James T. Dixon | Brouse McDowell
The premium a company pays for its general liability insurance is based on several factors. More obviously, the rate will be based on the limits of insurance obtained and the applicable deductible. Less obviously, however, classifications, rates and exposure bases also come into play. The Insurance Services Office (ISO) publishes a classification system used by many insurance companies and, for construction companies, the assigned classification is based on the nature of the work performed. For example, concrete construction companies are in classification 91560. The general thinking is that similar companies face similar risks and similar losses.
A rate is then charged for each classification, and those vary by carrier and by state. Further, insurance companies assign one rate to a company’s premises and operations risk (e.g., personal injury from a slip and fall at the office or jobsite) and another to its products and completed operations risk (e.g., personal injury from the collapse of a wall). Finally, an “exposure base” is applied to the rate, and that base could be set based on the size of a building or the annual sales of a company. Fortunately, construction executives have a partner in their insurance agent, who can help wade through this complicated area and find the right insurance at the right price.
Once insurance is in place, contractors can help themselves in ways that extend beyond having effective safety protocols. One of those ways is through the effective use of subrogation terminology in their contracts and insurance policies. In the insurance context, when an insurance company pays a claim, it can step into the shoes of its insured and recover what it paid from the party responsible for the loss. That process is called subrogation. While some subrogation rights are obtained through equity, the rights are most frequently defined by the contract. The insured can waive the insurance company’s subrogation rights by contract, but the insured must be careful. Before entering into a construction contract that waives the insurer’s subrogation rights, the insured should know whether it has the right to do so as set forth in the insurance policy. The standard form published by the ISO, for example, gives the insured permission to waive the carrier’s subrogation rights. That is not always the case, though.
This is where we get to the heart of the matter: What should a construction company look for in its contracts when it comes to subrogation waivers? To give itself the opportunity to pay lower insurance premiums and avoid legal expenses, a construction company can ask the project owner to waive its property insurance carrier’s subrogation rights. In this context, “property insurance carrier” includes those that issue popular builders’ risk policies. Achieving a waiver of this nature would prevent the owner’s insurance carrier from first paying for a loss, and then standing in the shoes of the owner to recover that loss from the contractor, if the contractor was at fault. Likewise, subcontractors can obtain subrogation waivers from general contractors and project owners.
The most popular standard form agreements in use in the construction industry are written to help contractors on this issue. The American Institute of Architect’s A101 Standard Form of Agreement Between Owner and Contractor, through its A201 General Conditions, includes a waiver of subrogation in Article 11.3. The same can be found in Section 10.3.2 of the ConsensusDocs 200. And, whether working with standard or custom forms, there are numerous scope issues that can be the subject of negotiations, including whether the waiver only applies to losses during construction, the insurance that is called for in the contract, damage to the work, design errors, claims for deductibles and retentions, or situations where the other parties have also provided subrogation waivers.
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