How much general liability insurance is enough?

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 Minimum contractural requirements may not tell the whole picture

By Simon Fenn

Special to Canadian Design and Constructio Report

Quantifying a contractor’s third party liability exposure is more complicated than quantifying contract value on a construction project. It is very complicated to quantify maximum exposure to loss from third party property damage and bodily injury claims, especially considering loss of use as an exposure.

Purchasing general liability insurance limits to the amount the contract documents require may not in fact meet contractual obligations.  By doing soyour business may be potentially exposed to self-insuring above the insurance limits purchased for larger accidents that may result in third party liability claims. They happen.

Often the words “at least” or “not less than” are inserted in front of the required insurance limit stated in contract insurance specifications (see example 1 from CCDC 41 below). This sends a signal that the required limit of insurance in contract is not necessarily the contractor’s maximum liability exposure. The question then is how much insurance is enough?     

Example 1

“1. General liability insurance shall be with limits of not less than $5,000,000 per occurrence, an aggregate limit of not less than $5,000,000 within any policy year with respect to completed operations,”…..

On review of12.1, “Indemnification” in the CCDC 2 contract note under 12.1.2.1 (example 2  that in the event of loss (within the owner-contractor relationship) it appears that the required “contract” insurance limit applies, that is, ($5 million per example 2).

Example 2

12.1.2 The obligation of either party to indemnify as set forth in paragraph 12.1.1 shall be limited as follows:

.1 In respect to losses suffered by the Owner and the Contractorfor which insurance is to be provided by either party pursuant to GC 11.1 – INSURANCE, the general liability insurance limit for one occurrence as referred to in CCDC 41 in effect at the time of bid closing.

CCDC clause 12.1.2.2 (Example 3) relates to losses “for which insurance is not required to be provided by either party.” There is still exposure but it is “contract price or $2 million but no greater than $20 million.” Pollution insurance may be an example as it is not a requirement in the CCDC 2 standard form.

Example 3

12.1.2 The obligation of either party to indemnify as set forth in paragraph 12.1.1 shall be limited as follows:

.2 In respect to losses suffered by the ownerand the contractor for which insurance is not required to be provided by either party in accordance with GC 11.1 – INSURANCE, the greater of the contract priceas recorded in Article A-4 – CONTRACT PRICE or $2,000,000, but in no event shall the sum be greater than $20,000,000.

The contractor’s liability exposure just increased significantly.

Example 4, CCDC 12.1.2.3, relates to claims advanced by third partiessuch as tenants of the owner’s building,  neighbouring properties, pedestrians, and so on. The contractor’s liability resulting in “bodily injury, sickness, disease, death” or “destruction of tangible property” is “without limit”, that is it is unlimitedin this caseForall other claims” the limits in 12.1.1.1 and 12.1.2.2 above apply but that does not leave much else as 12.1.2.3 mostly describes the scope of coverage supplied by most general liability policies.

Example 4

12.1.2 The obligation of either party to indemnify as set forth in paragraph 12.1.1 shall be limited as follows:

.3 In respect to claims by third parties for direct loss resulting from bodily injury, sickness, disease or death, or to injury to or destruction of tangible property, the obligation to indemnify is without limit. In respect to all other claims for indemnity as a result of claims advanced by third parties, the limits of indemnity set forth in paragraphs 12.1.2.1 and 12.1.2.2 shall apply.

Incidentally, this does not relieve, neither does it limit the contractor’s exposure to loss of use claims by third parties as the definition of property damage in a general liability insurance policy includes language related to loss of use of tangible property, whether injured (damaged) or not.

The contractor’s general liability insurance policy should be in force throughout the project to provide protection against claims from accidents that occur beyond the project site.  Contractors are contractually obliged to provide general liability insurance for “bodily injury, sickness, disease, death or destruction of tangible property” claims for six years from “substantial performance of the work” and incidentally even longer under Ontario statute.

If the contractor increases its liability insurance limits on a project to comply with contract specifications that stipulate for example a $10,000,000 liability limit, then reduces the limit following substantial performance, it may place itself in breach due to the six-year requirement.

To conclude, the contractor’s liability to the owner seems to be limited to the amount of insurance required under CCDC 41.  There is added exposure to other potential causes of loss due to 12.1.2.2 above.  In the case of third parties, the contractor’s liability is unlimited for bodily injury, sickness, disease, death or destruction of tangible property.

The risks should be considered in addition to the contract insurance requirements when determining how much general liability insurance a contractor needs.  If the work to be performed by the contractor exposes third parties to bodily injury, property damage or loss of use claims, then purchasing higher limits of liability insurance than required by contract  may be prudent.

This article is intended to help contractor better understand their exposure to third party liability losses and to reconsider whether current limits of third party liability insurance it purchases are adequate.

Most importantly in the words of the fictional Sergeant Phil Esterhaus of Hill Street Blues (1981):

“Hey, let’s be careful out there.”

            Simon Fenn is president of Fenn & Fen Insurance Practice Ltd.  See www.fenninsurance.com phone (866) 269-8799 or email simon@fenninsurance.com.

 


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