Contractors’ Insurance: Change Orders & Work Adjustments- Are You Covered?
By Brian Pilarski, Commercial Insurance Advisor
The plans are drawn up, the materials are on site. On paper, everything looks great, ready to roll. Installation starts and there are some problems. The drawings and actual land/structures are slightly different. The materials have some variations that pose difficulties.
But the work has to get done. Big money, a tight timeline, and weather delays are creating pressure to get the job done.
The trades get together, figure out some slight modifications, a few work arounds, and the job gets done, on time, on budget.
Delivery of building complete, the tenants move in…and then things start leaking. A few areas shift and walls break. Another major issue follows shortly after, a window falls in.
Property Damage Occurs: Does My General Liability Cover It?
Some of the adjustments didn’t hold. You turn in the request for payment/fixes to your insurance carrier.
The claim is denied- Professional Liability Exclusion cited. What?!?!?!
There are three types of professional liability endorsements with varying degrees of restrictiveness – an IRMI article (Slivka 2012), summarizes the coverage options and concepts well. An excerpt:
- CG 22 43—Broad Professional Liability Exclusion Endorsement (loosely interpreted)
- CG 22 79—Construction Means and Methods Endorsement (loosely interpreted)
- CG 22 80—Design Build Endorsement (loosely interpreted)
Endorsement CG 22 43
ISO endorsement CG 22 43 is pretty straightforward. It is a broad exclusion of professional services performed by or on behalf of the named insured. If this exclusion is attached to the liability policy, and the contractor is providing any of the professional services defined in the exclusion, it would be prudent to have this exclusion removed and replaced with either CG 22 79 or CG 22 80, and explore the need for a stand-alone Professional Liability policy.
Endorsement CG 22 79
This less restrictive endorsement was developed to correct the deficiencies of CG 22 43 with respect to construction means, methods, sequences, and techniques of the contractor. Simply put, construction means and methods are those processes or techniques that contractors use during the course of construction to construct a building or structure.
Endorsement CG 22 79 excludes coverage for professional services defined within the endorsement as:
- Preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings and specifications; supervisory or inspection activities performed as part of any related architectural or engineering activities.
However, it does provide some level of coverage for the construction means and methods with an exception to the definition of professional services:
- Professional services do not include services within the construction means, methods, techniques, sequences and procedures employed by you in connection with your operations in your capacity as a construction contractor.
No doubt, this affirmatively broadens coverage for a contractor as compared with the use of CG 22 43, but there is a limiting factor associated with it. The operative phrase in the above exception is “employed by you in connection with your operations.” While the intent of this endorsement is to provide coverage for services within the construction means, methods, etc., it is apparent that if professional services related to construction means/methods were performed on behalf of the contractor, coverage may not exist (sub-contracted work).
For example, claims arising out of the design of false work on a bridge project performed by a licensed professional engineer subcontracted with the general contractor (GC) may not be covered under this endorsement if the GC had this endorsement on the policy.
Another example would be shoring/trenching on a parking structure project. Had a subcontractor performed the design for the shoring/sheeting on the project, the GC would have no coverage as the work was not performed by the named insured. In essence, this endorsement provides virtually no coverage for those GCs that perform no work. However, in the event the subcontractor has the CG 22 79 attached to its CGL policy and provides additional insured status to the GC, the GC may have some level of protection regardless.
Although there is some element of coverage for professional liability, this endorsement still falls short of adequately addressing professional liability associated with various professional services performed by many construction firms such as construction management, pre-construction consulting services and design-build services.
Endorsement CG 22 80
ISO endorsement CG 22 80 was created to address professional liability exposures for contractors while performing design-build services or for any professional services performed on their behalf. It provides coverage for professional services, as defined in the endorsement, performed on the named insured’s behalf. It explicitly excludes coverage for professional services performed by the named insured.
Although the endorsement does provide enhanced coverage, it does have its limitations:
- It only provides coverage for bodily injury and property damage—the basis for the CGL coverage form. This is extremely important to remember: it does not provide coverage for economic damages as discussed earlier.
- It does not provide coverage for professional services performed by the named insured, which may be construction management, pre-construction consulting services, value engineering, scheduling, inspection services, subcontractor management, etc.
Talk to Your Agent- Know Your Policy & Exposure
Knowing what type of coverage and exclusions you currently have is an important first step. Based on how your General Liability policy currently addresses professional liability, you can then assess your exposures. Talk with your agent or ask Brown & Brown to work through what other options should be reviewed to secure adequate coverage protection. Contact us today for more information at 586.977.6300.
Slivka, Jeff. 2012. “Contractor’s Professional Liability and the CGL.” Posted October 2012. https://www.irmi.com/articles/expert-commentary/contractors-professional-liability-and-the-cgl