhibit also serves as a vehicle for parties to more fully explore the options available to them to manage project risk through insurance. 1 The AIA 2017 Documents are scheduled for public release in April The information provided in this presentation is of the 2017 Documents as they exist as of early February, 2017, when this paper went to press, subject to revision before their April 2017 release. 2 AIA 1888 Standard Form Owner-Contractor Agreement First Standard Edition of the General Conditions of the Contract Second Edition of the General Conditions Document. 5 The fifteen revisions occurred in 1911, 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1966, 1970, 1976, 1987, 1997, and AIA Document A201, General Conditions of the Contract for Construction, 13 th ed., August Article 11 was broken into four general topics: 11.1, Contractor s Liability Insurance; 11.2, Owner s Liability Insurance; 11.3, Property Insurance; and 11.4, Loss of Use Insurance. 7 Ironically, prior to 1987, the only bond required by Article 11 was that covering the Owner s obligations as a trustee to deposit and distribute insurance proceeds. AIA Document A at By 1987, the Owner s obligation to secure and distribute insurance proceeds was characterized as a fiduciary undertaking and required the Owner to secure a bond for the proper performance of its duties and the cost of which to be charged against the proceeds received as fiduciary. AIA Document A at AIA Document A Project Management Protective Liability Insurance (PMPL) is similar to Owner s and Contractor s Protective Liability Insurance (OCP), but broader, in that the Architect and Construction Manager are 2017 Patrick J. O Connor, Jr. 26