Contract documents serve as the primary to-do list for the owner, general contractor, subcontractors, and all other parties involved in the project. As the project progresses, contracts are amended. But, unfortunately, many aspects of a modern construction job that should be formalized in the construction contract are overlooked, poorly communicated—or, even worse, left to a handshake.
In this second in a two-part series on construction contract best practices, we’ll walk through how to ensure adequate insurance coverage, resolve disputes in the most cost-effective manner, and how a little advance research may save you big headaches down the road.
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INDEMNITY and INSURANCE
In construction, accidents happen. That’s why it’s important for general contractors to spell out in the construction contract exactly how much and what type of insurance all subcontractors must carry. It is not enough to accept whatever certificate of insurance that the subcontractor may tender. It’s vital that a general contractor double-checks that subcontractor insurance policies name the general contractor (and owner and design professionals, if required) as additional insureds on the policies, and that they provide “primary” not just “excess” coverage. Similarly, the general contractor should maintain a log of subcontractor insurance policy expiration dates and secure new certificates as the anniversary dates occur.
But there’s more. Before signing any contracts, general contractors should decide what liability insurance limits make sense for the project. If the project is design/build, even if only in part, the general contractor and all subcontractors providing design services should provide evidence of professional liability insurance and carry adequate limits of liability and acceptable deductible levels. Too often, subcontractors hold inadequate coverage for the specific job in question, or not enough insurance, the wrong type of policy, prohibitively high deductibles or eroding limits. This potentially costly oversight is easily preventable though with a trained eye.
When an insurance company pays a claim, it is normally entitled to assert subrogation. Subrogation is the right of an insurer to seek reimbursement from a third-party that is responsible for the loss. That may not be what’s intended on a construction job, however. Normally, owners and contractors want to transfer all risk of bodily injury or property damage to the insurer and not permit the insurance company that indemnifies, say, the owner, to turn around and try to collect reimbursement from one of the contractors. Subrogation rights can be limited by a properly worded waiver clause in the owner contract.
Indemnity clauses are commonplace in subcontract forms used by most general contracts. Many states have statutes or case law making such clauses unenforceable, or enforceable only in limited circumstances or only if worded in a certain way. If in doubt, ask an attorney familiar with construction law in your state to review your subcontract form, or draft a new one for you.
On large jobs, consideration should be given to purchasing a “wrap-up” insurance package. A “wrap” is project-specific insurance covering all project participants—owner, design professionals, contractors, and subcontractors of all tiers—for specified kinds of insurance. Normally, the wrap will include workers’ compensation, general liability, auto liability, and excess liability. It may or may not cover professional liability. A wrap assures that everyone has the same coverage and eliminates the need to collect and renew certificates of insurance and to verify additional insured endorsements. Wraps can be either OCIP’s (owner-controlled insurance programs) or CCIP’s (contractor-controlled insurance programs).
The Associated General Contractors of America publishes an extensive insurance checklist that may help you evaluate whether adequate coverage is carried in the following areas:
- Workers’ compensation and employers’ liability
- Commercial general liability
- Business auto policy
- Umbrella/excess liability
- Contractor’s equipment floater
- Builder’s risk on property, such as buildings, building contents (including personal property), valuable papers, accounts receivable, and leased property
DISPUTE RESOLUTION OPTIONS
Fast-paced, large-scale construction sites are fertile ground for disagreements, misunderstandings, and poor communication. Frequently, a third party is enlisted to sort through the facts and assign blame.
Form construction contracts often opt for arbitration under the auspices of the American Arbitration Association (AAA). While popular, it’s important to keep the following in mind: arbitration isn’t necessarily faster or cheaper than traditional litigation. For example, the AAA currently charges an upfront administrative fee of $8,700 for claims between $500,000 and $1 million.
By comparison, in Cook County, Illinois, the maximum non-jury lawsuit filing fee currently is $337. And the judges are paid by the taxpayers, who also supply the clerks and the courthouse. In arbitration, all of these costs must be paid by the parties.
In arbitration, daily fees cost as much as $3,000 per day per arbitrator. You’ll also be expected to rent a hearing room or other neutral venue. Moreover, it may be impossible to join all necessary parties in one arbitration and the final decision normally cannot be appealed. Arbitration has its place, but it is not a panacea for every construction dispute.
CONDUCT INDEPENDENT RESEARCH
If a project turns sour, it’s often easy to see why in hindsight. Maybe an owner or general contractor has a long track record of nonpayment? Or a subcontractor has been involved in dozens of lawsuits for failing to fulfill his or her legal obligations?
For all parties involved in a big construction project, it’s important to know thy co-parties—the good, the bad, and the ugly. If in doubt, review court documents or conduct independent research using services like Dun & Bradstreet. Even if the project does not require surety bonds, ask the contractor or subcontractor to provide evidence of “bondability.” If a contractor or sub could provide a bond, that’s some evidence that a commercial surety has investigated the contractor’s financial wherewithal. At the very least, ask around. ■
About The Author:
Mr. Fylstra is director shareholder at the Chicago law firm Kubasiak, Fylstra, Thorpe & Rotunno, P.C. He concentrates his law practice in business litigation, including the representation of business organizations and individuals in all courts. With extensive experience representing contractors, industrial companies, and financial organizations, his litigation practice includes complex construction cases, insurance disputes, real estate litigation, oil and gas litigation, Uniform Commercial Code matters, and intellectual property litigation. He can be reached at email@example.com.
Modern Contractor Solutions, June 2013
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