One thing that seems to get overlooked in negotiating construction contracts is the insurance requirements. Many disputes have erupted over the contractor’s failure or refusal to obtain insurance in the Owner’s name, or simply failing or refusing to name the Owner as an additional insured on the insurance policies obtained. While one might think that obtaining the proper insurance is not that important at the beginning of a project, the insurance requirements provision of the contract is one of the most important in the event of a dispute, and should not be overlooked or ignored.
Often a contractor or owner does not realize the problems with being underinsured until it is too late. Whether it be a third-party claim for personal injuries or property damage (defective construction claims), if insurance is not procured pursuant to the contract documents, it could leave the owner with tremendous exposure that was not contemplated at the time the contract documents were executed. In order to protect the Owner, or in the case of a general contractor, the only way to protect oneself concerning this issue, is to withhold payments until the offending party provides proper certificates of insurance that meet the requirements of the contract. Some companies have a standard business practice of requiring copies of the actual insurance policies because certificates do not provide complete information about whom and what is covered.
By requiring the insurance documents prior to the first payment, any ambiguities or problems can be rectified early on. A good example is the “additional insured” clause of an insurance policy. While an Owner might believe that he or she is an additional insured under the general contractor’s policy (because the Certificate of Insurance says so), the actual policy might state that its coverage is excess of any potential other coverage that the Owner might have. If the Owner’s primary coverage has a large self insured retention (SIR), the Owner could be on the hook for defense costs associated with the work performed by the general contractor, even though at the beginning of the project, the Owner reasonably believed it was covered under the General Contractor’s policy. This is also common for general contractors with their subcontractors.
While this is only an example, it is vitally important to (1) make sure the insurance requirements contained in the contract provide for the proper insurance necessary to protect oneself in the event of a claim; and (2) make sure you obtain and review the insurance policies to confirm that the coverage provided by the insurance company is consistent with the what was provided for in the actual contract.