hausmann-johnson
   

Making Music in Construction Contract Management

A few weeks back my daughter treated me to tickets for an Anderson East concert at the Majestic Theatre in Madison, WI.  (By the way, he puts on a great show.) During the second set, he covered one of my favorite old tunes by Sam & Dave, “Hold On, I’m Coming.” He then immediately transitioned into his hit “All On My Mind.” 

OK, you’re thinking, "What in the world does this have to do with construction contract management?" Well, it has to do with the transition of time and the evolution of risk transfer.

record

Think about it like this: if you were an owner, a general contractor, a subcontractor, or even a sub-subcontractor for that matter, in the era of Sam & Dave, adding someone as an additional insured to a general liability policy was easy-peasy. Today, in the Anderson East era, not so much.  In fact, it has become downright complicated. 

Let me explain. 

The ISO (Insurance Services Office) is one of the largest advisory organizations providing statistical and rating services to the property & casualty industry.  They also provide insurance product and coverage forms for use by insurance companies.  In 1997, the ISO introduced a series of “automatic” or “blanket” additional insured endorsements.  (For the purposes of this blog, the terms “automatic” or “blanket” mean the same thing.) The series evolved over time in an effort to expedite commerce and, in particular, improve contract administration. 

Before the ISO got involved, there were manuscript blanket additional insured endorsements offered by individual insurance companies, but only as one-off options. These manuscript endorsements came with no regulatory oversite. The intent of these early blanket additional insured endorsements was to trigger an additional insured coverage grant by using a construction contract that required one party to the contract to provide the other party to the contract additional insured status.  In a blanket additional insured endorsement, logic suggests that if the contract was not signed by both parties then the additional insured coverage grant was not triggered, even if the certificate of insurance includes a blanket additional insured endorsement by form number, references a specific endorsement form attached, or just indicates additional insured status.

Blanket Additional Insured Endorsements: The Hidden Risk.

At this point, a disclaimer is in order: The real purpose of a blanket additional insured endorsement is to provide additional insured status when required to avoid a breach of contract.  However, the scope of additional insurance provided is altogether another matter: ongoing operations vs. completed operations, primary & non-contributory, etc. You get the idea.

In a perfect world, these blanket additional insured endorsements are great because all owners and general contractors would have signed them before any work began. In that same perfect world, all general contractors and all subcontractors and, for that matter, all sub-subcontractors would follow suit.  But as we all know, we live in the real world, not a perfect world.

My purpose today is to educate all parties to these construction contracts, including lower tiered sub-subcontractors, that in the effort to reduce contract administration burden and avoid a breach of contract using blanket additional insured endorsements, there actually manifests a hidden risk that all parties need to manage.  

Now, after a very unscientific straw poll taken by me of all ongoing work performed at any given time, it seems plausible that between 10% and 20% of work performed may not have an executed contract in place.  If that indeed is the case, there is no additional insured status and no indemnification in place for that work.  As you can imagine, performing work without signed construction contracts presents different challenges for owners, general contractors, and all tiers of subcontractors.

To help manage this risk I have a suggestion for your consideration:

Since most general conditions documents are getting similar makeovers to the one the AIA A201 just had, I suggest you take advantage of the change that removes the insurance requirements formerly embedded in the body of the contract to the separate insurance exhibit and to include the indemnification as well.  In essence, create a separate insurance and risk transfer contract to be signed prior to the start of the work.  

By doing so, you will avoid the hidden risk created if construction begins without a signed contract and all parties will narrow the gap of time and improve the evolution of the transfer of risk. And that’s music to everyone’s ears!

Well music fans, that’s all for today.  If this topic is “All On Your Mind” now, give us a call. We’re happy to help.

 

About the Author

Tim Hausmann

Posted in: Property & Casualty, Construction

Posted by Tim Hausmann

Tim joined Hausmann-Johnson in 1980 after working in the oil fields in the North Sea, as well as for Del Monte Foods. During his time in the insurance industry he has found that he is most passionate about helping clients succeed. He takes pride in being an insurance resource and consults with clients to help them make the right choices for their company. Tim’s clients would say that he tells them what they need to hear, not what they want to hear, which helps them make the best decisions. Tim sits on the Board of Directors for Hausmann-Johnson. He graduated from Hamilton College in Clinton, New York with a BA in Economics. Traveling is one of his favorite pursuits and he especially enjoys the anticipation leading up to a big trip. If he’s not on the road, you can find him cooking a full family style dinner every Sunday.

LinkedIn

Website