Insurance Requirement Exceptions

Risk Transfer Requirements

The construction agreement between the owner and the CM/GC ¹ will outline insurance requirements for the CM/GC and may also include insurance requirements for subcontractors. In addition, the CM/GC will have insurance requirements in its subcontract agreements.

The primary purpose of the required insurance is to have insurance policies stand behind the indemnity obligations imposed in the contracts rather than relying on the balance sheet of each contractor. In addition to identifying the required types of insurance, the upstream party (owner or CM/GC) will also require that the lower-tier insurance policies name the upstream party(ies) as an additional insured on a primary and noncontributory basis and waive rights of subrogation against the upstream party(ies).

The risk transfer model of indemnity obligations backed up by insurance applies whether the project is insured under a wrap-up insurance program or traditional contractor-furnished insurance.

Which Insurance Requirements Apply?

A common challenge arises where multiple insurance requirements are imposed on the downstream parties (subcontractors and suppliers). For example, the owner may specify minimum insurance requirements for subcontractors and suppliers in the construction agreement with the CM/GC. In turn, the CM/GC may have insurance requirements that they impose on their downstream parties that may differ from the owner construction agreement.

When the project is insured with a wrap-up insurance program, the wrap-up administrator commonly evaluates and verifies the insurance coverage for downstream parties against the construction agreement between the owner and CM/GC. However, the CM/GC may concurrently require downstream parties to provide confirmation of insurance in compliance with its subcontract agreement. In fact, the trigger for releasing a progress payment by the CM/GC to the downstream party may be contingent on satisfactory compliance with the subcontract requirements.

This dynamic can be confusing to the downstream parties and creates duplicate work on behalf of the wrap-up administrator, the CM/GC, and the downstream parties. A more efficient and equitable approach is for the owner to allow the CM/GC to determine how to manage their subcontract risk. After all, the owner has contractual privity with the CM/GC, who ultimately bears the indemnity obligation to the owner and should have the ability to manage the risks of its downstream parties as they see fit.

That said, the owner and upstream parties should still be the benefactors of additional insured status on a primary and noncontributory basis, and waivers of subrogation on the insurance policies should be provided by the downstream parties.

What Happens If a Subcontractor Can't or Refuses To Comply

Whether it's the subcontractor insurance requirements imposed by the owner, the CM/GC, or both, routinely there are instances where the subcontractor can't comply due to limitations imposed by its insurers or refuses to comply with the contractual requirement.

Examples of subcontractor or supplier noncompliance include the following.

• Not obtaining a specified edition of an additional insured endorsement
• Problematic exclusions in the subcontractor's general liability policy
• Not carrying the prescribed limits
• The subcontractor may not carry the coverage required at all (e.g., umbrella liability, contractor's professional, or pollution liability)

As the CM/GC has the indemnity risk for the project, they will assess the risk of accepting the downstream parties insurance protection and either "waive" the specific insurance requirement or a portion thereof or require the subcontractor to purchase additional insurance. This may result in additional costs that will be borne either in the cost of the work or by the subcontractor.

There are instances where the CM/GC may be willing to waive its insurance requirements—either they assess the risk of the nonconformance as low, the subcontractor may be a specialty trade with few other alternatives, the subcontractor may have a competitive contract price, or to accommodate small or disadvantaged project goals.

Insurance Requirement Waivers or Exceptions on OCIPs

On projects insured with a wrap-up insurance program, there are required insurance coverages that only apply away from the project site for subcontractors "enrolled" ² in the wrap-up as well as other coverages that apply both on-site and off-site.

Too often, this author has observed that—when the project is insured using an OCIP—the wrap-up administrator will reach out to the owner's representative to grant the insurance requirement exception. This doesn't make sense as the owner is imposing the indemnity obligation on the CM/GC, but the owner is now waiving insurance protection that the CM/GC relies on from its downstream parties.

What's unique to an OCIP (verses a contractor-controlled insurance program (CCIP) or traditional insurance) is that the owner purchases the coverage and selects the wrap-up administrator. Thus, the wrap-up administrator often feels obligated to the owner to approve such exceptions to the insurance requirements. In fact, the wrap-up administrator should work in coordination with the CM/GC to review and obtain a waiver of subcontractor insurance requirements. After all, it's the CM's/GC's risk.

In contrast, on CCIPs, the CM/GC selects the wrap-up administrator, and the communication and collaboration process take place naturally as the CM/GC is the client of the wrap-up administrator. Similarly, under traditional insurance (no OCIP or CCIP), the CM/GC makes its own determination on waiving insurance requirements.

The Waiver Process on Projects Insured under an OCIP or CCIP

The process of waiving or accepting nonconforming insurance culminates when an authorized representative of the CM/GC advises the wrap-up administrator to proceed with the enrollment of the nonconforming subcontractor. If the subcontractor or supplier is an excluded party to the wrap-up, the CM/GC will advise the wrap-up administrator that the coverages as presented are accepted, and the wrap-up administrator will mark its file accordingly, which will end further action on the part of the administrator to pursue compliance with that subcontractor.

Most importantly, the acceptance of nonconforming insurance should not limit the indemnity obligations of the subcontractor or supplier. This is commonly addressed in the insurance article of the subcontract.

Best Practices

Several items should be considered to improve the insurance requirement exception process.

• If possible, ensure the owner construction agreement has subcontractor requirements that conform with the CM's/GC's standard insurance requirements. This can be accomplished by modifying the subcontractor requirements in the construction agreement to match the CM's/GC's standard insurance requirements, or the construction agreement could require subcontractor insurance requirements by referring to the CM's/GC's template subcontract agreement, either by reference or as an exhibit to the construction agreement.
• Even though the project is insured under an OCIP, the wrap-up administrator should establish a collaborative relationship with the CM/GC project team and have a clear understanding of who to contact in the event a waiver needs to be considered.
• The wrap-up administrator should submit the request in writing to the CM/GC project contact.
• The wrap-up administrator should document all correspondence in the subcontractor's file and proceed according to the instructions given by the CM/GC.

Concluding Thoughts

Insuring the risks on a large construction project can be both complex and tedious. One key risk transfer tool is the combination of indemnity provisions coupled with insurance requirements in the various contracts. It is important that all the contracts contain a single clear-set of insurance requirements. To achieve this, the owner and the CM/GC must be in sync with the insurance requirements for downstream parties, and the contracts should reflect this coordinated approach.

If the project is insured under an OCIP, it is the responsibility of the wrap-up administrator to communicate and coordinate with the CM/GC on any requests for acceptance of nonconforming insurance.