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Contractors: Get To Know These Insurance Phrases

Insurance requirements in construction contracts contain important but confusing phrases. Phrases like "contractual liability" and "primary and noncontributory" have different meanings and impacts on a contractor's liability insurance coverage. A contractor signing a construction contract can make better decisions by understanding what these concepts mean.

"Contractual liability," as the name implies, pertains to the insured subcontractor's contract with the general contractor. Most construction contracts require the sub to "indemnify" and "hold harmless" the GC for liability arising out of the sub's work on the project. Accordingly, the sub assumes the GC's liability. The sub tells the GC, "If you get sued because of something related to my work for you, I'll take care of it." The ISO Commercial General Liability Coverage Form states that the insurance does not apply to liability the insured business assumes under a contract. However, it gives coverage back for liability assumed under an "insured contract." A typical construction contract is one of the types of insured contracts. Therefore, the policy will provide contractual liability coverage in this situation. Some insurance policies do not provide this, so it is important to work with an agent who can spot that weakness.

An "additional insured" is someone other than the insured business who has coverage under the policy. Construction contracts often require the sub to cover the GC as an additional insured under the sub's policy. The sub must then ask its insurer to cover the GC, though some policies provide this coverage automatically. If the GC is an additional insured, the sub's insurer covers it for losses that arise out of the sub's work. The sub's insurance will also pay for the GC's legal defense of a covered lawsuit, in addition to the amount of insurance the sub purchased. In contrast, contractual liability coverage alone pays for the GC's defense out of the available amount of insurance.

"Primary and noncontributory" means that, when a GC is an additional insured on a sub's policy, the sub's insurer pays on the GC's behalf the maximum amount of insurance the sub bought. Only when that amount is used up will the GC's insurance will pay anything. The GC wants this because it keeps its own insurance from paying, which holds down the GC's insurance costs. This arrangement may not be automatic; the sub may have to ask its insurer to do it.

"Subrogation" means that, when an insurance company pays for a claim that it believes was someone else's fault, it can attempt to recover its money from the responsible party. A "waiver of subrogation" provision in a policy means that the insurer agrees to give up that right. A waiver of subrogation on the sub's policy means that the GC doesn't have to worry about the sub's insurer trying to recover from the GC's insurer. Again, this helps lower the GC's costs.

These are important concepts for contractors to understand, but they should get help. A professional insurance agent experienced in working with contractors can explain the nuances and help arrange the proper combination of coverages. With the right advice and coverage, contractors can bid on and accept jobs with confidence.

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