Unraveling the Mysteries of Construction Insurance

Arthur O'Leary, FAIA, MRIAI

Architects need to know enough about insurance to enable them to write their project specifications and to administer the construction contracts for their projects. A significant part of this knowledge is in knowing when to advise clients to seek the necessary insurance information from someone else.

At the very least, architects should read and be reasonably conversant with Article 11, Insurance and Bonds, of the AIA General Conditions (Note 1). These 24 paragraphs cover the contract requirements for the various forms of insurance that must be carried by the owner and the contractor.

Financial Responsibility for Accidental Losses
Unfortunate accidental occurrences causing severe property damage, personal injury, or death on a construction site could easily bring economic ruin to those who are financially responsible. It is customary to fund this awesome liability by means of insurance. Owners and contractors who enter into construction contracts owe each other the mutual obligation of providing insurance to cover certain specified risks.

Insurance is an extremely important element of the construction contract, so it is not surprising that over 10 percent of the text of the AIA General Conditions is devoted to this complex, arcane, and inscrutable subject.

AIA General Conditions
The AIA General Conditions of the Contract for Construction, Document A201, was extensively revised in 1997. The insurance portions were carefully considered, written and edited by construction industry legal and insurance experts in consultation with architects outstanding in the field of construction administration and documentation. Architects generally are not expected to be insurance experts but need to know how to cope with the insurance aspects of construction contracts and their administration.

The AIA General Conditions specifies the insurance requirements in broad general terms, while the Supplementary Conditions written by the architect must specify the specific insurance coverage required for the project, the interests to be insured, the policy limits, the perils to be insured, the insurance contract term, and the deductible amount.

It is a very risky practice for architects to provide insurance advice to their clients. Many professional liability insurance policies carried by architects specifically exclude coverage for the furnishing of insurance advice. The architect should respectfully but firmly decline to answer any insurance questions. Should an owner rely on an architect’s erroneous insurance or surety advice to its detriment, the architect would be likely to be held financially liable for the resultant damages.

Owner’s Instructions Regarding Insurance and Bonds
The AIA Owner-Architect Agreement, Document B141, also revised in 1997, provides in Subparagraph 1.2.2.6 that the owner will furnish all legal, accounting, and insurance services as may be necessary at any time for the project. Therefore, the architect should obtain the insurance requirements directly from the owner. Owners are not usually insurance experts either, so they will have to confer with their own legal and insurance advisors.

There is a convenient form devised by the AIA entitled Owner’s Instructions Regarding the Construction Contract, Insurance and Bonds, and Bidding Procedures, Document G612, 1987 Edition, which architects can present to their clients. It is in the format of a nine page questionnaire in three parts, A, B, and C. Part B, Owner’s Instructions for Insurance and Bonds, pages 4 through 7, can be used by the owner’s insurance advisor to instruct the architect in respect to the owner’s insurance and bond requirements. The architect can then rely on these instructions when writing the insurance specification in the Supplementary Conditions.

Certificates of Insurance
Evidence of insurance specified to be carried by owner and contractor must be provided as proof of its existence and its terms and conditions. Certificates of insurance are commonly issued free of charge by insurance carriers, agents, and brokers when requested by their insureds. Certificates of the contractor’s insurance should be addressed to the owner. (A201, 11.1.3) Copies of the owner’s property insurance should be addressed to the contractor. (A201, 11.4.6)

In the interest of promoting uniformity in construction industry documentation and administration, the AIA has issued a standard form of Certificate of Insurance, Document G705, which many construction insurers have adopted. This document may soon drop out of common use as a new insurance industry form is taking its place and is now recommended by the AIA. The Agency Company Organization for Research and Development issues the new form, designated as ACORD 25-S (3/88).

One of the most important aspects of an insurance certificate is the statement that the policies will not be cancelled or allowed to expire unless 30 days’ written notice has been given to the addressee of the certificate.

According to the AIA General Conditions, Subparagraph 4.2.4, all communications between owner and contractor shall be through the architect. Consequently, the insurance certificates from each party will flow through the architect’s administration to the opposite party. When the architect transmits insurance certificates, copies of insurance policies, or surety bonds, the covering letter should merely inventory the enclosures, but should not comment on the sufficiency of the carrier or surety or the adequacy or conditions of the coverage. The architect should advise the client to seek legal or insurance advice in appraising the insurance coverages underlying the certificates.

All specified insurance and bonds must be in force before any construction is undertaken at the jobsite. Insurance companies and sureties are reluctant to issue insurance coverage or bonds once construction operations are under way.

Insurance Coverage Required by the Contract
The owner and contractor are both required to carry liability insurance. (A201, 11.1 and 11.2)

The owner is also required to carry property insurance. (A201, 11.4) If the owner decides not to purchase property insurance, the contractor is entitled to purchase it and charge it to the owner. (A201, 11.4.1.2)

A new provision in A201-1997 provides that the owner, optionally, may require the contractor to provide Project Management Protective Liability Insurance. This coverage is in lieu of the owner’s and contractor’s liability insurance and covers the architect’s vicarious liability as well. This insurance will be paid for by the owner. (A201, 11.3)

Insurance Claims
Should an insured event occur on the project, the owner or contractor should make its claim to the insurance carrier, through its insurance broker. Although the architect may be asked to furnish relevant information underlying the claim, the owner or contractor should administer its own claim. If insurance information or services are required, the owner or contractor should rely on its legal or insurance counsel for appropriate assistance.

The Architect’s Insurance
The foregoing discussion concerns the insurance required by the construction contract (A201-1997) to be carried by the owner and the contractor.

The typical architectural office will insure its ongoing business risks with general liability insurance, automobile insurance, fire insurance, and valuable papers insurance. It might also carry life and health insurance for its principals and employees. Firms that have employees must carry workers compensation insurance.

In addition, the professional risks are insured by professional liability insurance, also called errors and omissions insurance. Other forms of insurance are also available.

Every architectural office should have a continuing relationship with a reliable and knowledgeable insurance advisor who will assist in deciding what forms of insurance are to be carried. A friendly insurance broker is a valuable asset when insurance information and advice is needed.

Construction Bonds
It is the owner’s prerogative to decide whether or not the contractor is to be bonded. Before making this important decision, the owner should discuss its advantages and disadvantages with its legal or insurance counsel. Some contractors cannot obtain a bond, usually because of insufficient financial resources. (Note 2)


Notes:
1. General Conditions of the Contract for Construction, AIA Document A201-1997.
2. See “What an Architect needs to Know About Construction Bonds,” by Arthur F.
O’Leary, FAIA, MRIAI, in the Nov/Dec Issue of Design Cost Data.
3. For more information on construction insurance and bonds, see Chapter 9,
Construction Insurance and Chapter 11, Construction Administration When the
Contract is Bonded, in A Guide to Successful Construction — Effective Contract
Administration, Third Revised Edition, by Arthur F. O’Leary, FAIA, MRIAI.

http://www.dcd.com/oleary/oleary_janfeb_2003.html