WHEN YOU THINK "CONSTRUCTION" ... THINK INSURANCE! DAVID MACKNIN JMB Insurance Agency, Inc. Chicago, IL LORA K. SANBERG Krasnow Saunders Cornblath Chicago, IL Whether you are a shopping center owner or tenant, when you hire a contractor, one of the most important parts of your agreement will be the insurance you require the contractor (and its subcontractors) to carry. Insurance products are a mystery to most lawyers, owners and retailers. We may feel confident we are protected by a long list of insurance requirements attached to our agreement (often a list someone else developed years earlier) without really knowing how we need to be protected and where there may be coverage gaps. This article describes the insurance coverage an owner or tenant should require a contractor to carry (and the insurance an owner should require a tenant to carry for construction), plus the policy endorsements and amendments that must be specifically described in the agreement with the con-tractor. If you are going to have a contractor (or contractors) bid on your work, the following insurance requirements should be stated in writing so the contractor can give you a more accurate bid that includes full compliance with the requirements. Contractor's Insurance Coverage Special Form Builder's Risk Insurance (often called "All Risk Builder's Risk Insurance") Type of Insurance: Property Covers all materials used in construction during the construction phase and prior to occupancy, including materials in-transit, materials on-site prior to installation and materials after installation, until the time the building is occupied. Insurance remains in force until the building is occupied. Amount: Replacement cost of all materials used in the construction. Commercial General Liability Insurance ("CGL") Includes, but is not limited to, bodily injury, broad form property damage, personal injury, advertising injury, contractual liability, products liability, completed operations and host liquor liability. A.-Type of Insurance: Liability Covers third-party claims for bodily injury and/or property damage resulting from the activities of the contractor. Amount: Ideally, the maximum total property damage for which the owner (or tenant, if the tenant is hiring the contractor) could be held responsible, plus at least $1,000,000 to cover bodily injury, but at a minimum $1,000,000 per occurrence/ $2,000,000 aggregate (better, $2,000,000. per occurrence/$3,000,000 aggregate). The aggregate amount should be at least $1,000,000 more than the per occurrence amount. The required limits may also be satisfied through contractor's Umbrella Liability insurance. "Per Site" or "Per Job" Aggregate (policy amendment): This is an amendment to the policy requiring that per occurrence limits and aggregate limits be designated for your specific site. No one facing a claim wants to find out that there are claims against his/her contractor that would exhaust the contractor's coverage limits. Without this amendment, if the contractor's insurance pays other claims, it reduces (and can eliminate) the amount available to pay claims arising out of your job. This amendment assures you that insurance proceeds up to the policy limit will be available to pay claims arising out of your job. Alternative to Commercial General Liability Insurance with Per Site Amendment: Contractor's/Owner's Protective Liability Insurance The standard CGL policy covers all of the contractor's jobs. Contractor's/Owner's Protective Liability Insurance, however, is a separate policy that applies only to a specific project and is maintained by the contractor solely for that project. While the owner or tenant would prefer this coverage, it will cost the contractor more and may not be cost effective for the contractor. This type of insurance may be available only from big contractors or small contractors doing big jobs. Automobile Liability Insurance Type of Insurance: Liability Covers third-party claims for losses due to bodily injury and/or property damage arising out of the use, operation, loading or unloading of any vehicle, regardless of whether it is owned, not owned or hired by the contractor. Amount: Not less than $1,000,000 per accident combined single limit for bodily injury and/or property damage. Workers' Compensation and Employer's Liability Insurance Type of Insurance: Liability Covers injuries to employees on the job. It is essential that the contractor carry this insurance. If the contractor is not covered, his employee(s) can be deemed to be the invited guest of the shopping center's owner or tenant, and the employee may have a liability claim against the owner or tenant. Amount: Workers' Compensation in the amount necessary to provide statutory benefits and Employer's Liability with limits of not less than $500,000 per injury/disease. Coverage of owners and partners of contractor: The contractor's policy must evidence that the owner(s) of the contractor or partners of the contractor are included and covered as employees since often they will also be working on the job and subject to injury. Design/Build Liability Insurance (when you don't have an architect). A. Type of Insurance: Professional Liability If an architect is involved in the project, he or she should have professional liability insurance. If your work does not require an architect, you might go directly to a contractor or subcontractor. While contractors can get professional liability insurance, this is not customary. If, however, the contractor is also doing the "design" work, he can get Design/Build Liability Insurance. This insurance covers "design flaws" and the cost of remediating a situation where, although a design may be faulty, the design flaw does not cause property damage or bodily injury (which would be covered by CGL). For example, if the duct work in the HVAC system is too small for the area needed to be covered, or incorrectly connected, the system will fail to heat or cool properly and may have to be redone. Although the premises are always either too hot or cold, there is no property damage or bodily injury: CGL insurance will not cover rebuilding. However, Design/Build Liability Insurance will cover rebuilding! No insurance will cover "poor workmanship" alone, but Design/Build Liability Insurance will cover poor design! B. Amount: A limit of liability equal to the estimated cost of entirely redoing the con-tractor's work, but not less than $500,000 per claim. Policy Endorsements 1. Additional Insureds and Loss Payee Endorsement A shopping center owner, lender, manager and tenant each has an insurable interest in the center or the premises to the extent that they can suffer from property damage to the shopping center or premises, or have liability to third parties for property damage or bodily injury connected with the premises or shopping center. Any of these parties can suffer a property loss or may be held liable to third parties as a result of damage or injury caused by the contractor, but each of them can be covered for this loss or liability (to the extent it is a result of the contractor's actions and not their own negligence) by "piggybacking" on the contractor's insurance coverage with an endorsement that adds each named party with an insurable interest as an "Additional Insured" or "Loss Payee." The contractor's insurance will then cover claims of the named parties or claims against them, which fall under the policy (but only if the loss or injury is not due solely to the negligence of the named party). Likewise, the contractor can "piggy-back" on the subcontractor's insurance! The "Additional Insured" or "Loss Payee" endorsement can also specify that: (i) specific Additional Insureds or Loss Payees (or all of them) have the right to be involved in the claims adjustment, or settlement, process, and (ii) proceeds be paid directly to the Additional Insureds or Loss Payees, to the extent of their interests. A. Additional Named Insureds Endorsement: (i) Contractor's Commercial General Liability Insurance, Automobile Insurance and Design/Build Insurance: Add owner, lender(s), tenant and management company (or manager) as "Additional Insureds;' with the right to approve the settlement and to be paid proceeds directly as their interests may appear. (ii) Subcontractor's Commercial General Liability, Automobile Insurance and Design/Build Insurance: Add all of the above and the contractor as "Additional Insureds " B. Loss Payee Endorsement: Contractor's Builders Risk Insurance: Add owner, lender(s), tenant and management company (or manager) as "loss payees," with the right to approve the settlement and to be paid proceeds directly as their interests may appear. Subcontractor's Builders Risk Insurance: Add all of the above and the contractor as "loss payees" 2. Notice Endorsement: All policies should be endorsed to include the provision that the owner (or tenant, if tenant has hired the contractor) be given (i) at least 30 days' advance written notice of any change, cancellation, termination or lapse of the insurance, and (ii) at least 15 days' advance written notice of expiration of the term of the policy. Subcontractors' Insurance Since you are not contracting with the sub-contractors, you cannot directly require them to can-y insurance. However, you want your subcontractors to be insured as well as your contractor. Your contract with your contractor should require that the con-tractor's subcontractors carry all of the above insurance, and list the contractor (i) as an "Additional Insured" on the subcontractor's CGL policy, Automobile Insurance policy and Design/Build Liability policy, and (ii) as a "Loss Payee" on the subcontractors' Builder's Risk policy. Additional Insurance Requirements Insurance Company Rating: Your agreement should specify that the contractor's insurance be carried by companies with a high industry rating, such as "a Best's rating of AVI,” which provides you assurance that the insurance company will be able to pay insured claims. Delivery of insurance certificates or policies: Your contractor should be required to deliver insurance certificates or policies to you for all of the required insurance before beginning any work so you can determine that the contractor has met all of the requirements! Sample Contractor's Insurance Provision for Lease While there seem to be a lot of requirements, they can actually be written into a lease or agreement with your contractor in just a few paragraphs, as follows: Tenant's Contractor's Insurance Before commencing any improvements, alterations or construction in or to the Premises, Tenant shall carry, or shall require any contractor performing work on the Premises to carry, the following insurance: (i) Special Form Builder's Risk Insurance in the amount of the replacement cost of the improvements to the Premises, (ii) Commercial General Liability Insurance (including, but not limited to, bodily injury, broad form property damage, personal injury, advertising injury, contractual liability, products liability, completed operations and host liquor liability), written on an Occurrence basis with a minimum combined single limit of $2,000,000 per occurrence/$3,000,000 aggregate, with a special endorsement naming owner, tenant, mortgagees and the managing agent as Additional Insureds providing the broadest possible coverage for the Additional Insureds, and with the right to approve any settlement and the right to be paid proceeds directly as their interests may appear, and a "per site" aggregate policy amendment; (iii) Automobile Liability Insurance in the amount of no less than $1,000,000 per accident; and (iv) Worker's Compensation Insurance as required by the jurisdiction in which the Shopping Center is located and of the amount required to pay statutory benefits, and covering the owners and partners of contractor as employees, with Employer's Liability Insurance limits not less than $500,000; and (v) if contractor is doing design work, Design/Build Liability Insurance with limits not less than the amount necessary to redo contractor's work. The Builder's Risk Insurance policy shall be endorsed to name owner, tenant, mortgagees and managing agent as Loss Payees, with the endorsement providing the broadest possible coverage for the Loss Payees, and giving the Loss Payees the right to approve any settlement and the right to be paid proceeds directly as their interests may appear. The Commercial General Liability Insurance, Automobile Liability Insurance and Design/Build Liability Insurance policies shall be endorsed to name owner, tenant, mortgagees and managing agent as Additional Insureds, with the endorsement providing the broadest possible coverage for the Additional Insureds, and giving the Additional Insureds the right to approve any settlement and the right to be paid proceeds directly as their interests may appear. All such insurance policies shall (i) be with Companies having a Best's Rating of at least AVI and licensed to do business in the jurisdiction in which the Shopping Center is located, and (ii) be endorsed to require insurer to give owner and tenant at least 30 days' advance written notice of any change, cancellation or termination of the policy and at least 15 days' advance written notice of expiration of the policy. Tenant shall deliver to Landlord, no less than 3 weeks prior to commencing any work in the Premises, insurance certificates (or copies of policies, if requested by owner or tenant), evidencing the insurance to be carried hereunder, and shall deliver, no less than 3 weeks prior to the expiration of any such insurance policies, certificates evidencing renewal of such policies. Certificates of insurance must not include any "endeavor to" limitations in the Cancellation provision. In addition to the insurance to be carried by contractor, Tenant shall require contractor to require all subcontractors to carry the insurance set forth herein, with the provisions set forth herein, and otherwise in accordance with the provisions of this paragraph. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * David Macknin, CPCU, is the Vice President of JMB Insurance, headquartered in Chicago, where he and his colleagues specialize in the design and delivery of commercial real estate risk management and insurance programs. Lora K. Sanberg, a partner at Krasnow Saunders Cornblath in Chicago, has been practicing law for over 20 years and specializes in commercial real estate leasing and development.