Managing Risk:

Insurance and Indemnity Clauses

in Construction Contracts
David B. Ratterman

his paper is directed almost ings, and begin the buy-out and fabri-

T exclusively at risk-shifting
clauses in construction con-
tracts. Any discussion of
construction contract clauses
and their interpretation has to begin
and end with two very basic common-
sense principles.
cation process to meet the project
schedule. If you proceed, and if you
change your economic position (i.e.,
spend your own money, devote detail-
ing and shop time, etc.) then you have
a contract. The terms of the contract are
the original request for proposal, your
The first principle is that companies bid, and any additional terms and con-
involved in the construction industry ditions in the notice to proceed, which
must exercise care in the selection of you accepted.
customers, the acceptance of work, and It is better to have a formal written
in the nurturing of customer relation- subcontract that is fully negotiated. But
David B. Ratterman is with ships. The contract clauses discussed in the law does not require this. On some
Stites & Harbison, PLLC, this paper are enforceable. However, public works projects, if you are the low
Louisville, KY. He is Secretary
and General Counsel for the the cost to enforce these clauses against bidder, and are an otherwise responsive
American Institute of Steel a customer, general contractor or sub- and responsible bidder, a general con-
Construction, Inc. contractor with whom one never tractor might not even have the ability
should have contracted in the first to refuse to award you the work based
place can be prohibitive! on the fact that you will not agree to its
Secondly, “THINK BEFORE YOU standard-form subcontract.
INK!” Some contractors do not read or There has to be a clear offer and
understand the terms of the contracts clear acceptance for there to be a con-
they sign. Hopefully you are one who tract; the receipt of a notice to proceed
does not fall into that trap! could be enough if you change your
economic position as a result; and you
CONTRACT ESSENTIALS do not have to execute a standard-form
Most contracts consist of an offer contract unless you were notified of its
and an acceptance. Contracts do not provisions in the documents upon
have to be in writing, unless the con- which you formulated your bid.
tract is incapable of being performed in Some subcontracts contain a clause
one year. The problem with oral con- that says that your bid has been su-
tracts is that it is hard to prove contract perceded by subcontract terms, no
terms when they are not written down. longer forms a part of your contract,
Some contracts that you might not and has no legal effect. If you are asked
have thought were written actually are. to sign such a contract, strike it or as-
For example, you could respond to a certain that all of the terms of your bid
request for proposal by submitting a are included in the final subcontract.
bid. The request for proposal is clear
with regard to what has to be done and STANDARD FORM CLAUSES
does not require you to execute a writ- It is advantageous for subcontrac-
ten subcontract agreement. You submit tors to use the standard-form language
your bid under that proposal and in- contained in the AIA contract docu-
clude your standard-form terms and ments. These documents address the
conditions. The customer writes back interests of subcontractors in as fair a
and accepts your bid, with subcontract manner as any standard-form con-
negotiations to follow. struction contract documents in the in-
In the interim, the customer sends dustry, and are better than comparable
you a notice that directs you to order forms prepared by general contractor
steel, prepare and submit shop draw- groups. They are widely used and rec-

April 2003 • Modern Steel Construction

ognized, and near to an industry stan- The insurance industry essentially de- Some standard pieces of advice for
dard. As such, they are an easier sell to lineates between two types of con- clients in the fabricated structural steel
an upstream contractor or owner than tracts: There are “insured” contracts, industry: take time to review the terms
a document prepared by your com- and there is everything else. of all policies with an insurance broker
pany or trade association lawyer. Customary risks that are part of nor- or agent; and confirm that the insur-
Further the 2000 AISC Code of Stan- mal business transactions in a particu- ance required by individual construc-
dard Practice should also be incorpo- lar industry will be covered if the tion contracts will be provided for all
rated. It is an industry consensus obligations which give risk do not stray risks assumed.
document and it establishes standard too far from insurance companies’ tem- In addition to coverage for normal
practice in the U.S. fabricated struc- plate for that industry. business risks, risks of delegation of de-
tural steel industry. It is the basis upon Indemnification clauses and design sign responsibility and involvement in
which knowledgeable bids should be responsibility clauses are the primary design-build projects might not be cov-
made and received, and it fills gaps in areas of construction contracts where a ered under “Insurance Contracts” in-
areas of custom and usage that no stan- fabricator is at greatest danger of ex- demnification clauses.
dard-form construction contract or ceeding the carrier’s notion of an “in- Most contract risks assumed by fab-
specification covers. sured contract” and losing coverage. rication and construction businesses
It has been endorsed by the Coalition In general, indemnification clauses are covered by Commercial General Li-
of American Structural Engineers, the should be mutual in nature (they should ability (“CGL”) insurance policies.
American Institute of Architects, and the apply equally to both parties). One Most risks assumed by design profes-
independent “MasterSpec” publication. party should not escape liability arising sionals are covered by a “professional
It also has been endorsed by use in stan- from its own negligence at the expense liability” or “errors and omissions”
dard-form guide specifications issued of another party that is without negli- (“E&O”) insurance policy. Standard
by the General Services Administration, ISO CGL forms exclude coverage for
the U.S. Army Corps of Engineers, and professional design services. Standard
other large public owners.
“Think ISO E&O forms exclude coverage for
construction work.
THE GOLDEN RULES OF RISK
MANAGEMENT before you The author has seen instances where
design professionals and construction

1. The entity that is in the best posi-

tion to control the risk should take ink!” contractors have entered into a design-
build venture together, and later dis-
responsibility for the risk. covered that each had inadvertently
If possible, risks that cannot be waived their individual coverage and
2. controlled should be transferred
to someone else.
gence; and one party should not be
asked to undertake a risk that another
that their combined work was not pro-
tected by insurance. The insurance in-
Risks that cannot be controlled party is in a better position to control. dustry has evolved since this occurred,
3. and cannot be transferred to
someone else should be insured.
The standard indemnity clause that
appears in AIA Document A401-1997,
but all parties should enter into design-
build arrangements with a clear under-
Risks are shifted to another party Contractor-Subcontractor Agreement, is standing of coverage issues.
through indemnification agreements or an indemnification clause that has been There are essentially four insurance
indemnification clauses in construction generally accepted by the insurance in- products that are applicable to a fabri-
contracts. Insurance policies are con- dustry. Indemnification provisions in cator’s normal business operations:
tracts between the insurance carrier steel fabricators’ construction contracts workers’ compensation insurance, au-
and the insured. Insurance require- should not stray too far from this norm. tomobile insurance, CGL insurance,
ments for individual construction proj- and builders’ risk insurance. A fifth,
ects are set out in the insurance clausesINSURANCE E&O insurance, could be applicable
in the project construction contract. If you cannot control a risk through where design responsibility is as-
Not all indemnification clauses and in- your business practices or transfer that sumed. Workers’ compensation cover-
surance clauses in construction con- risk to someone else through an indem- age varies from state to state and is
tracts are alike; and not all insurance nification clause, then you can manage applicable to all employers doing busi-
policies are alike. that risk through insurance. In general, ness in a particular state, as is automo-
most insurance companies participate bile insurance.
INDEMNIFICATION in an organization called the “Insur-
The Golden Rule of indemnification ance Services Organization” (ISO) that CGL POLICY COVERAGE
clauses is: has developed standard form, sug- CGL policies provide insurance cov-
■ If you agreed to it, then you are gested clauses for individual insurance erage for owners, developers and con-
going to have to do it; and, carriers to utilize in their insurance tractors in three major areas: 1. bodily
■ If you agreed to do too much, you contracts. Many carriers follow the ISO injury and property damage; 2. per-
might not have insurance to cover it. forms closely, but strict compliance is sonal and advertising injury liability;
Except in special, narrowly defined not required nor practiced. Also, many and 3. medical payments. The majority
situations, most courts will enforce in- companies issue exceptions or exclu- of CGL policies are “occurrence” poli-
demnity clauses as they are written. sions on individual policies. cies: Claims can be filed for incidents of

April 2003 • Modern Steel Construction

bodily injury or property damage that in the policy’s basic conditions) and exclusion where an independent sub-
resulted from an occurrence during the to provide records and documents contractor performs transportation.
policy period. The coverage and exclu- related to the suit.
sions discussed below apply to normal ■ The indemnitee must agree to notify DAMAGE TO PROPERTY
fabrication operations. any other insurer whose coverage is EXCLUSION
available to the indemnitee and to This provision excludes coverage
CGL MEDICAL PAYMENT cooperate in coordinating such for property damage to owned, rented,
COVERAGE other coverage. leased or alienated premises, personal
This coverage reimburses medical property in the contractor’s care, cus-
expenses incurred by persons injured EMPLOYERS LIABILITY tody or control, and to some extent the
on the contractor’s premises or because EXCLUSIONS contractor’s work. It is effective for the
of the contractor’s operations, without This provision excludes from CGL time period while the contractor’s
regard for legal liability for those in- coverage bodily injuries that employ- work is in progress. Potential problems
juries. The insurer will pay for all rea- ees of the contractor suffer as a result of in interpretation arise because most
sonable expenses incurred within a their employment. Also excluded are contractors purchase and “own” most
year of the injury on a “no-fault” basis consequential damages claimed by em- building materials going into projects,
for injuries compensable under the pol- ployees’ family members. These claims and are considered “owners” until
icy. These payments are designed to de- are assumed to be covered by workers’ such time as ownership is transferred
crease the number of claims filed under compensation insurance. to the project owner. Contractors re-
the “Bodily Injury” policy coverage. ceive maximum protection under this
POLLUTION EXCLUSION exclusion by incorporating a provision
CGL SUPPLEMENTARY The pollution exclusion excludes into their construction contracts that
PAYMENTS property damage arising from the “dis- transfers materials to the owner upon
This coverage addresses expenses charge, dispersal, seepage, migration, incorporation into the project or upon
associated with investigating and de- release or escape of pollutants” from payment to the contractor, whichever
fending against liability claims covered coverage. There is an exception about occurs first.
by the CGL policy. It covers investiga- transporting pollutants to the site for This exclusion also precludes cover-
tive and legal expenses incurred by the gas, fuel and other substances relating age for equipment and tools borrowed
contractor at the insurer’s request, pre- to the operation of machinery, but only by the contractor and for heavy equip-
judgment interest awarded against the if the discharge is accidental. ment in the contractor’s control, such
insured, and interest on judgments that as that moved by cranes.
accrue after the judgment but before AIRCRAFT, AUTOMOBILE, AND Finally, the provision excludes
the insurer pays the claim. Supplemen- WATERCRAFT EXCLUSION from coverage damage to “that partic-
tary payments do not reduce or other- This exclusion precludes coverage ular part of real property” on which
wise affect policy limits. for bodily injury and property damage work is being performed at the time of
arising from the ownership, mainte- the loss, and the repair, replacement or
ADDITIONAL INSUREDS nance, use (including operation and restoration needed because the work
The insurer has the positive duty to loading and unloading), or entrustment was incorrectly performed. That lan-
defend additional insureds when the to others of aircraft, automobiles, or wa- guage is meant to define resulting
following conditions are met: tercraft. Liability arising from damages damage to other work already in place
■ The insured contractor has specifi- arising from aircraft, watercraft and as being covered, while precluding re-
cally agreed in an “insured con- autos not owned, rented or loaned by imbursement for faulty work or for
tract” to assume the indemnitee’s the contractor (e.g. those of subcontrac- the item on which work is being per-
defense or defense costs. tors) is an exception and is covered. formed at the time of the loss. Unfor-
■ The liability for bodily injury and It is assumed that coverage for auto- tunately, it is difficult to draw the line
property damage assumed by the in- mobile liability will be covered by a sep- precisely between what is being
sured in the indemnity agreement arate business auto policy. Because of the worked on and what is already com-
must be a kind covered by the policy. overlap between automobile use, which pleted work.
■ The contractor and its indemnitees is excluded, and the use of certain mo-
are both named in the suit. bile machinery, which is included, it is THE “DAMAGE TO YOUR
■ There is no apparent conflict of in- recommended that contractors obtain WORK” EXCLUSION
terest between the contractor and its their CGL policy and business auto pol- This provision precludes coverage
indemnitee. icy from the same source. for damage to the contractor’s com-
■ The request for a defense is made by pleted work arising as a result of the
both the insured and the indemni- MOBILE EQUIPMENT contractor’s negligence or some defect
tee, and both parties consent to the TRANSPORTATION EXCLUSION in the contractor’s completed work. By
assignment of the same counsel to Bodily injury and property damage specific exception, this section does not
defend both parties. arising from the transportation of mo- apply to damage to the work of the in-
■ The indemnitee agrees to cooperate bile equipment by vehicle is not cov- sured’s subcontractors or damage aris-
with the insurer in defending the ered. There is an exception to the ing from the work of the insured’s
suit (just as the insured agrees to do subcontractors.

April 2003 • Modern Steel Construction

IMPAIRED PROPERTY cies are narrower in scope than all risk law in this area has advanced and fab-
EXCLUSION policies, and provide coverage only if a ricators now are in a better position to
This exclusion precludes coverage specified event results in property evaluate risks involved.
for damages arising in property not damage. All risk policies are more in- Most fabricators are faced with
physically injured (impaired property) clusive, but are usually limited by three types of contract clauses related
arising from a defect, deficiency, inade- named exclusions. Additionally, no to the process of selecting, detailing,
quacy or dangerous condition in the builders risk policy covers non-fortu- and fabricating connections:
contractor’s (or subcontractor’s) work, itous loss, which is generally defined as The “traditional” condition: the
or by a delay or failure of the contractor
to perform his contractual obligations.
an intended loss or a loss over which
the insured had control. Finally, a loss
1. project engineer of record either a)
fully designs the connections as part of
This is to preclude from coverage cer- must be physical damage to property preparation of the contract documents
tain business risks not resulting in in order to be covered. or b) specifies the types of connections
property damage or bodily injury but Included in most policies is cover- desired that the fabricator’s detailer
arising from the insured’s failure to age for loss or damage to the property will further develop through shop
perform contractual duties, including of others for which the contractor could drawing submittal. The project engi-
the duty to perform work in a work- be liable. This coverage is especially neer of record will review and approve,
manlike manner. important as most commercial general or take other appropriate action on,
This provision does not preclude liability (CGL) policies have a specific these submittals.
coverage for the loss of undamaged exclusion for care, custody and control Clauses where the project engi-
property arising from a sudden and ac-
cidental injury to the contractor’s com-
that could eliminate coverage under
the owner or contractor’s CGL policy.
2. neer of record specifies desired
connections and related performance
pleted work. It does preclude coverage Some builders risk policies provide criteria; and that the actual work of de-
for damage that can be repaired by re- coverage only while the covered prop- veloping the connections is to be per-
pair or replacement of the defective erty is within a certain distance of the formed by or under the supervision of
work. However, there is a gray area in construction site, usually 100’. How- a licensed professional engineer. Some-
the coverage concerning defective ever, other policies offer protection for times the word “design” appears in
work that cannot be replaced or re- property in transit and stored tem- this clause or a fabricator’s professional
paired. This exclusion does not apply porarily at off-site locations. Even poli- engineer is instructed to apply a pro-
to sudden and accidental loss of the cies that cover transit restrict transport fessional seal to the submittals. The
contractor’s work after it has been put over water from coverage. Most poli- project engineer of record will review
to its intended use. cies contain a specific list of property and approve, or take other appropriate
excluded from coverage, such as auto- action on, these submittals. The legal
BUILDERS RISK INSURANCE mobiles, aircraft, trailers and water- implication is essentially the same as
Builders risk policies protect the craft; contractor’s tools, equipment and the legal implication of the “tradi-
named insured (generally the contrac- machinery not destined to become part tional” approach.
tor/fabricator and owner) against the of the structure; trees, grass, shrubbery The fabricator is directed to pro-
eventuality that property, specifically
the building undergoing construction
and plants; and accounts, bills, cur-
rency, money, and securities. Insureds
3. vide a licensed engineer to assume
legal responsibility for connection de-
or renovation, is damaged by a named generally can negotiate necessary ex- sign, and/or indemnify the project en-
peril during the course of construction. ceptions to the exclusions. gineer of record from the legal
Under common law, the contractor was Most builders risk policies allow in- consequences of that design, and/or,
liable for any damages that occurred to sureds to waive, in writing, their right either expressly or by implication, be-
the property while construction was of recovery against other named in- come the “engineer of record for the
underway; specifically, the contractor sureds prior to the occurrence of any connections.”
was liable to produce the results for loss. Many standard construction con- An important insurance question is
which he had contracted, at the con- tracts include a mutual subrogation whether the above scenarios fall within
tracted price, irrespective of the value provision. If using a contract with a the insurance company’s notion of a
of lost work already provided. standard mutual subrogation clause, it normal contract risk in the fabricated
In general, construction contracts is imperative that the insureds ascertain structural steel industry. There is cur-
specify that the owner or the general that the builders risk policy allows such rently no industry-sponsored CGL pol-
contractor must purchase a builders subrogation. Otherwise, the insureds icy that provides a clear answer to this
risk policy that names the owner, the might be in violation of the policy, question.1 Because of this, fabricators
general contractor, and the subcontrac- which could bar recovery on a claim. should discuss their policies with their
tors as insureds. In some instances it is insurance carriers to assure, in writing,
appropriate for a fabricator to purchase DESIGN RESPONSIBILITY that coverage is in place for whichever
builders risk insurance if not covered In the two decades since the Kansas risks are assumed.
by other insurance applicable to the City Hyatt Regency Skywalk Collapse, The predominant view among most
project work. no topic has been as heatedly discussed fabricators appears to be that Situa-
Builders risk policies come in two as the assumption of responsibility for tion 1 would be covered by the fabrica-
general types: all risk policies and connection design by structural steel tor’s CGL policy and that Situation 3
named peril policies. Named peril poli- fabricators. As a result, the status of the probably would not.

April 2003 • Modern Steel Construction

 So if you plan to enter into contracts decision of the Supreme Court of New recognize standard of practice in the in-
characterized by the third example, then York in the matter of General Building dustry to include review and approval
you will probably need to purchase the Contractors of New York State v. New of shop drawing submittals by the proj-
type of errors and omissions insurance York State Education Department2. ect engineer of record. The standard
coverage normally provided to engi- The State of New York enacted a regu- practice is the same regardless of
neering firms. You probably should pur- lation defining the terms under which whether the submittals are prepared by
chase this insurance from the same delegation of limited design work can an unlicensed detailer or a licensed
company that provides your CGL cov- be delegated to an engineer retained by professional engineer.
erage, to prevent gaps in coverage. a construction contractor. However, the legal situation changes
If you can’t get this coverage, per- Both the New York regulation and when the fabricator moves into the role
haps you don’t need to sign these types the AIA General Conditions require the of “engineer of record for connections”
of contracts. You should express con- project engineer of record to specify or is required to indemnify the project
cern to the owner/general contrac- performance criteria to be followed in engineer of record from liability for
tor/construction manager: If this the delegated design, and require the connection design. This is a situation
coverage is not available to you, it project engineer of record to review that has not been addressed by any
might not be available to others in the and approve, or take other appropriate known court decision and it should be
industry. Design team members could action on, submittals involving the del- approached with extreme caution.★
lose their coverage if a fabricator that egated design.
has not checked its coverage carefully The rationale provided by the Gen-
is contracted and there is a connection eral Building Contractor’s case in New NOTES
failure. York supports fabricators and their at- 1AISC is in the process of investigat-

In the second example, the issue is torneys in both initial coverage negoti- ing formation of a captive insurance
whether your insurance carrier, or a ations and after-the-fact litigations company that would provide clarity to
court interpreting your CGL insurance with insurance carriers. The AISC 2000 this question.
contract, will agree that this example is Code of Standard Practice does not pro- 2For future reference by your

one of the industry’s “insured con- vide standard practice for utilization of lawyer, this case is recorded at 175
tract” risks. a licensed professional engineer to pre- MISC. 2d 922; 670 N.Y.2d 697; 1997 N.Y.
One case that supports the argu- pare shop drawings. Provisions of the Misc., LEXUS 683 (1997).
ment that your CGL policy should pro- 2000 Code that address the issue of con-
vide coverage for Example 2 is the nection design and submittal review

April 2003 • Modern Steel Construction