In New Contract Documents, AIA Bolsters Insurance Requirements: An In-Depth Look

Most contract documents published by the American Institute of Architects (AIA) are on a ten-year drafting cycle. The principal owner-architect agreements, owner-contractor agreements, as well as the general conditions document, were last issued in 2007. Their replacements are due to be released at the AIA’s National Conference in Orlando, April 27-29, 2017. One of the more significant changes from the 2007 documents concerns how the documents treat the subject of insurance. Designing and constructing projects is a risky business. Mistakes can and do happen. One of the principal methods for addressing design and construction risk is via transference for a premium to third-party insurers. Requiring construction participants to procure one or more types of insurance is an old concept. Mandating insurance in one form or another has been a staple of AIA contracts from the very beginning. The 2017 documents, however, mark a significant departure from the past. With the introduction of an insurance exhibit, the AIA has raised the profile that insurance is likely to play in the contract formation process. The new insurance exhibit prompts parties to explore insurance as a risk-management device in greater depth than they might otherwise have undertaken.

Information Expressly Required to be Provided by the Parties in Completing the Exhibit

The current AIA Owner and Contractor Agreement forms call for the parties to identify the limits of liability for the liability insurance required under Article 11 of the General Conditions Document.² The General Conditions Document requires the Contractor to secure workers’ compensation insurance, employer’s liability insurance, automobile liability insurance, and commercial general liability insurance. The limits for workers’ compensation are mandated by law. The Owner’s property insurance is required to be provided “in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis.”³ Therefore, the parties must only make decisions regarding the coverage limits for three types of insurance: employer’s liability; automobile liability; and commercial general liability. As a general rule, parties specify limits for each occurrence or accident (a per-occurrence limit), as well as a total limit for all occurrences (an aggregate limit).⁴

The 2017 Insurance Exhibit provides a much richer menu of potential coverages, durations, and limits. While the Exhibit prompts the parties to consider numerous options for insuring the project, they need only address limits for: (1) commercial general liability (§ A.3.2.2); (2) automobile liability (§ A.3.2.3); (3) employer’s liability (§ A.3.2.6), where the Contractor’s work does not involve (1) the transport, dissemination, use or release of pollutants; (2) the furnishing of professional services; or (3) maritime/aviation liability risks. If the Work implicates these risks, the parties are required to identify the limits for the applicable insurance addressing the particular risks at issue.⁵

The parties are not required to insert any information into the Exhibit with respect to insurance coverage other than for specifying the liability limits for commercial general liability insurance, automobile insurance, employer’s liability insurance, and where the work involves such risks, contractor’s professional liability insurance, pollution liability insurance and insurance for maritime liability/aircraft liability risks. The parties need complete no other “check box” or “fill point” contained in the Exhibit if they wish.⁶ In this regard, the completion of the Insurance Exhibit should not be materially more difficult than completing the insurance information required by the current AIA Owner and Contractor Agreement forms.

This is not to suggest, however, that the parties need only attend to § A.3.2 (Contractor’s Required Insurance) in order to properly address the project’s insurance requirements. While this is the only section where the parties must provide information with respect to insuring the project, there are other provisions which may well require the parties to secure specific insurance depending upon the nature of the work. For example, § A.2.3.3 requires the Owner to purchase and maintain insurance on an existing structure where the work involves remodeling that structure or constructing an addition to the existing structure. The parties are not required to fill out any information with respect to this insurance, but it is an obligation placed on the Owner in the event the work involves an existing structure. Moreover, the exhibit and Article 11 of A201™– 2017 provide much detail regarding required and optional coverages and related requirements and prohibited exclusions. For these reasons, even though the parties only need to fill out the liability limits for the insurance called for under § A.3.2, the parties are well-advised to carefully review the entire Exhibit, as well as Article 11, and to have the Exhibit reviewed by their insurance broker or policy provider.

Tailoring Coverage by Exercising Options and Specifying Limits and Durations

The Insurance Exhibit permits the parties to make dozens of decisions with respect to insuring the project. They are not required to make any decisions except for the liability limits of the Required Contractor’s Insurance, but the Exhibit serves as a guide for exploring additional coverages that may be appropriate in the particular case. Other provisions guide the parties with respect to providing greater specificity concerning required property coverage.

1. Required Property Insurance

   The Owner is required to secure property insurance covering the Contractor’s work unless the parties select the option (§ A.3.3.2.1) of having the Contractor provide this insurance. Section A.2.3.1 describes in general terms the builder's risk insurance required for the project. The Owner is required to purchase builder's risk “all-risks” insurance on a completed value or equivalent policy form. The limits of this insurance shall be sufficient to cover the total value of the entire project on a replacement cost basis. At a minimum, this should be no less than the amount of the initial Contract Sum plus the value of any subsequent modifications, materials supplied or installed by others, and furnishings, fixtures, and materials located at the project site. If the project involves construction performed by the Owner’s separate contractors, this work also should be covered by the Owner’s property insurance.

   While “all-risks” property or builder's risk insurance seldom covers all risks, the Exhibit prohibits certain exclusions (i.e., fire, explosion, theft, vandalism, malicious mischief, collapse, earthquake, flood, or windstorm). The property insurance shall also provide coverage for ensuing loss or resulting damage from error, omission or deficiency in construction methods, design, specifications, workmanship, or materials.⁷ Where it is not possible or desirable to purchase the required property coverage for specific perils at limits of the total project value, the Exhibit permits the parties to sublimit certain coverages. Earthquake and collapse are coverages that on occasion are subject to sublimits.

   The Exhibit also requires the builder's risk policy to provide specific related coverages. For example, false work and other temporary structures are to be covered.⁸ Debris removal and required demolition also are coverages required to be provided, as well as coverage for damage to building systems from testing and startup. The required property insurance also shall provide reimbursement for the services and expenses of the Architect and Contractor incurred as a result of the loss, including work spent in assisting in claim preparation. Some of these coverages, such as debris removal, frequently are subject to sublimits. As a consequence, the Exhibit provides an opportunity for the parties to specify applicable sublimits for these coverages.

   The Exhibit also identifies a number of optional extended property coverage extensions that the parties may wish to secure in connection with the project. These include:

   • Loss of use, business interruption, delay in completion insurance.
   • Ordinance or law insurance.
   • Expedited cost insurance.
   • Extra expense insurance.
   • Civil authority insurance.
   • Ingress/Egress insurance.
   • Soft costs insurance.⁹

   These optional property coverage extensions include several common time-element coverages. In many cases, the Owner is well advised to secure business interruption insurance, as it bears the risk of such loss under § 11.4 of the General Conditions Document.¹⁰ Because most builder's risk or permanent property policies are written on a manuscript basis, rather than a standard industry form, it is not unusual for one insurer’s “standard” property policy to provide types and scope of coverage different from another insurer’s property policy. For example, one insurer’s property policy may include extra expense insurance and soft costs insurance as part of the basic coverage package, whereas another company’s policy will provide these by way of specific coverage extensions. The Exhibit permits the parties to reach a more detailed understanding regarding the nature and extent of the project’s property coverage.

   The Exhibit also prompts the parties to discuss whether first-party cyber security insurance is a coverage that is appropriate under the circumstances.¹¹ There also is an opportunity for the parties to identify additional insurance coverages to be provided by the Owner.¹² There are a number of additional coverages an Owner may wish to secure for the project. For example, under the 2007 edition of the A201 General Conditions Document, the Owner is required to purchase “Boiler and Machinery Insurance required by the Contract Documents or by law.”¹³ This coverage is now more commonly known as “Equipment Breakdown Insurance.” This insurance protects electrical systems, air conditioning and refrigeration equipment, mechanical equipment, and modern office equipment, in addition to heating systems such as boilers. This insurance is provided in two basic ways: (1) on a monoline policy basis, separate from a property insurance policy; and (2) within a property insurance policy either embedded into the policy form or added by endorsement to the overall policy. Because the required builder's risk insurance must cover the entire project on a replacement cost basis, this coverage should be part of the builder's risk policy. Therefore, it was decided that a separate provision requiring such insurance was unnecessary. In the event that the builder's risk policy does not provide adequate protection for testing and startup of building systems, or the parties believe additional coverage for equipment breakdown is appropriate, they should specify such coverage under § A.2.5.2.

2. Duration of the Contractor’s Required Insurance

   Section A.3.2.1 requires the Contractor to purchase and maintain the required insurance until the expiration of the period for correction of Work. Under § 12.2.2 of the General Conditions, the Contractor is obligated to correct Work not found to be in accordance with the Contract Documents within one year after the date of substantial completion of the Work. This one-year correction period is extended with respect to portions of the Work first performed after substantial completion, although it is not extended for corrective work performed during the correction period.¹⁴ If the parties decide that the Contractor shall maintain insurance for a duration other than the expiration of the period for correction of Work, they may state that duration in the space provided at the end of § A.3.2.1.

   The Contractor’s obligation to provide insurance for a specified duration of time should not be confused with the common, but problematic, requirement that the Contractor secure completed operations coverage for a specified term of years. Contractors do not purchase monoline “completed operations” coverage for multi-year periods. Occurrence-based CGL coverage, the only type permitted under the AIA documents, is not written in such a way that one can secure the equivalent of “tail coverage” (a common feature of claims-made professional liability policies).¹⁵ “Completed operations” coverage is simply a feature of the “products-completed operations hazard” in the standard ISO CGL policy form, with the consequence that separate exclusions apply to property damage that arises after the insured’s work is complete or abandoned. Therefore, requiring a contractor to provide “completed operations” insurance for a specified period of years boils down to nothing more than a commitment to, in the future, purchase practice policies for the specified number of years.¹⁶ While a Contractor may well agree to purchase insurance in subsequent years (and name the Owner as an additional insured under those policies), this is usually not what the Owner has in mind by such contract language as it requires more contract administration than many Owners are able to provide.

3. Contractor’s Optional Insurance

   Section A.3.3 of the Insurance Exhibit identifies a number of optional insurance covers that may be appropriate for the Contractor to secure for a given project. These include railroad protective liability insurance, asbestos abatement liability insurance, and property insurance covering loss to the Contractor’s property as well as property located in off-site storage or in transit to the construction site.¹⁷ There is also an opportunity for the parties to agree that the Contractor shall purchase and maintain the requisite builder's risk insurance. It is likely that the parties will set forth a number of terms and conditions that will apply in the event the Contractor secures the builder's risk insurance and the Exhibit allows for such customization. The Exhibit also expressly requires that the Contractor comply with all obligations placed upon the Owner were it to purchase the required property coverage, although the Owner is still responsible for adjusting and settling any insured loss.¹⁸ The Exhibit also permits the parties to elect to require the Contractor to procure other specified types of insurance, such as cyber liability or other insurance appropriate for the project.19 Where the parties elect to have the Contractor provide optional liability insurance, the form requires the parties to set forth the liability limits for such insurance.

Insurance Requirements Contained in the 2017 General Conditions Document

The Documents Committee determined that it was appropriate to maintain in the General Conditions Document an Article 11 devoted to insurance and bonds. Although, upon initial reflection, it may seem odd to split the insurance requirements between the General Conditions Document and the Insurance Exhibit, this was done as a precaution in the event the parties failed to make the Insurance Exhibit part of their agreement. In such event, the General Conditions Document would govern the parties’ insurance obligations and provide the familiar waivers of subrogation to the extent the Owner has applicable property insurance even though none is mandated. Article 11 of the 2017 edition also maintains § 11.3.3 “Loss of Use Insurance” from the 2007 General Conditions Document. This provision provides the Owner the option to purchase insurance to protect the Owner against loss of use of its property due to fire or other causes of loss. This provision also contains a waiver by the Owner against all rights of action against the Contractor and Architect for loss of use of the Owner’s property, due to fire or other hazards however caused.²⁰

Additionally, Article 11 of the General Conditions Document sets forth the process for the adjustment and settlement of insured loss.²¹ The consequences of the Contractor’s failure to give notice of cancellation of required insurance, as well as the Owner’s failure to purchase required property insurance, also are set forth in Article 11.²² The Owner’s obligations arising from the cancellation of the insurance it is obligated to provide is also addressed in Article 11.²³

Summary of Major Changes

In addition to the significant contract formation change brought about by the introduction of an additional document (i.e., the Insurance and Bonds Exhibit), the 2017 General Conditions Document and Insurance Exhibit contain a number of material changes from the 2007 documents. These include:

• Setting forth specific procedures and process for giving notice of cancellation of insurance.²⁴
• Setting forth a detailed process for settlement of insured loss.²⁵
• Contractor’s required insurance shall be maintained through the correction of work period rather than until the date of final payment²⁶
• Specifying the Contractor’s obligation to provide additional insured coverage to Owner, Architect and Architect’s consultants with more specificity than set forth in the 2007 General Conditions Document.²⁷
• Requiring the Contractor to secure professional liability insurance where it is required to furnish professional services as part of the Work.²⁸
• Requiring the Contractor to procure pollution liability insurance where the Work involves the transport, dissemination, use or release of pollutants.²⁹
• Requiring the Contractor to purchase insurance for maritime liability risks and manned or unmanned aircraft risks where the Work requires such activities.³⁰
• Expressly anticipating situations where the parties decide that the Contractor shall purchase and maintain the required property coverages and setting forth the process for accomplishing this in the Contract Documents.³¹
• Expressly prohibiting certain practices or policy language eliminating or restricting commercial general liability insurance, including:
  • Prohibiting “insured v. insured” exclusions and the like.
  • Prohibiting the deletion of the subcontractor exception to the work-performed exclusion.
  • Disallowing broadly drafted employees’ or workers’ compensation exclusions.
  • Prohibiting exclusions eliminating insurance for indemnity claims arising out of injuries to the Contractor’s employees.
  • Prohibiting prior work endorsements.
  • Prohibiting prior injury endorsements.
  • Prohibiting residential or habitational exclusions where the Work involves such projects.
  • Prohibiting roofing exclusions where the Work involves such roofing Work.
  • Prohibiting exclusions related to exterior insulation finishing systems (EIFS) or similar exterior coatings where the Work involves such coatings or surfaces.
  • Prohibiting exclusions restricting or eliminating coverage for damages due to earth subsidence or movement.
  • Prohibiting exclusions or restrictions relating to explosion, collapse, and underground hazards where the Work involves such hazards.³²
• Contractor is required to disclose to the Owner any deductible or self-insured retentions applicable to any insurance required to be provided by the Contractor.³³
• Contractor must purchase insurance covering liability arising from the Jones Act and the Longshore & Harbor Workers’ Compensation Act where the Work involves hazards arising from activities on or near navigable waterways, including vessels and docks.³⁴
• Where the Contractor chooses to secure the required limits of liability through a combination of primary and excess insurance, the excess policy shall not require the exhaustion of the underlying limits only through the actual payment by the underlying insurers (i.e., the excess policy must be written on a “functional exhaustion” basis).³⁵
• The parties are prompted to set forth sublimits pertaining to specific causes of loss for which the builder's risk policy responds.³⁶
• The parties are encouraged to set forth sublimits for specific required coverages where appropriate.³⁷
• The required builder's risk insurance must provide coverage for ensuing loss or resulting damage from error, omission, or deficiency in construction methods, design, specifications, workmanship, or materials (i.e., the policy must contain the resulting loss or ensuing loss exception to the design and workmanship exclusion).³⁸
• Where the Work involves remodeling an existing structure or constructing an addition to an existing structure, the Owner must purchase and maintain until expiration of the period for correction of the Work all-risks property insurance protecting the existing structure against the same causes of loss to which the builder's risk insurance must respond.³⁹
• The Owner’s loss-of-use damages waiver extends to the Architect as well as the Owner.⁴⁰
• The parties are prompted to explore a number of optional property insurance covers including loss of use/business interruption/delay in completion insurance; ordinance or law insurance; expedited costs insurance; extra expense insurance; civil authority insurance; ingress/egress insurance; and soft costs insurance.⁴¹
• The parties are prompted to consider other optional insurance for the Owner to purchase and maintain, including cyber security insurance and such other insurance that the parties deem appropriate.⁴²
• The Contractor shall provide certificates of insurance to the Owner “upon the Owner’s written request” (in addition to providing certificates prior to commencement of the Work and upon renewal or replacement of required insurance).⁴³
• The requirement that the Contractor’s insurance may not be cancelled or allowed to expire until at least thirty days’ prior written notice has been given to the Owner has been eliminated. The obligation to provide notice is placed upon the Contractor rather than insurer.⁴⁴
• The certificates of insurance required to be provided to the Owner by the Contractor shall expressly identify the Owner as an additional insured on the Contractor’s commercial general liability policy and excess or umbrella liability policy or policies.⁴⁵

Conclusion

The AIA’s Insurance Exhibit is a significant development in the evolution of its Contract Documents. The Exhibit is an acknowledgement that insurance plays a pivotal role in managing design and construction risks. A separate Exhibit allows for a more rapid response to significant changes in the construction insurance environment. The Exhibit also serves as a vehicle for parties to more fully explore the options available to them to manage project risk through insurance.

² See AIA Document A101-2007 at Article 10, and AIA Documents A102-2007 and A103-2007 at Article 17.
³ AIA Document A201-2007 at § 11.3.1.
⁴ On occasion, parties may specify limits with greater precision. The limits for commercial general liability might be broken down into Coverage A (bodily injury and property damage), Coverage B (personal injury and advertising liability), and Coverage C (medical payments). Parties also may specify separate limits for products-completed operations coverage.
⁵ See AIA Document A101-2017 Exhibit A at §§ A.3.2.8, A.3.2.9, A.3.2.10, A.3.2.11, and A.3.2.12. Section A.3.2.10 permits the parties to address the professional services and environmental liability risks associated with the Contractor’s activities through the purchase of a combined professional liability and pollution liability insurance policy.
⁶ The Exhibit calls for two types of information. For one type, the parties “check a box” signifying their agreement to acquire one or more optional coverages. These “check boxes” are bounded by opened and closed brackets. In all other cases where the parties are either required or permitted to provide information, the vehicle is one type of “fill point” or another. Some fill points simply call for a dollar amount where the parties are required to set forth liability limits for one or more types of insurance. Other “fill points” are spaces in the form where the parties can provide information in any form that they choose, including setting forth a dollar amount (where a limit of coverage is sought) or a narrative regarding any terms or conditions with respect to insurance coverage (or performance and payment bonds) that the parties believe appropriate. In some instances, “check boxes” and “fill points” work in tandem, such as where the parties elect to secure some form of optional “other insurance” by checking the box next to “other insurance” and then fill out the specifics, including limits, of the elected insurance. There also is a specific article (Article A.4) entitled “Special Terms and Conditions” at the end of the Exhibit that allows the parties to specify all special terms and conditions that supplement or modify the Insurance and Bonds Exhibit.
⁷ AIA Document A101-2017 Exhibit A at § A.2.3.1.1.
⁸ AIA Document A101-2017 Exhibit A at § A.2.3.1.2.
⁹ AIA Document A101-2017 Exhibit A at § A.2.4.1-A.2.4.7.
¹⁰ AIA Document A201-2017 at § 11.4.
¹¹ See generally, Bruner & O’Connor on Construction Law, §§ 7:107.50-7:107-54 and 11:311.10-11:311.50. Cyber insurance can be secured in a number of different ways. The Owner can acquire a separate monoline cyber security insurance policy. Some insurers also provide a coverage extension to their builder's risk policy form covering Electronic Data Loss. Where electronic data is destroyed or damaged as a result of a covered cause of loss, the insurer will pay the cost to replace or restore it. Causes of loss that generally apply to this coverage include computer virus, harmful code, or other harmful instructions entered into the insured’s computer system or network. The coverage also applies to cyber extortionists who threaten to disrupt or render the insured’s computer system unavailable to it if their ransom demands are not met. This coverage, however, often will not apply to damage caused by the insured’s employees or third parties retained by it.
¹² AIA Document A101-2017 Exhibit A at § A.2.5.2.
¹³ AIA Document A201-2007 at § 11.3.2.
¹⁴ AIA Document A201-2017 at §§ 12.2.2.2 and 12.2.2.3.
¹⁵ In certain situations, it may be possible to secure what is essentially CGL tail coverage under a project policy. The AIA’s Exhibit does not require the contractor to furnish a project policy, for to do so would constitute a material change to the normal process of specifying the required insurance be furnished through practice policies. For similar reasons, the Exhibit makes no mention of Wrap-up or Controlled Insurance Programs, such as Owner-Controlled Insurance Programs (OCIPs) or Contractor-Controlled Insurance Programs (CCIPs). These programs require manuscript contract language.
¹⁶ If this coverage is desired for the project then the parties are advised to discuss the possibility of project insurance with their insurance advisers.
¹⁷ AIA Document A101-2017 Exhibit A at §§ A.3.3.2.2-A.3.3.2.5.
¹⁸ AIA Document A101-2017 Exhibit A at § A.3.3.2.1.
¹⁹ AIA Document A101-2017 Exhibit A at § A.3.3.2.6.
²⁰ AIA Document A201-2017 at § 11.4.
²¹ AIA Document A201-2017 at § 11.5.
²² AIA Document A201-2017 at §§ 11.1.4 and 11.2.2.
²³ AIA Document A201-2017 at § 11.2.3.
²⁴ AIA Document A201-2017 at §§ 11.1.4 and 11.2.3.
²⁵ AIA Document A201-2017 at § 11.5.2.
²⁶ AIA Document A101-2017 Exhibit A at § A.3.2.1. Compare with AIA Document A201-2007 at § 11.1.2.
²⁷ AIA Document A101-2017 Exhibit A at § A.3.1.3. Compare with AIA Document A201-2007 at § 11.1.4.
²⁸ AIA Document A101-2017 Exhibit A at § A.3.2.8.
²⁹ AIA Document A101-2017 Exhibit A at § A.3.2.9. The Contractor is permitted to satisfy its obligations under § A.3.2.8 and § A.3.2.9 by procuring a combined professional liability and pollution liability policy. AIA Document A101-2017 Exhibit A at § A.3.2.10.
³⁰ AIA Document A101-2017 Exhibit A at §§ A.3.2.11 and A.3.2.12.
³¹ AIA Document A101-2017 Exhibit A at § A.3.3.2.
³² AIA Document A101-2017 Exhibit A at § A.3.2.2.2.
³³ AIA Document A101-2017 Exhibit A at § A.3.1.2.
³⁴ AIA Document A101-2017 Exhibit A at § A.3.2.7.
³⁵ AIA Document A101-2017 Exhibit A at § A.3.2.4.
³⁶ AIA Document A101-2017 Exhibit A at § A.2.3.1.1.
³⁷ AIA Document A101-2017 Exhibit A at § A.2.3.1.2.
³⁸ AIA Document A101-2017 Exhibit A at § A.2.3.1.1.
³⁹ AIA Document A101-2017 Exhibit A at § A.2.3.3.
⁴⁰ AIA Document A201-2017 at § 11.4. Compare to AIA Document A201-2007 at § 11.3.3.
⁴¹ AIA Document A101-2017 Exhibit A at §§ A.2.4.1-A.2.4.7.
⁴² AIA Document A101-2017 Exhibit A at §§ A.2.5.1 and A.2.5.2.
⁴³ AIA Document A101-2017 Exhibit A at § A.3.1.1.
⁴⁴ AIA Document A201-2017 at § 11.1.4. Compare AIA Document A201-2007 at § 11.1.3
⁴⁵ AIA Document A101-2017 Exhibit A at § A.3.1.1.