Private construction projects have several different insurance components. In this blog, we are going to talk about general commercial liability, or CGL policies, and a broad overview of how they are used.
CGL policies are the primary insurance tool used to protect the various construction participants (owner/developer, general contractor, subcontractors) from liability for bodily injury to third parties or damage to another’s property, whether occurring during construction or years later. Note that the design professionals also have commercial general liability coverage. But their primary risk exposures are typically covered by professional liability policies, which we will be covering in a later post.
There are two approaches to obtaining CGL coverage for private construction projects—the first being what we tend to think of as the traditional approach and the second being the more current approach. The insurance industry sometimes dictates which approach is adopted—especially on multi-family, for-sale projects and medium to large tract home projects. However, for other projects, the owner/developer and/or the general contractor can sometimes decide how to structure this critical coverage. We invite you to reach out to us to learn more about mitigating your risks on your next construction project, both through insurance and other means.
The “Traditional” Approach
The traditional way of insuring private construction projects is sort of an “everyone brings their own” CGL policies to the table. Each participant—owner/developer, general contractor, and each of the subcontractors—in the construction project brings their own insurance.
The construction contracts typically require not only that these policies be purchased and maintained during the duration of the project (and in some cases for years afterwards), but also that the coverage be “upstreamed” using additional insured endorsements.
Essentially, insurance coverage is “upstreamed”, while liability for loss or damage is “downstreamed” through indemnity and other forms of contractual risk transfer. Because the “downstreaming” of liability to subcontractors is so common in the construction industry, the “upstreaming” of additional insured coverage is an important tool for subcontractors to protect themselves, essentially using insurance coverage to cover at least some of the subcontractor’s contractual risk.
The “Modern” Approach
More commonly, especially on larger projects and for certain types of construction, like residential, instead of insurance protection being “upstreamed”, insurance is sort of “downstreamed.” This is done by using wrap-up insurance policies (or wraps), which are usually either Owner-Controlled Insurance Programs (OCIPs) or Contractor Controlled Insurance Programs (CCIPs).
Wraps bring with them certain obvious advantages. Typically, all parties that perform work on a project are insured under the same program. This helps avoid the kind of internecine warfare that would so commonly take place between the owner, general contractor, and subcontractors when third party claims are presented. In some cases, the design professionals are also enrolled (However, adding design professionals to a wrap program is something that should be done only after careful analysis and consultation, as the decision can carry with it significant adverse consequences in the context of future claims.)
Wraps typically afford a broader scope of coverage than available to the individual construction participants under their own insurance programs. For example, your work exclusion is typically deleted, your product exclusion deleted or limited, and the alienated premises exclusion limited, among other changes. Wraps can often be expanded further to include coverage for damages arising out of post-completion warranty or repair work.
That said, wraps can frequently include coverage limitations that are not typically a part of non-wrap or traditional CGL programs. Further, when wraps are “built” using multiple layers—primary and excess—the integration of the coverages between those layers can require greater care lest inadvertent coverage gaps or issues be created. Another area of concern are SIRS (self-insured retentions), how they apply, who can satisfy them and how the policy SIRs and contractual provisions allocating or capping SIR contributions amongst the enrolled contractor’s mesh.
In later blogs, we will discuss how these approaches impact other types of insurance that may be needed for a private construction project.