8.1 Introduction

The business environment in general, and the construction business environment in particular, are fraught with risks of all kinds. An assessment of all of the elements of risk to which contractors and the construction projects they perform are exposed, would comprise a voluminous listing. Consequently, contractors must be resourceful, and diverse, and comprehensive in the management methods they devise to manage the risks to which they may be exposed.

Insurance is one form of risk management. Insurance does not eliminate the risks involved in construction contracting, but it does shift most of the financial threat to a professional risk-bearer and a company whose business it is to protect others from risk.

In devising the best risk management program for themselves and their companies, contractors quickly come to the conclusion that obtaining the correct kinds and the optimum combination of forms of commercial insurance is the keystone to adequate financial protection. Since the risks in construction are so numerous and so diverse, the variations in types of insurance policies that may be written by a risk underwriter and are available for purchase by contractors is a very lengthy compilation. This chapter is directed primarily toward a comprehensive discussion of standard commercial insurance coverages that are utilized in the construction industry.

8.2 Risk Management

Risk management may be defined as a comprehensive approach to handling exposures to loss. Any peril that can cause financial loss or impairment to the business enterprise is the subject of risk management. The following are four steps that a contracting firm can follow in applying risk management to its business:

1. Recognize and identify the varied risks that apply to the construction process. These may arise as a consequence of the people involved in the process, contract provisions, the nature of the work, site conditions, or the operation of law.
2. Measure the degree of exposure presented by the risks identified. This involves establishing the frequency of losses and the potential severity of the losses that may occur.
3. Decide how to protect against those risks that have been identified. If the risk cannot be eliminated by an alternative procedure or by contractual transfer to another party, such as hold harmless/indemnity provisions or waivers of subrogation, the choice may be to purchase commercial insurance, to optimize deductible amounts in policies, to self-insure, or to assume the risk.
4. Conduct a company-wide program of loss control and prevention. Project safety programs discussed in Chapter 15 constitute an important part of this procedure.
5. Monitor the results, and then make a decision to stay the course, or to modify the risk management plan.

8.3 Construction Risks

Construction work by nature is hazardous, and accidents can occur frequently and can be severe. The annual toll of deaths, bodily injuries, and property damage in the construction industry is extremely high. The potential severity of accidents and the frequency with which they occur require that the contractor protect itself with a variety of complex and costly insurance coverages. Without adequate insurance protection, the contractor would be continuously faced with the possibility of serious or even ruinous financial loss.

As has been discussed previously in this book, construction projects usually have in force several simultaneous contractual arrangements. Contracts are in existence between the owner and architect-engineer, between the owner and the general contractor, between the general contractor and its several subcontractors, and between general contractors and subcontractors and their vendors or materials suppliers. Contracts that provide for design-construct and construction management services, and the use of separate prime contracts, introduce additional considerations regarding risks. Viewed as a whole, these contracts and their numerous individual provisions establish a complicated structure of responsibilities for damages that may arise during the course of construction operations.

Liability for accidents can devolve to the owner or architect-engineer, as well as to the prime contractor and subcontractors whose equipment and employees perform the actual work. Construction contracts typically require the contractor to assume the owner's and architect-engineer's legal liability for construction accidents or to provide insurance for the owner's direct protection. Consequently, a contractor's insurance program normally must include coverages to protect parties other than itself, as well as coverages to protect it from liabilities not legally its own.

The matter of risk and insurance for the construction contractor is rendered even more difficult on large projects by confusion as to which party is responsible for a given loss or liability. The matter of how the responsibility should be divided among owner, architect-engineer, construction manager, general contractor, subcontractors, vendors, and fabricators has become a tangled and extremely complex legal matter. Modern project delivery methods such as fast-tracking, alternate designs, shop drawings, design-construct, and construction management have blurred the lines that divide the multiple participants involved with today's construction projects. The proper division of responsibility in such cases can be very problematic.

8.4 The Insurance Policy

An insurance policy is a contract whereby the insurer promises, for a consideration, to assume financial responsibility for a specified loss or liability in behalf of another, who is called the insured. The insured pays the consideration in the form of a premium. Under the terms of the insurance contract, which is called a policy, the insurer has a duty to indemnify the insured (the contractor) from loss covered by the terms of the policy. The policy will typically contain numerous detailed provisions pertaining to the loss against which it affords protection.

Because of its intimate association with the public welfare, the insurance field is controlled and regulated by federal and state statutes. Each state has some form of an insurance regulatory agency that administers that state's insurance code, a set of statutory provisions that imposes regulations on insurance companies concerning investments, reserves, annual financial statements, and periodic examinations. Insurance companies are controlled as to their organizational structure, financial affairs, and business methods. In most states, insurance policies must conform to statutory requirements as to form and content.

A loss suffered by a contracting firm as a result of its own deliberate action cannot be recovered under an insurance policy. However, negligence or oversight on the part of the contractor is generally covered by the terms of the insurance contract. The contractor pays a premium as the consideration for the insurance company's promise of protection against the designated loss. Most types of insurance require that the premium be paid in advance before the policy becomes effective. In the event of a loss covered by an insurance policy, the contractor cannot recover more than the loss; that is, a profit cannot be made at the expense of the insurance company.

The premiums for many types of insurance are adjusted upward or downward according to the contractor's loss experience record. For some types of insurance, when annual premium payments reach a certain level, the contractor becomes eligible for experience rating. Under this process, credits or debits determined for the individual contractor are applied to the manual rates in accordance with how the premiums that have been paid in compare with the losses paid out over a period of time. A manual rate is a standard premium charge based on a probable loss experience for a given class of risks. These rates are published by the insurance industry and are used for general insurance cost information. A contractor whose loss experience is low can enjoy a considerable savings on the costs of its experience-rated coverages. This becomes part of the payback for the contractor's investment of time, dollars, and other resources in his risk management program. These remarks also illustrate the fact that a contractor does well by following a practice of continuing to do business with an insurance company with which it has established a considerable background of favorable business experience.

It is also worthwhile for contractors to have some background knowledge with regard to the insurers who underwrite the policies the contractor is interested in. The next several paragraphs will develop some of the basic elements of understanding of the insurance industry and its companies.

Insurance companies can be organized as stock companies or as mutual companies. Stock companies are organized in a manner similar to that of a bank, and company ownership is vested in stockholders. The purchaser of an insurance policy has no ownership in the company, and assumes no risk of assessment if the insurance company encounters financial reverses.

A mutual company is one in which the policyholders themselves constitute the membership of the insuring company or association. Thus, every policyholder of a mutual company is, at the same time, an insurer and an insured. When it happens that the premiums collected by the company are in excess of the losses, the excess is returned to the policyholders as “dividends.” By the same token, if losses outweigh income, assessments of the policyholders are sometimes made. State laws permit mutual companies that satisfy certain tests to limit or eliminate the assessments that can be levied against the members. Consequently, the policies of many mutual companies are said to be nonassessable. This varies considerably with the bylaws and policies of the individual mutual company, as well as with the laws of the several states.

In the field of property and casualty insurance, a field of insurance that is especially important to contractors, several mutual insurance companies are among the largest companies that provide property and casualty insurance. In life insurance, probably a majority of the largest companies are mutual companies.

8.5 Contract Requirements

With the many hazards that confront a construction business and the multiple types of insurance that can be purchased, one might wonder how a contractor decides exactly what insurance is really needed. In reality, at least with regard to some types of insurance coverages, the contractor actually has no choice. For example, it is standard practice that construction contracts require the contractor to provide certain insurance coverages. As will be discussed in subsequent sections of this chapter, other insurance coverages are required by law.

Construction contracts typically require the contractor to purchase insurance coverages such as workers' compensation insurance (which is also required by law), employer's liability insurance, and comprehensive general liability insurance. The contract documents will also define, for many insurance policies the contractor is required to purchase, the minimum levels of coverage which are required.

Property insurance to protect the project, and liability insurance to protect the owner may be designated in the contract documents to be the responsibility of either the owner or the contractor, depending on the contract. The American Institute of Architects (AIA) Document A201–2007, “The General Conditions of the Contract for Construction,” included as Appendix D, defines the owner as being responsible for obtaining both of these insurance coverages. Other forms of contract documents make the contractor responsible for purchasing these coverages.

There are, of course, many examples of special insurance being required by contract when the construction involves unusual risks or conditions. When the contract designates specific responsibility to the contracting firm for obtaining certain insurance, it is customary that certificates of insurance from the insurance company be submitted to the owner or to the architect-engineer as proof that the coverage stipulated has, in fact, been provided and that it provides for the required level of coverage.

As was discussed in Chapter 6, construction contracts frequently require the contractor to hold the owner and architect-engineer harmless by accepting any liability that either of them may incur because of operations performed under the contract. Most contract documents that contain such indemnity clauses are explicit in requiring the contractor to procure appropriate contractual liability insurance. The language of Appendix D contains provisions to this effect.

With regard to project insurance requirements, it is considered good practice for a contractor to submit a copy of the contract documents to its insurance company before construction operations commence. The contracting firm is not an insurance expert and is not usually competent to evaluate the risks and liabilities placed on it by the contract. Its insurance agents or brokers are qualified to critically examine the documents and then to advise the construction firm concerning the insurance needs required by the language and requirements of a given construction contract.

8.6 Legal Requirements

Certain types of insurance are required by law, and the contractor must therefore provide them whether or not they are called for by the contract. Workers' compensation, automobile, unemployment, and Social Security are examples of insurance coverages that are required by statute. While it may be said that unemployment and Social Security insurance payments made by the contractor are more in the nature of a tax than of insurance premiums in the usual sense, both unemployment and Social Security are treated as forms of insurance for the purpose of discussion in this chapter.

The law makes the independent contractor liable for damages caused by its own acts of omission or commission. In addition, the prime contractor has a contingent liability for the actions of its subcontractors. Therefore, whether or not the law is specific concerning certain types of insurance, the contractor as a practical fact must procure several different categories of liability insurance to protect itself from liability for damages caused by its own construction operations as well as those of its subcontractors.

8.7 Analysis of Insurable Risks

Aside from coverages required by law and those required by the construction contract, it is the contractor's business management decision to decide what insurance the company will carry. This speaks to the matter of company management making a determination as to the optimum method of managing risks, as discussed at the beginning of this chapter.

Such elective insurances coverages that the contractor will consider pertain principally to the contractor's own property or to property for which it is responsible. It is not economically possible for the contractor to carry all of the insurance coverages that are available. If it were to plan to purchase insurance protection against every risk that is insurable, company management would quickly discover that the cost of the resulting premiums would likely outweigh the cost of the losses the company was endeavoring to protect against and would most certainly impose an impossible financial burden on the business.

The extent and magnitude of a contractor's insurance program can properly be decided only after careful study and deliberation. If company management identifies a risk that is insurable, the cost of the premiums to insure against that risk must be balanced against the realistic potential or probability for the risk to occur and the possible loss that would result.

There are, of course, some risks that are not insurable, or for which insurance is not economically practicable. The typical management determination is that any losses associated with these types of uninsurable risks must be regarded simply as ordinary business expenses.

At times, management will determine that careful planning and meticulous construction procedures can mitigate a risk at less cost than the premium of a covering insurance policy. Thus, the contractor may choose to assume a calculated risk rather than pay the premium for insurance. Sometimes reliance on the skill of the people in the company, taking extraordinary precautions, putting protective measures and/or equipment into place, providing extra training, and other similar actions so as to accomplish construction procedures that have high degrees of risk can get the job done without mishap and can avoid the cost of insurance premiums.

8.8 Construction Insurance Checklist

When a contractor considers his options with regard to insurance, he discovers that available insurance coverages are numerous and complex. With the additional thought that each new construction contract presents its own risks to be managed, the contractor can easily become confused or overwhelmed.

The contractor should make a business decision to select a competent insurance agent or broker who is experienced in construction work and familiar with the risks that contractors experience, and one who can provide competent advice with regard to coverages available. Without such capable advice and assistance, the contractor may either incur the needless expense of overlapping protections or expose itself to the danger of vital gaps in insurance coverage. The contractor can often reduce insurance costs by keeping its agent or broker advised in detail as to the nature and conduct of its construction operations.

In the long list of possible construction insurance coverages, not every policy is applicable to a given firm's operations. The following list of insurance coverages available is not represented as being complete, but it does provide an overview of the more commonly used insurance policies that are available to, and utilized to a greater or lesser extent by, construction contractors.

Property Insurance on Projects during Construction

1. All risk builder's risk insurance. This insurance protects against all risks of direct physical loss or damage to the project or to associated materials, caused by any external effect, with noted exclusions.
2. Named-peril builder's risk insurance. Provides protection for the project, including stored materials, only against direct loss by fire or lightning. A number of separate endorsements to this policy are available that add coverage for specific losses.
   1. Extended coverage endorsement. Covers property against all direct loss caused by windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke.
   2. Vandalism and malicious mischief endorsement.
   3. Water damage endorsement. Indemnifies for loss or damage caused by accidental discharge, leakage, or overflow of water or steam. Included are defective pipes, roofs, and water tanks. This does not include damage caused by sprinkler leakage, floods, or high water.
   4. Sprinkler leakage endorsement. Provides protection against all direct loss to a building project as a result of leakage, freezing, or breaking of sprinkler installations.
3. Earthquake insurance. This coverage may be provided by an endorsement to the builder's risk policy in some states. Elsewhere a separate policy must be issued.
4. Bridge insurance. Insures inland marine bridges during construction, and is often termed the bridge builder's risk policy. It affords protection during bridge construction against damage that may be caused by fire, lightning, flood, ice, collision, explosion, riot, vandalism, wind, tornado, and earthquake.
5. Steam boiler and machinery insurance. A contractor or owner may purchase this form of insurance when the boiler of a building under construction is being tested and balanced, or when it is being used to heat the structure while construction is underway. Unlike other property insurances listed here, this type of policy typically includes some liability coverage. This policy usually covers any injury or damage that may occur to or be caused by the boiler during its use by the contractor.
6. Installation floater policy. Provides named-peril or all-risk protection for property of various kinds, such as project equipment for installation in the project (e.g., electronic data processing equipment) from the time that it leaves the place of shipment until it is installed on the project and tested. Coverage terminates when the insured's interest in the property ceases, when the property is accepted, or when it is taken over by the owner.

Property Insurance on Contractor's Own Property

1. Property insurance on contractor's own buildings. Affords protection for offices, sheds, warehouses, and contained personal property. Several different variations of this insurance are available, which vary in the protections they provide.
2. Contractor's equipment insurance. Often termed a floater, this type of policy insures a contractor's construction equipment regardless of its location.
3. Motor truck cargo policy. Covers loss from named hazards to materials or supplies carried on the contractor's own trucks from supplier or manufacturer to warehouse or building site.
4. Transportation floater. Provides coverage against damage to property belonging to the contractor or others while it is being transported by a public carrier. This coverage may be obtained on a per-trip, project, or annual basis.
5. Crime insurance. Protects the contractor against the loss of money, securities, office equipment, and similar valuables through burglary, theft robbery, destruction, forgery, disappearance, or wrongful abstraction. Also insures against loss of valuables caused by safe deposit burglary and robbery.
6. Valuable papers destruction insurance. Protects the contractor against the loss, damage, or destruction of valuable papers such as books, records, maps, drawings, abstracts, deeds, mortgages, contracts, and documents. It does not cover loss by misplacement, unexplained disappearance, wear and tear, deterioration, vermin, or war.
7. Computer insurance. Provides protection for electronic computing equipment and software against a variety of perils including fire, water, smoke, theft, and vandalism.
8. Aircraft insurance. For contractors who own or lease aircraft, a variety of coverages are available to cover the aircraft, as well as to cover the associated liabilities.

Liability Insurance

1. Contractor's public liability and property damage insurance. Protects the contractor from its legal liability for injuries to persons not in its employ, and for damage to the property of others, if the property is not in the contractor's care, custody, or control, when such injuries or damage arise out of the operations of the contractor.
2. Contractor's protective public and property damage liability insurance. Protects the contractor against its liability imposed by law arising out of acts or omissions of its subcontractors.
3. Completed-operations liability insurance. Protects the contractor from damage claims stemming from its faulty performance on projects already completed and handed over to the owner. This form of insurance is often required because the usual forms of liability insurance provide protection only while the contractor is performing the work on the project, but no longer provide protection after the work has been completed and accepted by the owner.
4. Contractual liability insurance. Required when one party to a contract, by terms of that contract, assumes certain legal liabilities of the other party. The usual forms of basic liability insurance do not afford this coverage.
5. Professional liability insurance. Protects the contractor against damage claims arising out of design and other professional services rendered by the contractor to the owner.
6. Workers' compensation insurance. Provides all benefits required by law to employees who are injured or killed in the course of their employment.
7. Employer's liability insurance. This insurance is customarily written in combination with workers' compensation insurance. It affords the contractor broad coverage for the bodily injury or death of an employee in the course of his employment, outside of and distinct from any claims under workers' compensation laws.
8. Director and officer liability insurance. Protects the company CEO and other named executives from liability actions.
9. Fiduciary liability insurance. Protects the company and certain named officers and executives from liabilities arising from the company's fiduciary responsibility to its employees, and sometimes to its stockholders.
10. Owner's protective liability insurance. Protects the owner from its contingent liability for damages arising from the operations of the prime contractor or its subcontractors.

Employee Insurance

1. Social Security. This all-federal insurance system operated by the U.S. government provides retirement benefits to an insured worker, survivor's benefits to his family when the worker dies, disability benefits, hospitalization benefits, and medical insurance.
2. Unemployment insurance. This is a joint federal-state insurance plan that provides qualified workers with a weekly income during periods of unemployment between jobs.
3. Disability insurance. This insurance, required by some states, provides benefits to employees for disabilities caused by non-occupational accidents and disease.
4. Employee benefit insurance. Provides employees with designated fringe-benefit insurance such as medical, dental, optical, hospital, surgical, life insurance, and similar coverages.

Vehicle Insurance

1. Various forms of insurance are available in connection with the ownership and use of the contractor's motor vehicles. Liability coverages protect the contractor against third-party claims of bodily injury or property damage involving the contractor's vehicles, or by nonowned vehicles that are used in its interest. Physical damage coverage indemnifies the contractor for damage to its own vehicles.

Business, Accident, and Life Insurance

1. Business interruption insurance. This insurance is designed to reimburse the insured for losses suffered because of an interruption of its business.
2. Crime insurance. Protects company officers and executives, as well as company property, from the results of a crime that may be committed against them.
3. Sole proprietorship insurance. A policy of this type provides cash to assist heirs in continuing or disposing of the business and its assets without sacrifice in the event of death of the owner of a sole proprietorship.
4. Key person life insurance. Reimburses the business for financial loss resulting from the death of a key person in the business. In many policies, this type of insurance also builds up a sinking fund to be available to the identified key person on retirement.
5. Corporate continuity insurance. In the event of a stockholder's death, this insurance provides cash for the purchase of his corporate stock. This provides liquidity for the decedent's estate and prevents corporate stock from falling into the hands of people whom the other stockholders would not wish to have it.

The next several sections of this chapter will present a more detailed discussion of the types of insurance that are of major importance to the construction industry.

8.9 Project Property Insurance

Construction contracts typically make the general contractor responsible for the construction project until the requirements of the contract documents have been fulfilled and the owner has accepted the project from the contractor. Consequently, it becomes a responsibility of the contractor to take all reasonable steps necessary to protect the work on the project from loss or damage and to see that suitable insurance is provided for this purpose.

Most construction contracts require that project insurance shall be purchased and maintained on the entire project to the full insurable value thereof, including all subcontracted work. The possibilities of property damage to the project itself and to materials stored on the site, can depend considerably on the nature of the work, its geographical location, and the season during which the work will be performed. On building construction projects, the loss potential is usually large and diverse, and can include fire, smoke, explosion, collapse, vandalism, water, wind, freezing, and physical damage from a wide variety of causes. Marine structures are vulnerable to wind, ice, wave action, tides, water currents, collision, and collapse. In a general sense, the highway contractors face comparatively few hazards to project property during the course of construction, with the forces of nature probably constituting the source of greatest risk.

The contract documents for a project, typically in the conditions of contract, will usually designate that by the terms of the contract, the project property insurance may be provided either by the owner or by the prime contractor. Regardless of who purchases the insurance, however, the intent is to protect the interests of the owner, the prime contractor, the subcontractors, and the lending institution in the event a loss occurs during construction, and to provide funds for repairs or rebuilding.

In a very real sense, project insurance must be procured that is tailored to meet the specific risks intrinsic to the work. Builder's risk policies are typically used on building construction. An all-risk installation floater policy is commonly used on projects such as water and sewer projects, where there is little or no exposure to fire and extended coverage hazards. Policies that are designed for the specific construction hazards associated with the construction of bridges, tunnels, radio and television towers, and other special construction types are available. Highway, reclamation, and other engineering contractors often carry no project insurance of this kind, unless required to do so by the contract, choosing to self-insure the small risks and relying on “acts of God” contract clauses to protect them from major damage to the project while construction is under way.

A typical clause of this type provides that the contractor will make good all damage to any portion of the work, except those damages due to unforeseeable causes beyond the control of and without the fault of the contractor including “acts of God,” or extraordinary action of the elements. An “act of God” has been defined as a natural occurrence of extraordinary and unprecedented proportions, whose magnitude and destructiveness could not have been provided against by the exercise of ordinary foresight.

8.10 Builder's Risk Insurance

It is quite impractical for this chapter to discuss every type of insurance a contractor might typically purchase and use in the conduct of his business. Instead, several of the key types of policies that would be used by almost all contractors, will be discussed in more detail in this and the sections that follow.

Builder's risk insurance, is the term for a type of insurance policy that is purchased for nearly every building construction project. Builder's risk insurance provides coverage against loss of or damage to the building throughout the time of its construction, up until the time of its acceptance from the contractor at the time of completion of the contract. This insurance covers the interest of the owner and the contractor, and is usually required by lending institutions as a condition of the construction loan. This type of insurance policy provides property coverage only, and does not include any form of liability coverage.

On building construction projects, where builder's risk insurance normally constitutes the basic project policy, it is customary to insure the entire completed value of the building, as reduced by the costs of land preparation and site work, landscaping, excavation, underground utilities, and foundations below the lowest basement floor. The rationale behind this practice is that these portions of the project are not directly susceptible to loss by fire or other usual hazards.

Premium rates for builder's risk insurance can vary considerably with the type of construction and the availability of firefighting facilities. Premium rates are higher for unprotected areas and for the more combustible classes of construction.

There are two types of builder's risk policies, the all-risk form, which is the one most generally used, and the named-peril form, usually with endorsements. The all-risk form is much broader in scope than the named-peril form and provides insurance protection for all losses not specifically excluded in the policy. Both types of builder's risk policies normally provide that the structure shall not be occupied nor used by the owner in the course of construction without obtaining the consent of the insurance carrier.

Builder's risk policies routinely contain coverage exclusions of one kind or another, a matter that requires careful study before construction operations commence. A usual exclusion is coverage for the cost of correcting faulty workmanship, materials, construction, or design, as well as loss or damage caused by error, omission, or deficiency in design specifications, workmanship, or materials. Some policies exclude losses caused by the testing of project machinery, although this exclusion can normally be removed for additional premium. Losses caused by floods or earthquakes are similar examples of risks that are typically excluded but can be added by special endorsement and additional premium.

The builder's risk policy should be checked to see that job materials are covered, not only while stored at the job site but also while in transit to the job site, or when they are stored at an offsite location such as a warehouse. As a general rule, any loss to specifications, drawings, records, documents, accounts, deeds, currency, notes, securities, or designs is specifically excluded from a builder's risk policy.

Builder's risk policies can be written in such a way as to reimburse the insured on an actual cash value or a replacement cost basis. Replacement cost is the usual form that is utilized. Additionally, builder's risk insurance can be purchased on a specific or blanket basis. With the specific form, the contractor purchases a separate policy for each project the contractor performs, on an individual basis. Under blanket coverage, all projects acquired by the contractor during the policy period are included under the terms of the same policy. The blanket form may be preferable where the contractor has an appreciable volume of business, especially if most projects are of a similar kind.

Builder's risk policies are very flexible and can include many kinds of protective provisions other than merely covering the direct expense of physical loss or damage to the project. For example, should there be fire, storm, or other damage to the project, and if the necessary repairs that follow cause a delay in project completion or interfere with the use of the premises by the owner or tenant, the repair cost is obviously covered by the project property insurance. However, consequential loss coverage is also typically available under the policy as an additional coverage, and for additional premium, to protect the parties from the consequences of business interruption, loss of rents, or extra expense.

Very broad coverage under builder's risk policies can also be written for certain classes of projects. For example, project property insurance can sometimes be written to include performance and process guarantees to ensure that a project will meet specified output or service requirements. Completion guarantees are available that will cover debt service and penalties for liquidated damages in the event the project is completed after the completion date designated in the contract requirements.

8.11 All-Risk Builder's Risk Insurance

This policy, widely used for building construction projects, covers the project building under construction itself, as well as temporary structures at the jobsite. Materials and supplies pertaining to the construction are protected while these materials are held temporarily in storage prior to delivery, while in transit to the jobsite, and after their delivery to the jobsite and while awaiting installation. If not otherwise designated by the policy, the contractor's tools and construction equipment are also usually protected while they are on the premises.

The policy insures against all direct physical loss or damage from any external cause to the property covered, except for stated exclusions. There typically are many such exclusions, with some of the more commonplace including the following: certain damages due to freezing, explosion of steam boilers or pipes, glass breakage, subsidence and settling, artificially generated electrical currents, rain and snow, earthquake, floods, and nuclear radiation. There may well be others listed as well. Many of these exclusions can be removed or modified if the contractor wishes, by use of special endorsements and for additional premium.

All-risk policies provide for varying deductible amounts that apply to various defined loss categories. So the contractor should analyze with his agent whether the deductible amounts for various contingencies listed in the policy are consistent with the amount of risk the contractor wishes to assume. The all-risk policy is very flexible and can be tailored to meet the needs of the contractor.

8.12 Named-Peril Builder's Risk Insurance

Named-peril builder's risk insurance, unlike the all-risk form that protects the project against all losses except those that are specifically named as excluded, affords coverage for only those risks or loss that are specifically listed. The basic policy of this type usually protects building projects only against direct loss caused by fire or lightning. Such insurance ordinarily covers the cost of the facility itself, as well as materials connected to or adjacent to the structure insured, including temporary structures, materials, machinery, and supplies of all kinds incidental to the construction of the building. This type of policy typically also protects construction equipment and tools owned by the contractor, or the similar property of others for which the contractor is legally responsible. All property is protected that is a part of or contained in the structure, in temporary structures or on vehicles, or is stored on the premises adjacent to the project.

There are, of course, many possible causes of physical loss or damage to a construction project in addition to fire and lightning. Other significant risks the contractor or owner may wish to have covered can be insured against by purchasing various endorsements to the basic named peril policy. The extended coverage endorsement provides protection against damage or loss caused by windstorm, hail, explosion, riot attending a strike, civil commotion, aircraft, vehicles, and smoke. Another common endorsement covers vandalism and malicious mischief. It is to be noted that each endorsement protects against only the hazards named and that each additional endorsement is accompanied by an additional premium. Many other special endorsements to named peril builder's risk policies are available, including protection against water damage, sprinkler leakage, early occupancy by the owner, and earthquake. Each of these additional endorsements will, of course, be accompanied by additional premium.

8.13 Builder's Risk Policy Premiums

There are two ways in which the premiums for builder's risk insurance can be paid. One payment method is the reporting form, which establishes the insurable value of the structure, and hence the face value of the policy, in accordance with periodic progress reports submitted to the insurance company by the contractor. The other payment method is the completed-value form. This policy is written for the full amount of the project value, which is the contract price less the cost of the foundations and other excluded work. The contractor and his insurance agent will discuss each payment method, and the potential advantages and disadvantages of each, in order that the contractor can make a well-informed decision regarding the method of paying the premium.

8.14 Provision of Builder's Risk Insurance by the Owner

The standard conditions of the contract documents of the AIA stipulate that, unless otherwise provided, the owner shall purchase and maintain the builder's risk policy (see Appendix D). When other contract forms are used, however, it is common practice for the general contractor to provide this coverage, especially on public projects. In general, it can be said that most contractors would prefer to provide the builder's risk insurance themselves, rather than having the owner purchase the policy. This is true because owners, who are not usually closely familiar with this type of insurance, and who may not be closely familiar with the risks on a project, sometimes procure insurance policies that do not provide all of the necessary coverage, or that have very high deductible amounts.

There are, however, certain types of projects that do lend themselves well to the provision of builder's risk by the owner. One such example is a project that involves several prime contractors.

Another example occurs in the case of a remodeling project or an addition to an existing building. If the contractor is to provide the builder's risk insurance, there is always considerable uncertainty with regard to the proper amount of protection for the existing structure. In such circumstances the contractor may make an arrangement with the owner to add the additional coverage to the owner's existing policy, although this matter can become involved from an insurance standpoint. It is certainly simpler and perhaps less costly for the owner in such cases to obtain the insurance. Notwithstanding this however, a contractor's-interest form of builder's risk insurance can be purchased for alteration or remodeling projects, for the purpose of protecting only the interests of the contractor. If the owner does purchase the builder's risk insurance, the inverse of the situation mentioned previously now pertains. Now the contractor must determine that the policy provides the proper coverage to protect his interests. If the coverage is not adequate, the contractor can request the owner to obtain broader coverage, or the contractor can usually arrange additional coverage on its own behalf.

8.15 Subrogation

An important aspect of builder's risk insurance, and also of some other types insurance policies as well, is the subrogation clause. The workings of subrogation may be illustrated by an example. If the owner of insured property should sustain a loss to this property, the insurance company will pay the insured for the damage suffered, up to the face amount of the policy. However, by the terms of the subrogation clause that may be written into the policy, the insurance company acquires the right of the insured to recover from the party whose negligence was the cause of the loss.

This process of subrogation gives the insurance company the right to sue the offending party in the insured's name for recovery of the insurance company's loss. In the case where the owner provides the builder's risk insurance for a project, and the general contractor's operations cause or contribute to damage to the property during construction, the contractor may be exposed to action by the builder's risk carrier for recovery of the insurance company's loss under the policy. Alternatively, if a subcontractor or sub-subcontractor causes or contributes to a loss on the project, this party may be subject to suit by the insurance company. If the general contractor has purchased the builder's risk insurance, subrogation applies to its subcontractors or sub-subcontractors in the event they cause a loss on the project. It is easy to see that application of the subrogation clause by the insurance company could defeat the entire purpose of the project property insurance.

One means of at least partially avoiding the undesirable effects of subrogation is to make the owner, prime contractor, and all of the subcontractors and sub-subcontractors named insureds under the policy. Subrogation cannot usually be employed against parties who are insured under the policy. However, this exemption may apply only to damage that a contractor does to its own work and not to damage caused to the work of others where the contractor has no insurable interest.

Another approach, much more commonly employed, is for the owner and all of the contractors to waive all rights against each other for damages caused by fire or other perils while the building is under construction. This is the language employed in the AIA Document A201–2007, “General Conditions of the Contract for Construction” (see Appendix D). However, there are some builder's risk forms that contain provisions which state that the policyholders cannot waive such rights unless written permission of the insurance company has been received.

8.16 Termination of Builder's Risk Insurance

Builder's risk policies may be canceled on a pro rata basis at any time requested by the policyholder. If the contractor is providing this insurance, the time at which it can terminate the policy is an important consideration. On the one hand, the premiums are costly, and the contractor quite naturally wishes for his expenditure for premiums to cease at the earliest possible moment. On the other hand, the contractor cannot afford to dispense with the protection afforded by the builder's risk policy until such time as the owner is legally responsible for the project. When the contract is silent in this regard, the courts have repeatedly found that the contractor remains responsible for the project until the owner has definitely made formal acceptance.

8.17 Contractor's Equipment Floater Policy

The insurance that a contractor procures in order to protect the construction equipment owned by the company from loss or damage is commonly referred to as an equipment policy, or as an equipment floater policy. A policy of this kind provides protection against physical loss or damage by external means that may occur to the contractor's portable equipment while the equipment is on the job, in transit, or on the contractor's own premises. This type of insurance policy is very flexible, and can be written in such a way as to provide the best fit for the specific needs of the contractor. As a general rule, a contractor's floater policy does not provide any liability coverage for loss of or damage to leased or rented equipment. However, an endorsement is usually available to cover this liability exposure.

There are no standard premium rates for an equipment floater policy. Each construction company is rated by the insurance company on the basis of the type of work performed, past loss experience, company reputation, and dispersion of risk.

Equipment insurance can be obtained on a named-peril or all-risk basis. With named-peril coverage, the policy provides coverage only for equipment losses that are specifically named in the policy. Such coverage typically includes such hazards as fire, transportation, upset, landslide, theft, collision, tornado, flood, explosion, windstorm, and overturn. The all-risk form protects equipment against all losses other than those that are specifically excluded in the policy. Such exclusions commonly include loss of equipment loaned to others, equipment overload, loss resulting from maintenance or repair, and waterborne equipment. Deductible amounts typically apply to most or all losses. The cost of the all-risk form is normally higher than that for the named-peril, and the size of the deductible amounts can have a substantial effect on the premiums.

The equipment floater policy is available to the contractor on either a schedule or blanket coverage basis. Under the schedule form, each item of equipment must be listed in the policy to be covered, and a specified value must be provided for each covered piece of equipment. For contractors with large equipment spreads, the maintaining of an up-to-date schedule becomes a burdensome task, and therefore coverage is usually maintained on a blanket basis. With blanket coverage, the contractor submits a listing of all owned equipment and the value of each item at the beginning of the policy period. A similar listing is presented at the end of the policy period. In this way, policy coverage is automatically adjusted to reflect the acquisition or sale of equipment units. Equipment is normally insured for its actual cash value, which is defined as its replacement cost less reasonable depreciation.

Should a key piece of the contractor's equipment be damaged or destroyed, a rental cost reimbursement endorsement is normally available. This endorsement will pay the cost of renting replacement equipment on a temporary basis until repairs can be made or a new unit obtained.

Equipment insurance, like many other forms of property insurance, is usually sold on a 100 percent co-insurance basis. This means the contractor is required to carry insurance to the full value of the equipment. If this is not done, the contractor becomes a co-insurer with the insurance company on any loss that may occur. For example, if a contractor is carrying insurance coverage at only 80 percent of the actual value of the equipment, compensation by the insurer will be for only 80 percent of any loss, subject to overall policy limits. The contractor will have to make up the remaining 20 percent.

8.18 Property Insurance

Property insurance is purchased by the contractor to protect its offices, warehouses, and other buildings from physical damage. Such a policy is designed to cover buildings and the business personal property of the contractor, as well as the personal property of others that is in the contractor's care, custody, or control. This insurance includes protection for the contents of buildings and can be made to provide coverage for a wide variety of loss possibilities. The basic form policy typically includes coverage for direct loss by fire, lightning, vandalism, sprinkler leakage, hail, smoke, aircraft, vehicles, riot, explosion, windstorm, and other named hazards. This policy can be expanded to a broader form of coverage that includes several other named loss possibilities. Another option is the special form of property insurance that covers all risks of physical loss except those perils specifically excluded in the policy.

The property policy can be a specific policy in which the dollar value of coverage for each building and the value of personal property covered at each location are specified. An alternative to this is blanket coverage where a single policy amount covers the entire schedule of property. In either case, a co-insurance provision is usual, which requires the insured to either maintain insurance equal to at least a specified percentage of the property's value (e.g., 80 percent) or to act as a co-insurer with the insurance company. In this later event, the contractor will receive a reduced payment in case of a loss.

A property insurance policy can be written to reimburse the contractor for property loss on an actual cash value basis or on a replacement cost basis. The property policy normally covers only direct loss to the insured property caused by covered perils. However, the policy can be written to include coverage of indirect losses such as business interruption, rental value, and extra expense. The cost of this insurance is derived, based on the values of the property insured.

8.19 Crime Insurance

Crime insurance is available in many different forms to cover a wide variety of losses the contractor may suffer. Almost every type of crime peril, and almost every property subject to crime, can be covered under a separate crime insurance policy. However, contractors usually obtain package coverage plans that include various forms of crime coverage. These include employee dishonesty, theft, disappearance, and destruction, in addition to premises burglary, computer fraud, forgery and alteration, safe deposit box burglary and robbery, and many others.

8.20 Liability Insurance

Liability is an obligation imposed by law. In the course of conducting the business of the enterprise, the contractor may incur liability for damages in any of a number of different ways, including the following:

1. Direct responsibility for injury or damage to the person (not an employee) or property of third parties, caused by an act of omission or commission by the contractor.
2. Contingent liability, which involves the indirect liability of the general contractor for the acts of parties for whom it is responsible, such as subcontractors.
3. Liability that arises out of a project after the work has been completed and the structure has been accepted by the owner.
4. Contractual liability, whereby the contractor has assumed the legal liability of the owner, or other party, by the terms of a contract.
5. Liability that may devolve to the contractor as a result of the operation of its motor vehicles.
6. Liability that arises from design and associated professional services rendered by the contractor to the owner.
7. Liability to injured employees, both those covered and those not covered by worker's compensation laws.

Liability insurance is also sometimes referred to as defense coverage, and serves to protect the contractor against claims brought against it by third parties. Insurance of this type will pay the costs of the contractor's legal defense, as well as paying judgments for which the contractor becomes legally liable, up to the face value of the policy.

In the settlement of liability claims against the contractor, the insurance company has the right to settle as it sees fit, without the approval or consent of the contractor. Liability insurance provides no protection to the contractor for loss of or damage to its own property. It is important to note that many forms of liability insurance customarily include subrogation clauses, as discussed in a previous section of this chapter, which give the insurance company the right to file suit to recover its losses.

While design-construct and construction management contracts are very widely used today, these business arrangements impose the requirement for special liability insurance coverage. The precise nature of the liability insurance needed by a practitioner engaged in these functions, becomes a matter of the exact nature of the company organization, and the specific wording of the contract between the insured and the owner, and the exact nature or the functions being performed by the insured, as well as the type and nature of the authority and control exercised on the project by the insured. The liability coverage needed for design-construct and construction management professional practice is a matter requiring specialized expert advice.

It should also be noted that when contractors affiliate together to form a joint venture, which is defined as a legal entity separate from its constituent members, the liability coverages of the individual contractors will not apply to claims arising from a joint venture project. Separate policies must be obtained with the joint venture indicated as the named insured.

For a variety of good reasons, a contractor should consider obtaining all of its liability insurance from a single insurance company. This arrangement usually offers the possibility of substantial premium discounts because of the larger total premium amounts involved, as well as a better overall loss rating, and importantly, the fact that a single liability insurance carrier helps to avoid gaps and overlaps in coverage and eliminates the possibility of disagreements between insurance companies regarding the responsibility for losses.

8.21 Commercial General Liability Insurance

Because most contractors require similar basic liability coverages, certain of these are typically packaged together by insurance companies into a single commercial general liability policy. Such a policy protects contractors against third-party liability claims arising from its own operations, from the operations of independent contractors, from completed operations, as well as contractual liability, personal injury, and certain other named hazards. The liability coverages just named will be discussed in greater detail in subsequent sections of this chapter.

Commercial general liability policies are written to cover bodily injury and property damage caused by “occurrences.” An occurrence in this context is defined as an accident, which may include continuous or repeated exposure to the same harmful conditions. Thus, it can be seen that liability coverage is not limited to a single event, and the occurrence need not be sudden, but may be produced over a period of time.

Consequently, in construction, bodily injury and property damage caused by pile driving, water leakage and water seepage, dust, settlement, inadequate shoring, and other instances of injurious exposure are normally covered by the policy. To be covered, an occurrence must be unforeseen, unexpected, and not intended by the insured. Thus, if a loss occurs and the insurance company covers the loss, a failure by the insured to correct the condition that caused the loss may permit the insurer to deny coverage for a second event, on the grounds that it logically could have been foreseen.

The term occurrence is also used in a different manner from that just discussed with regard to general liability insurance. This has to do with the event that must happen during the policy period in order to “trigger” the insurance coverage. With liability insurance written on an “occurrence” basis, the insurance covers bodily injury and property damage that occurs during the policy period, even though the claim may not be made until after the policy has expired. Under the “claims-made” form of liability insurance, the injury or damage is covered by the policy in effect at the time claim is made, even though the loss may have occurred prior to the present policy. If a claim is made when no policy is in effect, the contractor has no insurance protection. However, with claims-made coverage, this restriction can be altered somewhat by retroactive coverage; by extended reporting period coverage, also referred to as tail coverage; and by special exclusion endorsements.

8.22 Bodily Injury and Property Damage Liability Insurance

The basic form of this liability coverage, which is often referred to simply as public liability insurance or premises-operations insurance, protects the contractor against its legal liability to third persons for bodily injury and property damage arising out of its own operations. Excluded from coverage are injuries to the contractor's own employees as well as all forms of automobile liability; these risks are covered by different insurance. The contractor's buildings and premises, whether owned or leased, are included, as well as its construction operations in progress anywhere in the United States.

Normally included in the property damage liability coverage, either as a part of the basic policy or by broad-form property damage endorsement, is damage to the property of other contractors (including subcontractors). Consequently, if the operations of Contractor A cause damage to the work of another contractor on a construction project, the public liability insurance of Contractor A will pay the cost. Not covered, however, would be any damage that Contractor A did to its own work.

Also normally included in this public liability insurance is an elevator liability clause that covers the insured's legal liability for bodily injury or property damage arising from ownership, maintenance, or use of elevators owned, controlled, or operated by the contractor. The term elevators, in this context, includes material and personnel hoists. Contractors must ordinarily carry very high limits of coverage (bodily injury and property damage) for this type of insurance, either as required by contract or simply as a matter of being adequately protected. This is often done through the use of umbrella excess liability coverage, discussed in a subsequent section of this chapter.

Standard typically used forms of this insurance include personal coverage for individual proprietors, partners, executive officers, and directors of companies, and stockholders of corporations while acting within the scope of their duties. For an additional premium, the policy may be endorsed to extend coverage to company employees as additional insureds while carrying out their company duties. This affords protection to employees who are named as individuals in lawsuits together with their employers. Premiums for public liability insurance are based on the contractor's payrolls.

With respect to a contractor's liability for injury to third parties, the concept of “attractive nuisance” is an important consideration. The doctrine of attractive nuisance establishes a special obligation on the part of the possessor of land to children and others who trespass on the property because of the fact that buildings under construction, and the materials and equipment that are used to construct them, are attractive to the interest and curiosity of some people. When a contractor is in possession of land, such as a job site, its operations frequently attract children, and other trespassers as well. Because that person may not realize that he or she is entering on the land of another, or may not appreciate the hazards involved on a construction jobsite, the contractor has an additional responsibility to protect against trespassing. These standards of due care, however, apply only to artificial conditions on the land, such as the building itself, and the construction equipment, or scaffolding on the job site, and not to natural features such as trees, cliffs, or bodies of water which may be on the site. The courts have held that a contractor who maintains a dangerous appliance, or hazardous premises which could be construed to be an attractive nuisance is expected to exercise reasonable care to eliminate the danger or otherwise to protect the site by use of security guards, fences, or other appropriate protective measures.

8.23 Contractor's Protective Public and Property Damage Liability Insurance

Often called contractor's contingent liability insurance, the contractor's protective public and property damage liability insurance policy protects the contractor from its contingent liability imposed by law because of injuries to persons or damage to property of others arising out of the acts or omissions of independent contractors (e.g., subcontractors). This includes protection for the general contractor if the subcontractor's insurance is inadequate or nonexistent. A claimant alleging damages caused by a subcontractor may sue not only the subcontractor but the prime contractor as well. This situation arises from the fact that the prime contractor exercises general supervision over the work and is responsible for the conduct of construction operations, including those of the subcontractors. Contingent liability insurance not only covers accidents arising out of operations performed for the contractor by an independent subcontractor but also protects the contractor from liability it may incur because of any supervisory act by its own supervisory people in connection with a subcontractor's work. If a subcontractor further subcontracts portions of its work, it will also need this form of protection.

The premiums for contractor's contingent liability insurance are derived from the subcontract amounts and do not generally vary with the work classifications. Insurance companies writing this form of insurance may require that the prime contractor obtain from its subcontractors certificates of insurance verifying that they have purchased public liability and property damage insurance to cover their own direct liability.

8.24 Completed-Operations Liability Insurance

There are some cases where a contractor can be held liable for conditions or events on a project he has constructed, even after the project has been completed. Completed-operations liability insurance protects the contractor from liabilities arising from projects that have been completed or for projects that may have been abandoned.

In a limited sense, the contractor is not liable for damages suffered by a third party by reason of the condition of the work after the project has been completed and accepted by the owner. According to the “completed and accepted” rule, once the owner accepts the work, then the owner generally becomes the party responsible for any defects in the work or for conditions that may be the cause of injury or damage. When a dangerous condition exists that is obvious or readily discoverable on inspection, and the owner allows this condition to continue, the owner is substituted for the contractor as the party answerable for damage to a third party even though the dangerous condition may originally have been created by the contractor. Additionally, the contracting firm is generally not liable if it merely carries out plans, specifications, and directions given to it by another (typically the owner and architect-engineer), unless the information is so obviously faulty that no reasonable person would follow it.

However, there are many exceptions to these rules, and the courts now increasingly hold contractors at least partially liable to anyone who might be injured because of their negligence. A contractor who creates a dangerous condition on the property of another may be held responsible to parties injured thereby, even after the owner has accepted the project, if the parties so injured could reasonably have been expected to come into contact with the dangerous condition, and provided the contractor knew or should have known of the hazard and did not exercise reasonable care to warn of or to eliminate the dangers.

The rule of owner responsibility does not apply to dangerous conditions that are of a latent nature so that their existence would not be discovered by the owner during the exercise of ordinary care and usage. Indeed, courts have imposed liability on contractors without requiring a showing of fault in cases involving latent defects in completed projects. This is an extension to construction of the doctrine of manufacturers' or product liability, whereby builders of mass-produced homes and other contractors as well, have been held subject to strict liability for damages to third parties, even in the absence of contractor negligence. This follows from the legal theory that a producer of goods is strictly liable for injuries or damages resulting from a product defect. Consequently, a contractor's responsibility does not necessarily end with project completion and owner acceptance. Rather, the contractor's liability for completed operations continues for the full period of the applicable state statutes of limitations.

When contractors obtain completed-operations liability insurance, they are protected against loss resulting from damage to persons or to the property of others arising from any completed project, regardless of its completion date. This is true, of course, in the absence of any specific exclusion to the contrary. The protection under this policy starts with the effective date of the insurance, and continues as long as the insurance is kept in force. The date of injury or damage however, must fall within the policy period.

Protection under this type of policy extends only to liability to damaged parties, and does not apply to damage to the work that was performed by the contractor. This exclusion can be relieved to some extent by a broad-form property damage endorsement applied to the completed-operations policy.

8.25 Contractual Liability Insurance

The liability coverages discussed to this point protect the contractor only with respect to its liability as imposed by law. There are many instances in construction, however, where the contractor, by terms of a construction contract, or purchase order, or other form of agreement, assumes the legal liability of another. This form of liability is called contractual liability and refers to the contractor's acceptance by contract of another party's legal responsibility. The contractor is protected from such assumed liability by contractual liability insurance. This coverage provides protection from the tort liability of another for bodily injury or property damage caused to a third party, such liability being assumed by the contractor through a business contract. The premium for contractual liability insurance is based on the contract amounts involved.

Routine purchase agreements can impose serious contractual liability obligations on the contractor. For example, the purchase orders used by some transit-mix concrete companies contain a clause whereby the contractor agrees to hold harmless the concrete dealer from all liability that may arise out of any accident involving the transit-mix trucks or their drivers while on a job site. Upon signing such a purchase order, the contractor assumes a legal responsibility normally belonging to the ready-mix supplier. In the absence of contractual liability coverage, the contractor will be unprotected should such a loss occur.

Contractual liability policies often have a number of important exclusions. A common exclusion pertains to bodily injury or property damage occurring within 50 feet of railroad property, or involving a railroad bridge, trestle, tracks, road beds, tunnel, underpass, or crossing. Third-party beneficiary losses (discussed in the section that follows), as well as explosion, underground damage, collapse, and other such losses may be exempted from the contractual liability policy. Also typically excluded is contractual liability associated with the operation, ownership, maintenance, or use of automobiles. Such coverage must be provided by separate automobile insurance policies.

8.26 Third-Party Beneficiary Clauses

Contractual liability insurance policies usually stipulate that the policy coverage does not apply to an action on a contract by a third-party beneficiary arising out of a project. Therefore, the contractor may wish to insure himself for this risk. A third-party beneficiary contract is a contract where two parties enter into an agreement whereby one of the parties to this agreement is to perform an obligation for a third party. In such a contract, if the obligated party does not perform as promised for the benefit of the third party, the third party can enforce its rights under the contract even though it is not a party to the contract.

To illustrate this point, contracts with public agencies may require that the contractor be responsible for all damage to property, however caused, by the construction operations. Such clauses often refer specifically to blasting. This is the natural result of the desire of governmental bodies to protect adjoining property owners from the hazards of construction operations on the property of the government body or public agency. However, when the contract wording states that the contractor assumes direct liability to third parties, a citizen can assert rights as a third-party beneficiary even though he is not a party to the contract, and even though the contractor was not negligent in its operations. In other words, a party whose property has been damaged by the contractor's operations can sue for damages on the basis of breach of contract without having to prove contractor negligence. This contingency is not covered under usual contractual liability coverage. Third-party beneficiary coverage can be added for an additional premium, usually on a specific exposure basis.

It is of interest that special provisions are now being included in some public construction contracts to limit the risk of third-party beneficiary suits. Called no third-party liability clauses, they provide that the contracting parties do not intend to make the public or any member thereof a third-party beneficiary under the contract for construction, or to authorize anyone who is not a party to the contract to maintain a suit for bodily injury or property damage pursuant to the terms or provisions of the construction contract. The intent of such a clause is, of course, to remove the construction contract as a vehicle for third-party suits, and to ensure that the duties, obligations, and responsibilities of the parties to the contract remain as imposed by law.

8.27 Personal Injury

Bodily injury, as used in an insurance context, refers to physical injury to the body, including shock, mental anguish, mental injury, sickness, disease, or death. Personal injury refers to intangible harm, and the usual commercial general policy covers personal injury liability. There are a number of reasons why this type of insurance coverage can be important to the contractor.

Personal injury liability insurance protects the contractor from liability it may incur for:

• False arrest, malicious prosecution, willful detention, or false imprisonment;
• Libel, slander, or defamation of character.
• Wrongful eviction, invasion of privacy, or wrongful entry.

Such protection might be needed, for example, if the contractor caused the arrest of someone it suspected of theft or damage to its property and was sued for false arrest. In another illustration, it could happen that a contractor's security guard might detain someone in the course of performing his duties. Personal injury liability coverage is normally written subject to the exclusion of the contractor's own employees from coverage, but the policy can be written so as to include them.

8.28 Exclusions from Commercial General Liability Policy

Those liability coverages that are usually contained in a contractor's commercial general liability insurance have been discussed in the previous sections. However, despite its name, this policy is not all-inclusive in its coverage, and there typically are in fact many exclusions. Important examples of these exclusions include the following:

• Exclusions from property damage liability.
• Automobile, watercraft, or aircraft liability.
• Professional liability.
• Liability for injury to contractor's own employees.
• Liability arising from pollution.

Most of the items listed are insurable at additional cost, either by means of endorsements to the commercial general liability policy, or by means of separate policies. The first four of the exclusions listed above are discussed in the following sections.

8.29 Property Damage Liability Exclusions

A contractor's commercial general liability policy excludes coverage for liability arising from damage to:

• Property owned by, leased to, or rented to the contractor.
• Personal property in the contractor's care, custody, or control.
• Property damage to premises sold, abandoned, or given away by the contractor.
• Property loaned to the contractor.

During the course of construction, the following property damage is typically excluded:

• That particular part of real property on which the contractor, or subcontractor working on the contractor's behalf, is performing operations, if property damage arises out of these operations.
• That particular part of any property that must be restored, repaired, or replaced because of faulty workmanship.

These exclusions mean that the commercial general liability policy does not protect the contractor for damage done to another person's property while the contractor is working on it or with it. Additionally, coverage typically excludes damage to the insured's own property. This is consonant with the general rule that liability insurance is not intended to cover damage to one's own property.

The effect of these exclusions can be mitigated somewhat by obtaining the appropriate form of property insurance, or by the use of a broad form of property damage endorsement that restricts application of the exclusions to some degree. Actually, this endorsement uses more explicit language with respect to the exclusions, thereby covering more damage situations and providing somewhat broader protection for the contractor. Although it does not completely eliminate the property damage exclusions, it does cover more claims.

It can be readily seen that much of the property damage that is exempted in the commercial general policy is normally insured by other standard property policies. Builder's risk, equipment floater, installation floater, and other types of policies cover much of the property that is excluded in the liability coverage.

8.30 Automobile Insurance

The operation of automobiles exposes the contractor to two broad categories of risk. One form of risk comes from loss or damage to the contractor's own vehicles caused by collision, fire, theft, vandalism, and similar hazards. The other form of risk is liability for bodily injury to others, or damage to the property of others, caused in some manner by the operation of the contractor's automobiles. Many states have statutory requirements concerning the purchase of liability insurance by owners of motor vehicles. In an insurance context, automobiles or vehicles are construed to include passenger cars, trucks, truck-type tractors, trailers, semi-trailers, and similar land motor vehicles designed for travel on public roads. Many statutes make it mandatory that the contractor obtain liability insurance on its vehicles. The contractor may also elect to insure some or all of his vehicles for physical damage.

Automobile liability insurance provides financial protection when the contractor is legally obligated to pay for bodily injury or property damage arising out of the ownership, maintenance, or use of a covered vehicle. This includes liability coverage for over-the-road hazards for self-propelled motor vehicles used for the sole purpose of providing mobility to construction equipment such as pumps, power cranes, air compressors, electric generators, welders, and drills. The insurer also provides the contractor with legal defense against liability actions.

Automobile liability coverage has several exclusions such as the injury to an employee, as well as property owned or transported by the contractor, and others. The insurance carrier will pay all damages resulting from an accident up to the liability limits specified in the policy. In view of the recent history of large awards in cases of bodily injury, as well as the claims consciousness of the public in general, the contractor must maintain high limits of motor vehicle liability coverage. The contractor's umbrella liability insurance, defined and discussed in a subsequent section of this chapter, normally provides liability limits above those in the automobile policy.

Physical damage automobile coverage is available in three major forms: collision, specified perils, and comprehensive coverage. Collision pays for loss to a covered vehicle resulting from a collision with another object or its overturn. If only a few motor vehicles are involved, collision coverage is often purchased by the contractor. However, many contractors who have large fleets of vehicles prefer to self-insure the collision exposure because of the high premium costs for collision insurance. Collision insurance customarily provides for a specified deductible for each collision loss occurrence. This deductible amount can be varied, correspondingly changing the premium rate for the insurance.

Specified perils coverage pays only for losses caused by hazards listed in the policy such as theft, fire, earthquake. explosion, flood, vandalism, wind, hail, and others not including collision or overturn. Comprehensive coverage pays for damage to or the loss of a covered automobile for any cause except collision and overturn. The specified coverage is normally less costly than the comprehensive form, and many contractors choose to obtain the specified perils coverage to reduce premium expense. In addition, it is normally possible for a contractor to place some vehicles under comprehensive coverage and others under specified perils coverage.

There are a variety of endorsements that the contractor should consider when purchasing its motor vehicle insurance. One provides protection when an employee uses his private automobile in taking care of the contractor's business. In this regard, the contractor can purchase an “employees as insured” endorsement. When this endorsement is added to the contractor's policy, it will provide coverage if an employee is found liable for an accident that occurs while the employee was using a private vehicle on company business. Other endorsements are available to provide the contractor protection when using leased or hired units. Medical payments coverage for persons occupying an insured vehicle, and uninsured motorists coverage are additional examples of endorsements that are available.

8.31 Professional Liability Insurance

Professional liability insurance provides protection from liability arising out of errors, omissions, or negligent acts of the insured in performing design and other professional services. When the contractor's responsibilities to the owner include professional as well as construction duties, professional liability insurance must usually be obtained. While this risk applies primarily to design-construct contractors and construction managers, other contractors can have varying exposure in this area.

Professional liability may devolve to the design-build contractor in two ways. Direct responsibility may arise out of design performed by in-house architect-engineers. In addition, contingent professional liability is possible where professional design services are subcontracted to an outside architect-engineer firm, or under a design-construct contract to a subcontractor.

Liability exposure of a construction manager arises out of its involvement in the feasibility and design phases of the project and the supervision of work forces other than those of the construction manager itself. Most professional liability policies are written on a claims-made basis, a topic previously discussed in this chapter. In addition, such policies generally provide for relatively large deductible amounts. Professional liability coverage can be obtained on a project basis or on a blanket basis.

When professional liability insurance is obtained, it should include contingent professional liability coverage where design work is subcontracted to outside professionals or subcontractors. The total design liability exposure of the contractor is actually covered by a combination of professional liability insurance, the comprehensive liability policy, and the builder's risk policy. While the contractor may have each of these policies, and while he may believe that these cover professional liability, he must understand that the usual form of commercial general liability, umbrella excess, and builder's risk policies may specifically exclude professional liability protection. Insurance protection for contractors in the area of design liability is a very complex matter, and the contractor is well advised to seek expert advice with regard to this matter.

8.32 Umbrella Excess Liability Insurance

Because of the numerous and substantial hazards that its operations present, and due to the high awards that are frequently made in bodily injury cases, the contractor may very well be concerned regarding the adequacy of the liability insurance it carries. A common solution for managing this risk is to purchase insurance called umbrella excess liability insurance. This type of insurance provides excess coverage above the underlying commercial general liability, automobile liability, and employer's liability policies.

Although the coverage of a policy of this type is not at all standardized, such an insurance policy serves several purposes. One is to cover liability claims that might otherwise fall between the coverages carried under the separate underlying liability policies the contractor has.

A second purpose is to raise the policy limits of the contractor's existing liability insurance to values that are high enough to provide protection against any foreseeable loss or combination of losses. The umbrella coverage does not take the place of the existing policies; it merely provides substantially greater protection for the same hazards insured against under the primary coverages. If the contractor incurs a liability beyond the limits of a primary policy, then the umbrella coverage is invoked. Umbrella coverage is sold on either an occurrence or claims-made basis.

In addition, an umbrella policy can provide some protections that are not provided in the underlying liability policies. These losses are normally subject to a specified deductible amount per occurrence. To illustrate how an umbrella policy works in this instance, suppose that a contractor has an umbrella policy with a $25,000 self-insured deductible. If the contractor's operations should cause damage to adjoining property, a form of loss not covered by its underlying insurance, the contractor pays the first $25,000 of the loss, and the umbrella coverage pays the remainder, up to the face amount of the policy.

Umbrella policies do contain a number of exclusions. Among these are damage to property owned or controlled by the insured, damage to the work of the insured, contractual liability, explosion, collapse, and a number of others.

8.33 Wrap-up Insurance

Sometimes, especially on large construction projects, all of the work on the project can be performed under a coordinated or wrap-up insurance program that is provided by the owner. In such cases, the owner elects to furnish certain insurance coverages for the entire construction team of owner, architect-engineer, construction manager, prime contractors, and all subcontractors. On such projects, the contractors are required to accept the coverages provided by the owner if the owner has made this requirement a provision of the contract.

The usual procedure is for a single insurance company to provide all of the workers' compensation and employer's liability, general liability, umbrella, and builder's risk insurance for the entire project. When the wrap-up insurance method is used, the owner buys and pays for all of the insurance stipulated. The general contractors and the subcontractors bid on the project without including the cost of the insurance in their proposals.

The prime attraction of the wrap-up form of insurance coverage is the reduced cost to the owner, both in terms of the direct cost of the premiums and potentially in the saving of the contractors' and subcontractors' markup on the cost of the premiums. Lower premium rates often result through the owner's volume purchase from a single insurance carrier.

Wrap-up insurance also eliminates much of the administrative detail involved when each contractor and subcontractor on a project purchases its own insurance. Under these conditions, layer upon layer of hold-harmless clauses can increase the cost of the public liability insurance.

There seems to be little question that on large projects the direct cost of insurance can be reduced through use of the wrap-up insurance concept. In addition, a single carrier can provide concentrated safety inspections and quick claims service. Gaps and overlaps in coverage can be minimized, and disputes between insurance carriers can be eliminated.

It is to be noted, however, that wrap-up plans of this kind upset the normal business arrangements that contractors have with their usual agents and insurance companies. Additionally, when the owner uses insurance of this kind, the contractors find that they must deal with a different set of safety engineers, underwriters, claims adjusters, and auditors for each different wrap-up insurer. Additionally, repeated audits of the contractor's accounting records by different insurance companies can seriously disrupt a contractor's normal office routine, and can certainly add to administrative costs. And, certainly, the contractor will need to closely examine the wrap-up insurance policy, in order to assure that all of its interests are adequately protected.

8.34 Owner's Liability Insurance

The owner is responsible for procuring its own general liability insurance that applies to its normal operations and that protects it from liability that may arise because of its own negligent acts or those of its employees. It may also choose to obtain owner's protective liability coverage, either as a part of its general liability policy or by having the protective coverage furnished by the general contractor.

The owner's protective liability insurance protects the owner from injury or damage claims caused by the operations of the general contractor or any of the subcontractors. Despite the fact that the general contractor and the subcontractors are directly and legally responsible for liabilities arising out of their operations, the owner is often made a party to legal actions arising from acts or omissions connected with their construction activities.

To protect the owner from this source of liability, owner's protective liability insurance is available. This insurance, with the owner as the named insured, covers its contingent liability for personal injury, including death, or property damage that may occur during the construction operations, as well as covering any liability it may incur as a result of its direction or supervisory acts in connection with the work being performed, or through the omission of a duty that cannot be lawfully delegated to an independent contractor.

Where the contractor is made responsible for obtaining protective liability insurance for the owner, this insurance is normally obtained as a separate policy, although in some instances the owner can be added as an additional insured on the contractor's commercial general liability policy. When a construction contract requires that the contractor provide protective liability insurance for both the owner and the architect-engineer, both parties can be named insureds on the same protective policy for an additional premium.

If the construction contract contains an indemnity clause in favor of the owner and also requires that the contractor provide protective liability coverage for the owner, there is some duplication of coverage. The protective liability coverage is considered to be the primary policy, which then entitles the contractor to a substantial reduction in the premium for the contractual liability coverage on that project.

8.35 Subcontractors' Insurance

By the terms of its subcontracts, the prime contractor normally requires each subcontractor to provide and maintain certain insurance coverages. Appendix M, AIA Document A401–2007, “Standard Form of Agreement between Contractor and Subcontractor,” contains this requirement.

For the most part, prime contractors require their subcontractors to have the same coverages and limits as required by the prime contractor's construction contract with the owner. The insurance carried by its subcontractors is a matter of serious importance to the prime contractor. The subcontractors' coverages play an important role in the total insurance protection of the prime contractor and often, either of themselves or in conjunction with the prime contractor's own insurance, these policies of the subcontractors will provide direct protection for the prime contractor. Many prime contractors require their subcontractors to name the prime contractor as an additional insured party in the subcontractors' employer's liability, commercial general liability, and automobile liability policies.

Subcontractors' insurance is also of great concern to prime contractors due to the fact that in cases where the liability insurance coverage of a subcontractor proves to be faulty or inadequate, responsibility can devolve to the prime contractor from the subcontractor. In addition, when the subcontractor does not provide insurance coverage required by law, such as workers' compensation insurance, for example, the general contractor may be held responsible. Workers' compensation insurance will be discussed more fully in subsequent sections of this chapter.

To illustrate, most of the states have what are called “subcontractor-under” provisions in their workers' compensation statutes. The effect of these provisions is that a prime contractor (or subcontractor who further subcontracts) is considered to be the statutory employer of the employees of any subcontractor that does not procure the required workers' compensation insurance. In such an instance, an injured employee of the subcontractor may be able to recover under the insurance of the prime contractor. Construction subcontracts may provide that if the subcontractor does not procure the insurance required, the prime contractor has the right to obtain such insurance for the subcontractor and to charge the account of the subcontractor with the premium cost involved, or to terminate the subcontract.

8.36 Group Insurance Plans

In most cases, general contractors purchase the insurance they need for their company on an individual basis from commercial companies of their choice. However, it is not uncommon for contractor groups or members of trade associations to associate together for the purpose of obtaining certain insurance coverages from a common source. Potential benefits include possible premium savings, readily available coverage to members in a tight insurance market, and possible investment income for member contractors in some cases. A number of different organizational methods have been devised to provide contractor members of groups with a variety of insurance types.

A common group insurance arrangement occurs where member contractors form a group purchase pool, called a risk retention group (RRG). This pool serves effectively as a co-op in the purchase of designated insurance types for contractor members from a selected commercial carrier. Such a pool assumes no risk but uses the group's purchase volume to negotiate better coverages at less cost.

A more ambitious arrangement is one where the members of a construction group establish themselves as a self-insured pool. Members of the pool invest capital into the company and make premium payments into a trust fund. The plan is implemented by the group forming an insurance subsidiary that provides only member contractors with designated insurance coverages. Such subsidiaries are often referred to as group-owned insurance companies or group-owned captive insurance companies. Programs of this type are often formed and used when a certain type of insurance becomes very expensive or difficult to obtain.

To cite a specific example, several local chapters of the Associated General Contractors of America now have self-funded workers' compensation insurance programs. (Workers' compensation insurance is further discussed in subsequent sections of this chapter.) In such a plan, the contractor members pool their funds and insure themselves. This enables the plan participants to save on this line item of operating cost, and to become more cost competitive. The self-insured trusts formed by the group are directed and controlled by their own trustees and pay losses covered by the insurance provided. Some of these companies prepare their own policies and handle their own claims and underwriting. Such companies function as small, self-contained insurance firms.

It is more common practice for captive companies to engage the services of a commercial insurance company to perform the normal duties and activities of a typical insurance firm. Participating contractors pay premiums into a trust fund, and this fund is used to policy losses. The trust distributes any dividends back to the member contractors after paying claims and maintaining a reserve to meet future claims and expenses. The trust often purchases reinsurance to protect itself against catastrophic loss.

There are also so-called offshore captive insurance companies. This is a case where the group-owned company is located in another country, such as Bermuda, where taxes and other conditions are favorable to private business.

8.37 Employee Benefit Insurance

Construction firms, like other businesses, very often provide their employees with certain forms of insurance coverage as fringe benefits. Major medical, hospital, surgical, dental, vision, life, accidental death, disability, and weekly income coverages are examples. Group coverage can be arranged between a construction company and an insurance carrier where certain benefits are made available to all employees of that company, or to all employees in a specified class or category. As a result of the seasonal nature and labor mobility in the construction industry, an employee must normally serve with the company for a prescribed minimum time and must work at least a specified number of hours per week or per year in order to be eligible for company group insurance coverage. Most group insurance is sold on a yearly term basis, with the rates being recalculated annually by the insurance carrier.

There are also group insurance plans that provide such benefits, not for an individual employer but for all company members of a trade association or other body. This is a broad-scale arrangement where all eligible firms can obtain selected group coverages from the same source. Such benefits are often provided by a multiple-employer insurance trust underwritten by a large national insurance company.

Group insurance is a useful management device in attracting and keeping company personnel. The group insurance package can be a valuable recruiting device, and is a vital component of employee compensation, as well as being important for enhancing company loyalty, as well as the morale of company employees. This is very important to company personnel because the contractor ordinarily pays all or a substantial part of the premium cost of such insurance coverages.

8.38 Certificates of Insurance

An insurance certificate, also referred to as a certificate of insurance (CI), is a printed form which is executed by an insurance company certifying that a named insured has policy coverage in effect for the insurance designated by the certificate. Such certificates are addressed to the party requiring the evidence of insurance, and the certificates list the types and amounts of insurance the insured has purchased. These certificates typically contain the limits of the coverage in effect, and note the expiration dates of the policies, and typically contain a statement to the effect that the party in whose favor the certificate is drawn will be informed in the event of cancellation or change of the insurance described.

The general contractor is often required to submit certificates of its insurance to owners and other parties. Construction contracts usually contain the provision that the contractor shall submit suitable insurance certificates to the owner or the architect-engineer at the time the contract is signed or, at least before field operations are commenced (see Appendix D). Many municipal building departments require proof that certain insurance is in effect, by way of the appropriate CIs, before they will issue building permits.

It is standard practice for a general contractor to require suitable and up-to-date certificates of insurance from all of its subcontractors. A management axiom of many general contractors, as well as a requirement frequently included in subcontractor agreements, is a statement that no work by the subcontractor may be performed unless and until the appropriate CIs have been furnished to the general contractor. A properly maintained file of such certificates is maintained by the general contractor to ensure that each subcontractor provides and maintains the insurance coverages and amounts required by law and by subcontract agreement.

8.39 The Principles of Workers' Compensation

Before the present era of workers' compensation laws, an employer was obligated to protect its employees only to the extent of providing a safe place to work. If an employee was injured in the workplace, in order to obtain redress in the common law, the injured employee had to file suit against the employer and prove that the injury was due to the negligence of the contractor. For the defense of such suits, the employer had available the accepted common-law defenses of contributory negligence of the injured employee, assumption of risk by the injured employee, and negligent acts of fellow employees.

Under the contributory negligence doctrine, the employee could not obtain redress if he were found to have been negligent in any manner or to any degree, regardless of the employer's negligence. The assumption-of-risk doctrine denied recovery if the worker knew or should have known about the fact that the work was accompanied by inherent risks. The defense of negligent acts of fellow employees followed a fellow-servant doctrine which held the employer liable for its own actions, but not for those of a fellow worker of the injured party. This trinity of common-law defenses made it very difficult for an injured or disabled worker to prove employer responsibility and negligence. The process was slow, and costly, and uncertain at best, for the employee.

The social and economic consequences of this system were instrumental in providing impetus for the development of workers' compensation laws. New York was the first state to enact a state workers' compensation law, which became effective in 1910. Since that time, workers' compensation legislation has been passed by the federal government, and by every state and territory of the United States, as well as by each dominion of Canada. Workers' compensation statutes apply to most private employment and much public employment (with federal civil service and the military being notable exceptions).

The underlying economic principle of workers' compensation is that the costs associated with an on-the-job injury or death of an employee, regardless of fault, is a cost of production and should therefore be borne by the industry. The expense incurred by employers in providing suitable protection for their employees is considered to be another cost of doing business and, as such, is presumably reflected in the selling price of the products or services of that company. The fundamental objective of all of the workers' compensation statutes is to ensure that an injured worker receives prompt medical attention and monetary assistance for injuries sustained in connection with his work. Such support is provided by the employer and involves a minimum of legal formality.

Another basic principle in workers' compensation is the strict liability of the employer, regardless of any fault of the injured employee. Contributory negligence of the employee, such as failure to wear a company-provided safety helmet or to conform with posted safety regulations, will not usually affect the employer's liability. As a matter of fact, about the only exceptions to the payment of compensation benefits occur when the worker deliberately inflicts the injury on himself, when the injury occurs when the worker is intoxicated, when the injury is sustained in the course of committing a felony or misdemeanor, or when the injury is intentionally caused by a co-employee or third person for reasons not associated with the employment.

Secondary objectives of workers' compensation laws were to free the courts from the tremendous volume of personal injury litigation, and to eliminate for the injured, the expense and time involved in court trials. Additionally, it was believed that workers' compensation statutes could serve as motivating or instigating factors for contractors and other businessmen in the development and administration of effective safety programs.

8.40 Workers' Compensation Laws

Although all of the various workers' compensation laws embody the same general principles, they differ considerably in their working details, and no two of them are exactly alike. The contractor who performs work in more than one state must be especially careful to purchase the proper workers' compensation insurance so as to be in compliance with the legal requirements of the workers' compensation statutes of each state in which the contractor performs work.

Every law makes certain exclusions to its workers' compensation coverage. For example, most of the acts exclude domestic servants, farm labor, casual employees, independent contractors, and workers in religious or charitable organizations from the requirement to be covered by workers' compensation. Businesses that employ fewer than a specified number of employees are exempted in some states. Interstate railway workers and maritime employees are not covered by the workers' compensation acts, but are protected by separate federal legislation. Clearly, the contractor must avail himself of expert legal counsel, in order to assure that he is complying with the requirements of the statute in the locale where he is performing or planning to perform work.

Every employer whose employees are covered by a compulsory workers' compensation law must accept the act and must provide for the benefits specified. Failure to comply with the prescribed provisions can result in severe penalties, as well as the payment of damages to injured workers, and possible imprisonment. In most states, the presumed-acceptance principle applies, whereby in the absence of specific notice to the contrary, the employer is presumed to have accepted coverage by the compensation act. Workers in excepted or excluded employments can usually be brought into workers' compensation coverage through voluntary action on the part of their employers.

An injured employee who files a claim for and accepts assistance under a workers' compensation statute ordinarily forfeits the right to sue his employer for damages. Compensation statutes have historically provided that a workers' compensation claim is the only remedy the employee has against his employer. According to law, the employer is strictly liable, and the injured employee is guaranteed the benefits as prescribed by law. The employer avoids the danger of unpredictably large jury verdicts for bodily injury caused by employer negligence.

However, during recent years there has been a gradual erosion of the employer's no-fault immunity from suit when an injured employee accepts workers' compensation benefits. In many states, injured workers can now sue their employers for tort damages in addition to receiving state compensation benefits. For an injured worker to have this right, there usually must be a subjective realization on the part of the employer that injury or death could occur because of an unsafe condition. The usual basis for suit by the employee is some form of gross negligence on the part of the employer.

Workers' compensation statutes normally protect the general contractor from tort liability to employees of its subcontractors. Such statutes also protect project supervisors and managers from lawsuits for negligence or tort where they are acting within the scope of their employment. States vary as to whether an injured employee or the workers' compensation insurance company can sue third parties who may have caused the injury. In most states, an injured construction worker can recover from the employer's workmen's compensation insurance, and then can sue a third party who caused the injury.

In some areas, the worker cannot collect further compensation from fellow employees. This term is considered to include other contractors and other workers on the project. However, several states do allow co-employee suits, some of these only when the injury involved an intentional act, intoxication, a reckless act, willful and malicious conduct, unprovoked aggression, gross negligence, or when the accident involved a motor vehicle. In most states however, an injured employee has considerable latitude in suing third persons for negligence. This contributes appreciably to the number of third-party suits filed against owners and architect-engineers. To be successful, of course, the injured employee must demonstrate that the party sued was negligent and that this negligence caused or contributed to the injury which the worker sustained. In some states, however, statutes now provide that an injured worker cannot proceed against the architect-engineer after receiving state workers' compensation benefits. Exempted from this protection, however, are claims based on negligent design on the part of the architect-engineer.

Additionally, all of the states, territories, and the District of Columbia have enacted child labor laws that regulate the conditions under which minors may be employed. Workers' compensation laws cover legally employed minors. In some jurisdictions, double compensation or added penalties are provided in cases of injury to illegally employed minors. Minors also enjoy special benefit provisions in workers' compensation policies.

As was noted earlier, it is imperative for a construction contractor to avail himself of expert assistance in order to assure that he fully understands, and is fully compliant with, the workers' compensation statutes and child labor statutes in the jurisdictions where he will be performing work. Being properly informed, and making good decisions with regard to this type of insurance is a critically important component of the contractor's risk management program.

8.41 Administration of Workers' Compensation Laws

Workers' compensation laws are generally administered by commissions or boards that are created by law. A few states provide for court administration. Statutory provisions relating to administration vary somewhat from one state to another, but each of the laws contains certain typical regulations pertaining to its implementation. Notice to the employer of the injury by the injured worker is required within stipulated time limits unless the contractor or its agent had actual knowledge of the injury. A claim must be filed by the injured worker within a statutory period. Such claims are normally settled by agreement, subject to approval of the administrative body.

Review and appeal of the compensation award to the injured worker, as well as regulation of attorney's fees, are also provided for by the provisions of the various acts. Requirements vary concerning the keeping of accident records by the employer, but all states require that the employer report injuries to a designated authority. Failure to report in accordance with the applicable statute can result in fines and, in some jurisdictions, even imprisonment. Except for preliminary reports, the contractor's insurance company usually makes the formal reports required by law except in states with monopolistic funds.

Benefits to an injured worker are only those provided by the law and approved by the administrative authority. Should the injured party not be satisfied with the award as specified by law, he can appeal to the court designated by the act. Such appeal must be initiated within a statutory period. In some jurisdictions, the employee can file suit against his employer under the compensation act for alleged failure to provide safety devices. Some states allow this practice, if the employee can show gross negligence on the part of the contractor.

8.42 Workers' Compensation Benefits

All workers' compensation laws provide various forms of benefits for the disabled employee or his dependents for job-related injury, death, or sickness, without regard to how the disability or death may have been caused. The monetary value of such benefits varies substantially from one state to another. These benefits include medical treatment, hospitalization, and income payments for the worker during his disability. In the event of a fatality, funeral expenses and survivor death benefits are also paid. Many jurisdictions include special benefits such as a lump-sum payment for disfigurement, rehabilitation services, and extra benefits for minors injured while illegally employed.

Most statutes now stipulate that medical benefits shall be provided without limitation as to maximum total cost and that wage compensation shall be paid for as long as the worker is disabled. In those states where benefits are limited by statute, either in terms of dollars or period of time, the contractor may purchase an endorsement to its workers' compensation insurance policy that provides additional benefits beyond those required by law for its injured employees.

Most states require a waiting period before a worker can collect certain benefits, seven days being typical. However, these states normally allow a worker who has been off the job for a specified length of time to receive benefits for the waiting period retroactively.

Four classifications of work injuries are used in conjunction with workers' compensation benefits. These are:

1. Temporary-total
2. Permanent-partial
3. Permanent-total
4. Death

Other than medical assistance, the usual benefits provided by workers' compensation laws are quite modest, especially when compared with the worker's usual earning capacity. The idea is, of course, to give the worker sufficient monetary help so that he will not become a burden to others.

The great majority of compensation cases involve injuries of the temporary-total classification, meaning the worker is temporarily unable to work but ultimately recovers fully from his injuries and returns to employment. Income benefits payable during the period of convalescence are determined as a percentage of the worker's average wages. Most states limit the minimum and maximum benefits payable weekly as well as the number of weeks and the total dollar amount of benefit eligibility.

Permanent-partial disability connotes a continuing partial disability, although the worker is eventually able to return to work. This form of disability is classified either as a schedule injury, meaning the loss, or loss of use of, a thumb, eye, leg, or other part of the body, or a nonschedule injury, which is of a more general nature. Compensation acts provide additional benefits for schedule injuries.

A permanent-total disability injury prevents the worker from future employment in his former craft. Most of the state workers' compensation laws provide that specified benefit payments shall be made for life in cases of permanent-total disability. Rehabilitation services are also provided to train disabled people in new skills or occupations.

In the event of the accidental death of a worker, all states provide for the payment of death benefits to his family or other dependents. A few acts provide for payment of benefits to the widow for life or until remarriage, and to children until they reach a prescribed age. Most states place a limitation on the time period or total amount of such payments.

8.43 Additional Provisions of Workers' Compensation Laws

Workers' compensation statutes now include occupational diseases within their coverage. Provisions vary, but compensation benefits are generally the same as those for other forms of disability. Many states have provided for extended periods of time during which claims may be filed as a result the discovery of certain latent, slowly developing occupational diseases.

Claims under the name of occupational disease have increased greatly, stemming from certain practices, and the use of many substances common in construction. A commonplace example is the growing number of claims made because of the effects of asbestos. Claims are often for very large sums of money, reflecting the long periods of time between the first exposure and discovery of the disease, as well as the attendant disability.

New products are coming into use and the attendant effects of different substances, alone or in combination, are only now being discovered. There are serious questions concerning who should pay, how much should be paid, and who is eligible to receive such payments.

In addition to the increasing incidence of occupational disease, the definition of what constitutes an occupational disease is being broadened. Benefits are now being awarded for illnesses caused by mental stress in the workplace, as well as for cumulative injury such as loss of hearing, and cardiovascular problems. More and more claims under workers' compensation are coming from older workers as the result of more diseases being found to be occupational and therefore compensable.

Second-injury or special-disability funds have been developed to meet problems arising when an employee, previously injured, suffers a second injury that, together with the first, results in a combined disability much more severe than that caused by the second injury alone. Historically, the employer in whose employ the second injury took place was required to provide benefits as indicated by the total resulting disability. However, this interpretation has sometimes resulted in employers being reluctant to hire previously injured persons. All states now provide that the employer is responsible for payments required by the second injury only. Additional compensation to the injured employee as called for by the combined effects of his injuries comes from second-injury funds, which were created at the time the second-injury provisions were enacted into law.

8.44 Workers' Compensation Insurance

A workers' compensation statute requires the contractor to provide its injured workers with all benefits as may be required by law in that state. The usual way in which a contractor does this is through workers' compensation insurance, although almost all states allow the contractor to carry its own risk as a self-insurer, provided it can provide satisfactory evidence of its financial ability to do so.

Monopolistic state funds have been established in some states and the provinces of Canada. Under the laws of these jurisdictions, employers whose operations are covered by their compensation laws are required to insure in the state funds, although in some instances employers can qualify as self-insurers. A number of other states have competitive state funds, whereby the employer may purchase compensation insurance either from a private insurance carrier or from a state fund. In the remaining states, private insurance companies provide all workers' compensation insurance. Workers' compensation insurance provides benefits only as prescribed by state laws. Claims made under federal compensation laws can be covered by an endorsement to the contractor's workers' compensation policy.

Workers' compensation insurance has unlimited policy limits and will pay the medical costs and provide the benefits required by law. This insurance also provides legal defense for the insured and pays any court awards in jurisdictions in which an injured worker can bring suit against his employer under the compensation act. If injury to sole proprietors, partners, or corporate officers of the company is to be covered, a specific policy endorsement to that effect is required in some states. In other states, those parties are automatically included in coverage.

The contractor must have workers' compensation insurance in force for each state in which its employees may be performing work. The workers' compensation policy applies only to obligations imposed on the insured by compensation laws of those states listed in the policy. If a claim against the contractor originates in a state not listed, there is no coverage. It is possible for the policy to list some or all of the states except the monopolistic fund states that do not permit private workers' compensation insurance.

8.45 Workers' Compensation Insurance Rates

There are two components to the calculation of a contractor's workers' compensation insurance premium. The first is called the base rate, and the second is the experience modifier rating (EMR). The base rate is calculated on the basis of the work classifications of the contractor's employees (concrete formwork carpenters, trim and cabinet installation carpenters, cement finishers, etc.), as listed in the workers' compensation classification guide published by the state.

The manual rate is stated as the cost of insurance per $100 of payroll for that craft, or as a percentage of payroll for that craft. For example, in one state the manual rate for formwork carpenters might be $21.30 per $100 of payroll for that craft, while in another state the manual rate might be expressed as 19.4 percent of payroll for that craft. The manual rate applies uniformly to a particular craft classification in the entire state. The manual rates for the various crafts are calculated for each state based on the loss history for that craft in that state. This explains why different states may have markedly different manual rates for the same craft.

The manual rates for workers' compensation insurance are set by rating bureaus of the various states and are adjusted annually. Basic premium costs are computed by multiplying each employee's total wages, exclusive of overtime pay, by the rate specified for his classification.

The second component of workers' compensation premiums is the EMR, which is employer specific. Each contractor's EMR is calculated by a state rating bureau. While the details of the calculation vary slightly from one state to another, the principle is consistently the same. A contractor's EMR is a numerical value, expressed as a percentage, which is applied to the contractor's workers' compensation manual rate premiums, based on the contractor's loss history over a three-year period of time. The bureau makes a comparative analysis of the company's claims history to that of other companies in the same industry performing the same type of work, taking into account both incidence rate and severity in each case. Based on this information, a contractor's EMR is calculated and then assigned to the contractor. If a contractor has an EMR of 1.0, his loss history is statistically the same as that of others in performing the type of work he does, during the three year period considered. If the EMR is below 1.0, the contractor's loss history is better than average, and if it is greater than 1.0, the loss history is worse than average.

The EMR value serves as a multiplier to the manual rate component of the workers' compensation premium. If the contractor's manual rate premium for a certain craft is $28.80, and his EMR is 1.3, the actual premium for insurance for that craft is now $37.44 ($28.80 ×1.30 per $100 of payroll for that craft). If the contractor's EMR is 0.72, that contractor will pay $20.74 per $100 of payroll for the same craft.

When the EMR calculation is performed, three years of the contractor's loss history are examined, specifically a three-year period that does not include the immediately preceding year. To illustrate, the contractor's EMR for year 2014, would include consideration of his loss history for years 2012, 2011, and 2010. Additionally, the determination and analysis of the contractor's loss history is done in such a way that a large loss in a single year will not by itself have a catastrophic effect on the EMR. In fact, the data analysis that determines the EMR is performed in such a way that a single large loss will not affect the EMR as severely as will a large number or regular pattern of smaller losses. The rationale of the loss control industry is that a history or numerous or regularly occurring small losses is an indication that a large loss will soon happen.

In practical terms, the EMR value is significant with regard to the contractor's safety record, safety program, and thus to his overall focus on safety. In economic terms, this means that if a contractor has an EMR of 1.0, he is paying 20 percent less for his workers' compensation insurance premiums than his competitor who has an EMR of 1.2. This is a significant competitive advantage.

The following example illustrates the magnitude of savings in the cost of workers' compensation insurance that can result from an effective company safety program that reduces accident incidence rate and severity, and thus results in a lower EMR. Assume that a contractor performs an annual volume of $10 million of work. Considering a typical amount of subcontracting and the cost of materials, this general contractor's annual payroll might be about $2.5 million. If its worker's compensation manual rates average about 20 percent, and if the contractor has an EMR of 1.0, the annual premium cost will be about $500,000. Now consider the case of a competitor with a similar volume of work and similar payroll whose EMR is 0.7. This company's annual premium cost for its worker's compensation insurance is $350,000, a difference each year on the order of $150,000 in the cost of this one insurance coverage alone. A direct result of this is the improved competitive position of the second contractor. Lower insurance premiums mean lower bids.

EMR values, in addition to their direct implications as illustrated in the examples above, are widely used by contractors for comparing their operations, and the results of their safety programs, with those of others, and to incentivize their managers and workmen to take the matter of safety seriously. Additionally, it is common practice today, for owners to require contractors to include their EMR rating in materials to be considered by the owner and the architect-engineer in selecting the contract recipient for a project. In similar fashion, it is commonplace for owners to include statements in advertisements for bid, or in invitations for bid, or in contractor prequalification forms, that if a contractor has an EMR greater than a specified value, he will not be considered for contract award for the project.

Workers' compensation insurance is an expensive coverage whose premiums can constitute one-half or more of the total cost of a contractor's insurance program. In addition, as has been illustrated, the EMR component of the workers' compensation premium has a profound effect on the contractor's operations. These considerations often serve to incentivize construction businesses to redouble their efforts in striving to achieve loss reduction through more comprehensive company safety programs, strict enforcement of safety policies, more selective hiring, more effective employee training, and better safety planning.

Workers' compensation insurance, as well as other liability coverages, is also sold on a retrospective basis. When the retrospective rating plan is used, the contractor pays manual premium rates during the life of the policy. The insurance carrier periodically evaluates the contractor's losses under the policy. The contractor receives a rebate if its loss experience was good, and is required to pay additional premium if its loss experience was unfavorable. Compensation insurance sold on a retrospective basis stipulates both a minimum and a maximum premium rate under the policy. Several different retrospective plans are available, each plan specifying a different set of minimum and maximum premium rates and providing for different possible ranges of final premium adjustment. Retrospective-rated insurance is truly a cost-plus form of insurance subject to a guaranteed maximum price but is not suitable for all contractors. Expert advice is highly desirable. As a usual rule, larger contractors with good safety programs stand to gain most from this arrangement.

8.46 Workers' Compensation Deductible Plan

In some states, a plan called the workers' compensation deductible plan is offered by insurance companies. Under this plan, if the contractor assumes personal responsibility for paying a prescribed portion of a workers' compensation claim, the premiums for the contractor's workers' compensation insurance coverage are reduced. For example, if the per-accident deductible credit applied to insurance company payments to a given claimant is made $5,000, the contractor's workers' compensation insurance premium payments are reduced by, say, 15 percent. Under this plan, the insurance company pays the entire claim and then looks for reimbursement from the contractor, generally through monthly or quarterly billings. Since the contractor holds the funds until the insurance company actually pays the claim, the insurance company usually requires financial protection from the contractor in the form of a letter of credit, surety bond, or premium trust fund.

8.47 Workers' Compensation Self-Insurance

A large majority of the compensation acts allow an employer to act as its own insurer, provided it can satisfy certain minimum financial requirements as stipulated by the various state insurance departments. Self-insurance is limited in a practical sense to large companies having such a large spread of risks that they can assume their own liability on workers' compensation to their financial advantage. For complete self-insurance, the contracting firm must establish its own services of claim adjustment, claim investigation, safety engineering, and other services, similar to those provided by insurance companies. To qualify as a self-insurer with state officials, a contractor may be required to furnish a surety bond in an amount fixed by law or by the administrative agency.

Self-insurance programs have been devised between employers and insurance companies whereby the employer is self-insured up to certain maximum amounts. Payments in excess of this amount are guaranteed by excess insurance purchased from the insurance company. Under such plans, the employer deposits a percentage (e.g., 75 percent) of the usual workers' compensation insurance premiums in a bank. This establishes a fund for the payment of workers' compensation benefits. The remainder of the premium (25 percent in our example) is paid to the insurance company. This payment goes in part to purchase the excess insurance coverage. The remainder of the payment to the insurance company provides the contractor with the usual insurance company services pertaining to claims, safety inspections, auditing, accident reports, and medical and legal services.

8.48 Employer's Liability Insurance

Employer's liability insurance is written in conjunction with workers' compensation insurance and affords the contractor broad coverage for bodily injury or death of an employee arising out of or occurring in conjunction with his employment but not covered under workers' compensation law. Employer's liability insurance applies to the contractor's operations only in those states listed in the contractor's workers' compensation policy and to those operations in other states that are necessary and incidental to operations in the listed states.

There are instances when an injury to an employee can fall outside the coverage of workers' compensation insurance. For example, if the employee is injured through the failure of the contractor to provide safety appliances or working conditions required by state law, the employee may elect not to receive workers' compensation benefits but to sue the contractor for damages under common law. The contractor may have an employee injured on a minor operation in another state where the contractor does not have workers' compensation insurance in effect. An injured employee of the contractor may collect workers' compensation benefits from the contractor's insurance company, and then file suit against a third party such as the owner or a subcontractor. In this event, it is usual for the owner or subcontractor to make the contractor a party to the action. In each of the instances just cited, workers' compensation insurance provides no direct protection for the contractor. However, employer's liability insurance will pay the legal costs incurred in the contractor's defense as well as any judgment, up to the face amount of the policy.

As previously discussed, a contractor doing business in a monopolistic fund state must purchase workers' compensation insurance from that state fund. These state funds, however, do not include employer's liability insurance with the workers' compensation coverage. Here the contractor must obtain a “stop gap endorsement” that will provide employer's liability insurance in the monopolistic states. This endorsement can apply to the commercial general liability coverage or to the workers' compensation policy.

8.49 Nonoccupational Disability Insurance

Disability benefit laws in a few states require employers to provide insurance protection for their employees for disability arising from accidents or diseases not attributable to their occupation. This type of disability insurance pays a weekly benefit when an eligible wage earner is disabled by an off-the-job injury or illness. Such an occurrence would not be covered by workers' compensation insurance.

Workers' compensation insurance does not apply in such instances and does not provide any benefits, thus the rationale for nonoccupational disability insurance. Usually, a waiting period of seven days must elapse before benefits begin, thus eliminating claims for minor disabilities. All state plans provide for maximum weekly benefits and a maximum number of weeks that benefits are paid.

In some states, nonoccupational disability insurance may be obtained through either a private or a state plan. In others, all of the disability insurance required by law must be acquired through the state. State-administered plans are supported by payroll taxes levied against both the employer and the employee.

Private plans are acceptable in some states, particularly if they are underwritten by a reputable, well-established insurance carrier. State statutes require that benefits provided by private plans must be at least equal those in the state plan, and contributions from the employee must be no greater. The cost of disability insurance usually is shared by employer and employee. Some employers, however, regard these benefits as essential to their employee relations programs and underwrite the entire cost of this insurance.

In some areas, the contractor's legal obligation for providing disability benefit insurance to its employees can be satisfied by contributions to union welfare funds that provide disability benefits substantially equivalent to those required by state law. Protection for nonunion employees and for union members who are not covered by such union welfare funds must be acquired through other sources.

8.50 Unemployment Insurance

Unemployment insurance is a hybrid type of insurance coverage, involving both federal and state laws, that provides weekly benefit payments to a worker whose employment is terminated through no fault of his own. The cost of the unemployment compensation system is paid for by employers through federal and state taxes. Each state has some form of unemployment compensation law that works in conjunction with the Federal Unemployment Tax Act.

Also, each state has established its own administrative agency that works in partnership with the Bureau of Employment Security, which is an agency of the U.S. Department of Labor. The federal government sets minimum benefit standards for the states. Each state specifies its own qualifications, the amount of the benefit, the duration of payments, and the employment covered. Excluded from most state laws are railroad workers; domestic workers; federal, state, and municipal workers; workers in nonprofit educational, religious, or charitable organizations; agricultural workers; casual labor; and those who are self-employed.

Unemployment insurance is intended to provide workers with a weekly income to assist them during periods of unemployment. There is no intent to provide benefits to those who cannot or will not work. Only persons who have been working for a specified period of time on jobs covered by their state unemployment compensation law, who are able and willing to work, and who become unemployed through no fault of their own, are eligible to receive benefits. However, some states do provide unemployment benefits under certain circumstances to workers on strike.

All employers who come under the provisions of the state unemployment insurance laws must pay taxes based on their payrolls, up to a prescribed amount per calendar year for each employee. In a few states, a portion of the unemployment tax is also assessed against employees.

The tax applies to a contractor's entire workforce, including both field and office employees. The employer pays a part of such payroll taxes to the federal government and a larger share to the state in which the employment takes place. Federal law imposes on all covered employment, a basic payroll tax whose rate is variable from year to year, depending on the financial condition of the national fund. With certain restrictions, the employer can take credit against its federal unemployment tax for its payments to the state fund and for amounts that it is excused from paying to the state because of its favorable claim experience.

Each state has an established tax rate that is adjusted up or down for a given employer, depending on its experience. A separate account is set up by the state for each employer covered. Each account is credited with tax payments made, and is charged with benefits paid to former employees. The extent to which the tax credits exceed or are less than the benefits charged, determines by how much the employer's rate is adjusted above or below the basic tax rate. A contractor who finds it possible to offer a maximum amount of steady employment to its workers can enjoy a substantial reduction in its state unemployment tax rate. Conversely, if a company has a large turnover, its tax rate can be raised. The state tax rate can also vary with the solvency of the state unemployment benefit fund.

When a worker files a claim for benefits, the employee's last employer is sent a notice. If the employer replies that the worker was separated from the firm for a reason other than lack of work, the benefits may not be chargeable against that employer's account. In addition, an unemployed worker may disqualify himself from unemployment benefits by voluntarily quitting his last job without good cause, being discharged for misconduct, being directly engaged in a strike or other labor dispute, failing to apply for or accept an offer of suitable work, and for a variety of other causes. Under the existing compensation program, the states pay jobless benefits for a defined number of weeks. If the state unemployment level reaches a defined “trigger” point, the states and federal government split the cost of additional benefits for an additional series of weeks. Federal supplemental compensation can provide benefits in some areas beyond the original maximum weeks and at federal expense, during periods of high national unemployment. The total amount of unemployment payments a worker can receive, varies from one state to another.

8.51 Insurance Claims

Every loss or liability for which a contractor's insurance may be responsible must be brought to the attention of the insurance carrier, and perhaps to other parties as well, through the submittal of a written notice or report regarding the claim. State workers' compensation statutes require that accident reports be submitted covering all compensable accidents to employees. In the event of accidental injury to a person not an employee, the contractor should, for its own protection, submit a complete report of the matter to the company carrying its commercial general liability insurance. Motor vehicle accidents must usually be reported both to the insurance company and to law enforcement agencies on special forms provided. Property damage is reported on a proof-of-loss affidavit, although final settlement is usually made on the basis of a detailed schedule of costs.

To ensure that claims are properly made and followed up, it is wise for the contractor to designate one person in its organization to assume complete responsibility for matters pertaining to insurance. In addition to the filing of reports and claims, this individual must be familiar with all aspects of the various insurance policies of the contractor and of the subcontractors. This person should keep a checklist of all coverages, have all new or potential construction contracts examined for insurance requirements, make necessary cancellations and renewals, keep a file of subcontractors' insurance certificates, and generally oversee the contractor's insurance program.

8.52 Social Security

Social Security, a program operated by the federal government through the Social Security Administration, provides four basic types of benefits for the workers covered. Monthly cash payments are provided after a wage earner reaches a certain age and retires. When a qualified worker reaches the age of 65, hospitalization benefits are provided and supplementary medical insurance is available on application and payment of a small monthly premium. Survivor benefits are provided for the dependents of a worker should that worker die at any age. Benefits are made available to a worker who suffers a disability that renders him unable, for a period of 12 calendar months or longer, to do any substantial gainful work for which he is qualified by age, experience, training, and education. The Social Security Administration also administers the Supplemental Security Income program, which provides financial assistance to people who are blind, disabled, or who are 65 years of age or older and who can establish a genuine financial need. Since the passage of the original Social Security Act in 1935, benefits have been liberalized and the number of workers covered has grown substantially.

Employees and employers share the cost of Social Security by paying special taxes into a fund in the U.S. Treasury, from which Social Security benefits are paid. The employer must contribute for each employee the same amount that is deducted from the employee's pay. The tax rates paid by employer and employee are statutory, as is the annual amount of wages subject to the tax. Both the tax rates and taxable earnings have been increased several times by Congressional action.

The Social Security Administration keeps a record of each worker's wages received while in employment covered by the act. This record is maintained as a separate account for each worker, under his name and identifying number, the Social Security number. Each individual must have his own Social Security number, which he can obtain from any local Social Security office. Any worker can check on his Social Security account by writing to the Social Security Administration and asking for a statement of his wage credits. Account balances can also be checked, and additional social security information of all kinds obtained, by contacting the social security administration online at www.socialsecurity.gov.

8.53 Summary and Conclusions

As can be readily discerned from the foregoing discussion, insurance is at once a very simple and an extremely complex topic for construction contractors. Simple, because construction company management formulates a risk management policy, and then develops means and methods for managing risk. One of the methods for accomplishing this risk management objective is to purchase insurance policies for those risks that the law requires and for those risks the enterprise does not wish to accept.

Insurance is a complicated topic because insurance policies exist in so many types, and in so many variations, and with so many features such as special endorsements, and exclusions, and limits, and deductibles. Because of this complexity, the principle has been repeated several times in this chapter: it is imperative for the construction contractor to apply his own judgment, and also to obtain expert guidance and assistance with regard to all of the elements of his risk management through his use of insurance policies.

Chapter 8 Review Questions

1. Define EMR as it relates to worker's compensation insurance, and discuss three major reasons why it is important.
2. Is the purchase of unemployment insurance optional for a construction contractor or subcontractor? Explain.
3. What is a CI, and what is its significance with regard to contractors and subcontractors commencing work on a construction project?
4. What are they key provisions of professional liability insurance?
5. State four key elements of coverage of a typical builder's risk insurance policy.
6. Define subrogation and state its application to construction insurance.
7. Describe an equipment floater policy and discuss the type of contractor most likely to carry this coverage.
8. Define contractual liability insurance, and describe its significance for a general contractor.
9. Define wrap-up insurance policies, and discuss their significance for a general contractor.
10. What is the primary underlying principle behind workers' compensation insurance?