Insurance and Bonds

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 557-586

CHAPTER

557

. INTRODUCTION

This chapter introduces the areas of bonds and insurance, with a particular

focus on the difference between the two types of contracts and, in the case of

bonds, the fundamental equitable principles that shape the rights and defenses

of a surety.

.2 THE ROLE OF INSURANCE

The role of insurance is to protect oneself against named categories of risk,

shifting that risk to the insurer in exchange for payment of a premium. The

one purchasing the contract of insurance is called the insured, who buys a

policy issued by the insurer. In the event of a loss covered by the policy, the

insurer pays or indemnies the insured up to the amount of coverage. The

insurer has no recourse against the insured except to change the pricing of

the policy prospectively or decline to renew the policy when it expires.

Insurance and Bonds

DEBORAH GRIFFIN

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CONSTRUCTION LAW

558

The business of insurance is highly regulated. Congress has made a con-

scious decision to leave the regulation of insurance to the states, a decision

manifested in an express exemption from such federal statutes as the antitrust

laws.1 Even the Gramm-Leach-Bliley legislation, which regulates nancial ser-

vices corporations that own insurance companies, leaves the basic regulation

of insurance to the states.2

In order to issue an insurance policy to an insured in a given state, the

insurance company must be registered with that state’s insurance commis-

sioner. Information about what companies are registered in a particular juris-

diction is available on most state insurance commissioners’ websites.

.3 CONTRACTUAL INSURANCE REqUIREMENTS

Different types of insurance policies protect against different risks. Construc-

tion contracts often require the contractor, the architect, and the owner, respec-

tively, to purchase and maintain in force certain types and levels of coverages.

The types of insurance most often required in connection with construction

contracts or construction projects are

For owners: • builders’ risk coverage

• property insurance

• ood insurance (in ood zones)

• general liability coverage

For design professionals: • errors and omissions coverage

For contractors: • general liability coverage

• workers’ compensation 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 pro-

gram (which can include contractors, subcontractors, project managers, design

professionals, and the owner) against whatever risks are included. To the extent

enrollment in the OCIP satises a party’s contractual insurance obligation, that

party is required to reduce its contract price by the amount of the insurance

component of the party’s price, passing the savings along to the owner.

Standard insurance requirements for a contractor are set out in various

contract forms published by the American Institute of Architects (AIA) or its

competitor ConsensusDocs. For example, AIA form A102, Exhibit A–2017,

Insurance and Bonds, provides in part:

1. McCarran-Ferguson Act, 15 U.S.C. §§1011–1015 (2012).

2. Gramm-Leach-Bliley Act, 15 U.S.C. §§6801–6809 (2010).

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