Chapter 5 Construction Insurance

• Library: Arkansas Construction Law Manual (2016 Ed.)

Construction Insurance

J. Don Overton^* © 2016

5.1 Scope of Chapter.......................................... 5-1

5.2 The Role of Insurance in Construction........... 5-2

A. Types of Insurance....................................... 5-3

5.3 Contractual Insurance Requirements............ 5-4

5.4 WC – Workers’ Compensation Insurance...... 5-5

5.5 CGL – Commercial General Liability

Insurance.................................................... 5-7

A. Bodily Injury and Property Damage.............. 5-8

B. Exclusions to Coverage............................... 5-11

C. Additional Insured Status and Additional

Named Insured.......................................... 5-12

5.6 Builder’s Risk Insurance............................. 5-14

A. Who Buys?................................................. 5-15

B. Perils Insured and Property Covered

(Excluded)................................................. 5-17

C. Excluded Property...................................... 5-18

5.7 Waiver of Subrogation and Real Party

in Interest.................................................. 5-19

A. Waiver of Subrogation................................ 5-19

B. Real Party in Interest................................. 5-20

5.8 CIP – Controlled Insurance Programs.......... 5-21

5.9 Conclusion................................................ 5-23

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5.1 Scope of Chapter

This chapter covers the basic principles of construction insurance coverage and includes a discussion of the common contract insurance requirements and provisions. The first section describes the role of insurance in the construction process and a brief history of the development of the common forms of insurance used within the framework of a construction project. The subsequent sections detail the need for and use of these forms of insurance and feature references to both statutes and caselaw, as well as recent developments that affect the limits of each of these forms of insurance coverage. The chapter also highlights activities and occurrences that limit or eliminate coverage under certain types of insurance policies, about which practicing professionals should be aware. Performance Bonds, Payment Bonds, Sub-Guard Policies and Sub-Guard Insurance, and Professional Liability Insurance are not covered in this chapter.

5.2 The Role of Insurance in Construction

Risk is inherent in all construction projects. On most projects, the inherent risk is exacerbated by the interdependence and mutual reliance of the project participants on one another. If one participant runs into difficulty, it will not only impact the other participants, but the entire project will likely suffer. As a result, construction contracts typically require the project participants to carry multiple forms of insurance, which together work to reduce the risk that the many participants face.

By purchasing an insurance policy, the insured party shifts some of its risk to the insurance company. If the insured party suffers a loss that is covered by the policy, then the insurance company must indemnify, or reimburse, the insured party up to the amount of coverage. The insurance company is obligated to pay a valid claim and has no recourse against the insured party until the policy comes up for renewal. At that point, the insurance company can increase the premium or refuse to renew the policy. In some cases, the insurance company may be able to recover the amount it was obligated to pay from whomever was responsible for the loss.

A. Types of Insurance

There are two distinct categories of insurance: first-party insurance and third-party insurance. Under first-party insurance, the insured party contracts for coverage in the event of injury or loss to itself or its own property. Property insurance and health insurance are examples of first-party insurance. Under third-party insurance, the insured party contracts for coverage in the event it causes injury or loss to someone else (a third party) or the third party’s property. Many insurance policies include both first-party and third-party insurance components; vehicle and equipment insurance are common examples of such policies.

Insurance is generally regulated by state law. In 1944, Congress explicitly gave the power to regulate the insurance industry to the states under the McCarran-Ferguson Act,¹ and the statutory framework is located in the Arkansas Code Annotated beginning at Ark. Code Ann. § 23-60-101.

The participants in a construction project typically have several policies, and each policy covers a specific risk or set of risks. Contractors and subcontractors usually carry commercial general liability insurance (“CGL”), workers’ compensation (“WC”), and auto insurance. The contractor may also carry builder’s risk insurance on the project, but since the cost of the policy is passed through to the owner, many owners prefer to purchase the builder’s risk policy themselves. The architect or engineer (“A/E”) may carry professional liability insurance, as well as workers’ compensation and auto insurance.

5.3 Contractual Insurance Requirements

Different types of insurance policies protect against different risks. Construction contracts often require the contractor, the architect, and the owner to purchase and maintain in force certain types and levels of coverage. The types of insurance most often required in connection with construction projects are:

For owners: (1) builder’s risk coverage, (2) property insurance, (3) flood insurance (in flood zones), (4) general liability coverage

For design professionals: (1) errors and omissions coverage (“E&O”)

For contractors: (1) commercial general liability coverage, (2) workers’ compensation coverage, (3) automobile liability coverage

On some larger projects, the owner can save substantial sums of money by purchasing insurance under an owner-controlled insurance program, or OCIP. With an OCIP, the insurance covers all project participants who enroll in the program (which can include contractors, subcontractors, project managers, design professionals, and the owner) against whatever risks are included.

To the extent enrollment in the OCIP satisfies a party’s contractual insurance obligation, that party is required to reduce its contract price by the amount of the insurance component of its price, passing the savings along to the owner. Standard insurance requirements for a contractor are set out, by way of example, in Article 11 of AIA Document A201-2007 (General Conditions).²

5.4 WC – Workers’ Compensation Insurance

Workers’ compensation insurance is designed to cover workers who are injured in the course of their employment. Workers are entitled to compensation without regard to fault and without having to resort to litigation. In exchange for guaranteed compensation, workers give up their right to sue their employer for employment-related injuries. The amount received for an injury under workers’ compensation is likely to be considerably less than what would be awarded in a lawsuit. As a result, injured construction workers may try to prove that the A/E or a contractor other than their employer was responsible for the injury. Workers’ compensation statutes do not provide any protection to the A/E or other contractors.

Workers’ compensation is administered by the State of Arkansas Workers’ Compensation Commission (“AWCC”), and the AWCC provides a forum for resolving disputes about: (1) an employee’s right to payment, (2) the amount and duration of benefits, and (3) any defenses the employer might have.³

The Arkansas courts typically follow the findings of fact and holdings of the AWCC in regard to work related injuries and whenever possible defer to the AWCC as the holder of exclusive jurisdiction to determine fault and allocate liability. Appellate courts view the evidence in the light most favorable to the AWCC.⁴

In Entergy Arkansas, Inc. v. Pope County Circuit Court, the court decided the question of who (AWCC or the circuit court) has the specific jurisdiction to determine tort liability under the Arkansas Workers’ Compensation Act (“the Act”) within the competing interests of the constitutional “right to a jury trial” and specific wording of the Act.⁵ The Court held, “This court has consistently held that the question of whether an employer-employee relationship exists between the parties is a factual issue solely within the jurisdiction of the Commission.”⁶

Arkansas law requires contractors and subcontractors with one or more employees to provide workers’ compensation coverage.⁷ In the event that a business is a single owner entity with no employees, then a certificate of non-coverage may be requested from the AWCC for the owner, and the certificate is valid for a two-year period; however, the certificate of non-coverage is not applicable in the event that the entity hires any employees during...