Insurance and Bonds

Insu rance and Bon ds 531
20.0 inTrODu CTiOn
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.
20.02 The rOle O F insu ranCe
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 to decline to renew the policy when it expires.
Insurance and Bonds
532 CO N S T RU C T I O N L A W
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 that
is manifested in an express exemption from such federal statutes as the anti-
trust laws.1 Even the Gramm-Leach-Bliley legislation, which regulates nancial
services corporations that own insurance companies, leaves the basic regula-
tion of insurance to the states.2
To issue an insurance policy to an insured in a given state, the insurance
company must be registered with that state’s insurance commissioner. Infor-
mation about what companies are registered in a particular jurisdiction is
available on most state insurance commissioners’ Web sites.
20.03 COnTraCT ual ins uranCe requiremenTs
Different types of insurance policies protect against different risks. Construc -
tion contracts often require the contractor, the architect, and the owner to pur-
chase and maintain in force certain types and levels of coverage. 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
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 satises a party’s contractual insurance obli-
gation, 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). The
dollar amounts of the required coverages are stated in the contract. AIA Docu-
ment A201–2007 Article 11 provides in part:
1. McCarran-Ferguson Act, 15 U.S.C. §§ 1011–1015 (2004).
2. 15 U.S.C. §§ 6801–6809 (2006).

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