A Word to the Wise: The AIA Revised Contract Documents Could Lead to New and Unanticipated Risks – Part I

The contract documents published by the American Institute of Architects are widely utilized by the construction industry. As such, prudent participants in the construction process analyze these documents in order to appreciate their legal rights and obligations. This analysis is particularly important in light of the recently released decennial revisions to AIA documents A101, A201 and B101.¹

While it is still too soon to gauge the effect of these revisions, their impact could be far-reaching. These revisions, among other things, could lead to a significant cost increase and shifting of liability amongst the parties. Anyone involved in the construction project as owner, contractor or architect must consider these changes and be cautious before utilizing the new contract forms. This article will explore some of the revisions to A201 and discuss possible implications.²

GENERAL CONDITIONS

A201 addresses the General Conditions portion of construction contracts. A201 is the most crucial section of the AIA documents since the terms of A201 are often incorporated elsewhere in the construction contract and changes in A201 will ripple through the entire AIA contract. Moreover, the General Conditions portion of the AIA contract documents cover commonly litigated portions of a construction contract such as insurance, payment, change orders and claims and disputes.

REVISED INSURANCE TERMS

The most obvious change to A201 is that the insurance requirements of Article 11 have largely been relocated to a separate Exhibit A to the AIA contract documents. Article 11 still contains key insurance requirements such as:

• the owner’s builder’s risk property policy which insures the property on the site during construction, including property of the contractor and its subcontractors and suppliers;
• the contractor’s commercial general liability policy naming the owner and architect (including the architect’s consultants) as additional insureds; and,
• the parties and their insurers subrogation waiver of rights against one another.

Exhibit A, titled “Insurance and Bonds,” however, includes more thorough descriptions and requirements for insurance. Some of the requirements go far beyond those of the 2007 version of A201 and are likely to increase insurance costs.

REVISIONS THAT AFFECT OWNER’S REQUIRED INSURANCE

Article 2 § 2.3.1 details the insurance which the owner must acquire. The owner is obligated to purchase builder’s risk insurance that specifically covers losses from “error omission, or deficiency in construction methods, design, specification, workmanship, or materials.” ³ Moreover, the builder’s risk policy must insure the owner as well as contractors and subcontractors.

Article A2.3 could dramatically affect the risks associated with construction defects – one of the most hotly litigated areas of construction law. Under the prior AIA contract documents, if a defect allegedly caused damage to the owner’s property, the owner would likely have made a claim against the CGL policies of the contractor, subcontractor or perhaps the architect. Whether or not CGL policies cover damage caused by construction defects is not a settled issue.

CGL insurers have denied coverage contending, inter alia, that construction defects do not constitute an ‘occurrence’ under the policy. The specific policy terms and the law of the relevant jurisdiction will determine the success of the insurers’ denial of coverage.⁴ In any event, the new insurance requirements would offer clarity as to which policy covers construction defects and could avoid the problems presented by seeking coverage for construction defects under a CGL policy. Builder’s risk policies, however, will only provide a temporary and likely expensive solution and will not cover latent defects discovered after the builder’s risk policy expires – usually about one year after substantial completion of the project.⁵  It remains to be seen if owners will actually purchase these expensive builder’s risk policies or if the insurers even will write them.⁶

REVISIONS THAT AFFECT CONTRACTOR’S REQUIRED INSURANCE

As in the 2007 version, the contractor is required to maintain CGL, automobile, workers’ compensation and employers’ liability insurance.⁷ The 2017 updates, however, now contain requirements that the contractor provide professional liability, pollution liability, maritime liability, and manned or unmanned aircraft liability insurance if applicable to the work being performed.⁸ Further, the new revisions specify that the contractor’s required insurance must be maintained through the “correction of work” period, rather than the date of final payment, as previously required.

Consistent with the prior versions of the AIA documents, the 2017 revision requires the contractor to name the owner, architect and architect’s consultants as additional insureds. The 2017 version, however, dictates the amount of coverage to be provided to these additional insureds. Exhibit A Section A.3.1.3 details: that the additional insured coverage “shall be primary and non-contributory . . . [and] “[t]o the extent commercially available, the additional insured coverage shall be no less than that provided by Insurance Services Office in three ISO three endorsements.⁹ This raises two significant questions:

• if the contractor’s liability policy fails to provide the required level of coverage, is the contractor liable for any shortfall; and
• since these policies are required to be “non-contributory” which party must pay the deductible or SIR under the additional insured coverage?

Part II addresses revisions that affect dispute resolution, supervision and construction procedures, shop drawings and contract termination.