AIA UNVEILS NEW 2017 INSURANCE EXHIBIT
In last month’s blogpost, we discussed contractual risk transfer as a practical means of reducing personal risk. This month, we review a significant example of contractual risk transfer in AIA’s 2017 Contract Forms.
Every ten years, the American Institute of Architects (AIA) updates and publishes a range of contract templates for projects of various sizes under the assumption that an architect has been hired to design and supervise the project. For the first time, AIA forms include a separate exhibit so that parties can specify a project’s insurance requirements, reducing the ambiguity in construction contracts. This new feature illustrates the growing influence that insurance has in business risk management.
INCREASED FLEXIBILITY: Customizable limits, Required coverage, and prohibited exclusions
The 2007 version of the AIA contract documents primarily set insurance requirements in Article 11 of the general conditions. This year’s documents cover insurance more extensively, and create a menu for various types of required and optional insurance for both property owners and contractors. With provisions for customizable insurance limits, these contract templates afford individual projects more flexibility depending on the size and scope of the work provided.
For Property Owners:
Required coverages include Business Risk (property insurance) that, notably, is valid through the completion and correction of work. In contrast, the 2007 version only required that this insurance be maintained through the date of final payment. Other required insurance should cover errors and omissions, and deficiency in construction methods, design, specifications, workmanship, or materials.
The new exhibit also lists prohibited exclusions specific to property owners to ensure that their insurance remains active and valid during various common situations. These include fire, explosion, theft, vandalism, malicious mischief, collapse, and natural disasters such as earthquake, flood or windstorm.
Contractors must obtain commercial general liability (CGL) that provides coverage for completed operations. The insurance must cover bodily injury, personal injury,advertising injury, and physical damage to or destruction of tangible property.
The prohibited exclusions on a contractor’s CGL policy tend to be more extensive and complicated by contract requirements. You can refer to the list below, or AIA documents A101-103 for more detail:
- Claims by one insured against another
- Claims for property damage to the Contractor’s work arising out of the products-completed operations hazard where the damaged Work or the Work out of which the damage arises was performed by a Subcontractor
- Claims for indemnity under Section 3.18 of the General Conditions (Article 11) arising out of injury to employees of the insured
- Claims related to residential, multifamily or other habitational projects, if the Work is to be performed on such a project
- Other specific claims where the work involves such hazards, such as roofing, EIFS, earth subsidence, or explosion, collapse and underground hazards
It is also in a property owner and contractor’s best interests to consider the AIA’s list of optional additional insurance. While the insurance below is generally not required by contracts and not always relevant, the AIA prompts construction managers to take a look at the coverage afforded and the risks of not obtaining it:
- Equipment Breakdown Coverage
- Cyber Insurance
- Auto Liability
- Worker’s Compensation
- Employers Liability
- Railroad protective liability
- Asbestos abatement liability
- Property insurance covering the Contractor’s property
- Professional Liability
- Pollution Liability
- Maritime Liability
- Manned or unmanned aircraft
SHIFTING RESPONSIBILITY to the insured
The 2017 documents specify that all insurance must be produced from companies that are lawfully authorized to issue insurance in the district where the project is to be located. Furthermore, the responsibility to notify owners of cancelled or expiring policies has been shifted in the 2017 documents from the insurer to the insured with regard to both contractor’s insurance and property owners’ required property insurance.
This sounds like an obvious change, but it is an important step in shifting responsibility for losses from insurance companies to contractors and property owners. For a decade, the 2007 AIA requirements had placed this burden on insurance companies rather than those who had the best opportunity and ability to prevent injuries or losses.
THE INCREASED WEIGHT OF INSURANCE
It should be noted that the new insurance exhibits do not replace Article 11 of the General Conditions found in Document A201. Article 11 still lists appropriate means of settlement in case a contractor or property owner fails to obtain contractually required coverage. That said, the addition of a separate insurance exhibit and the extent to which its provisions can be customized for individual projects demonstrates the AIA’s acknowledgement that insurance is rising in importance as an essential tool in risk management.