By Bri Souder, Marsh McLennan Agency
It’s finally arrived. The final day of your project is here, and now you can celebrate and look forward to other projects on your list. Of course, the construction industry is not always that simple. While you and your team have completed the project, that doesn’t mean the risk associated with your work is gone. Sometimes, losses happen after a project finishes. If these incidents relate to your work, your business could face astronomical claims costs.
As the new year approaches, your business should understand two project contract items that can mean the difference between being protected after a project is done or risking financial and reputational damage for future losses. Completed operations and contractual privity are not new terms in the industry. However, many incidents and court cases show construction businesses have room to learn more about these concepts and how they can impact their bottom line.
Completed operations
Completed operations is a broad insurance policy term that relates to the tasks performed by the policyholder or on the policyholder’s behalf. Regarding construction work, this term includes bodily injury or property damage that occurs after a project is finished. This contract term aims to place proper responsibility on the groups that work on a construction project, whether it’s the project owner, the general contractor, or the subcontractor.
Subcontractors need to think beyond the coverage they carry during the project. There’s always a chance that the work done during a project can lead to a loss even after the project finishes. Imagine that the owners of a commercial building are installing a new roof. The owners hire a general contractor who then hires a subcontractor to help with the installation. The SC focuses on installing the roof tiles. Sometime after the completion of the project, the roof began to leak, causing damage to the property’s interior. A later investigation found that the main culprit of the leak was faulty roof tiling installation.
If the subcontractor had a general liability policy, they typically would also have ongoing and completed operations coverage and be covered against litigation. However, the policy coverages that respond to injuries or damages after a project is complete differ from the policy terms that respond to losses in the middle of the project. To avoid paying out of pocket for claims or litigation, subcontractors must understand which policy or coverage under a policy—ongoing or completed operations—applies when a loss occurs. The roofing subcontractor must notify their agent and carrier and review the policy in place when the injury or damage happens. That will be the completed operations coverage that will most likely apply.
Contractual Privity
The name of the game in construction coverages is to make sure that the general contractor is insured for their portion of the project or for whatever else they agreed to in their contract. Project owners and general contractors can transfer their exposures on the project downstream to subcontractors through contractual risk transfer. Contractual privity is one risk transfer mechanism that aims to establish who is a part of a construction contract.
Subcontractors should be fully aware of their responsibilities in a project contract. They should also understand who is included on their blanket additional insured endorsements. One trend to note is that “blanket” coverages are not as expansive as they used to be. Some blanket coverages still cover a broad space of parties, but others can be narrower. The key is to bring in a construction contract professional to help tell the difference between a broad blanket and a smaller one. As a subcontractor, adding the project owner to the policy is essential. Blanket coverages can include everyone you have a direct contract with or only the entity that the contract is directly with, depending on the policyholder’s needs.
For example, while the project owner has a direct contract with the general contractor they brought on, that doesn’t mean the project owner is directly in a contract with the subcontractors that the general contractor hired. As a result, there is no contractual privity between the owner and the subcontractors. Many blanket additional insured endorsements are only triggered if there is contractual privity. If your policy lacks this risk transfer tool, there is a chance that there is no coverage for all the parties that must be additionally insured, as your contract requires. You can also face the risks of a breach of contract or indemnity payments that will need to come out of your pocket.
The leaky roof scenario is an example of contractual privity. The general contractor lists the owner and the subcontractor as additional insureds on their blanket endorsement. However, the subcontractor only adds the general contractor as an additional insured on their policy.
Remember, blanket additional insured coverages don’t cover every upstream party in a contract. If required under the general contractor agreement, the subcontractor needs to also add the owner to their additional insured endorsement. Since the subcontractor for the roof failed to add the owner to their policy as an additional insured, they may have to pay the loss from their balance sheet.
How can you plan ahead for these challenges in 2024?
At this point in the year, your business has completed many projects. However, you should keep tabs on them as you enter the new year because most contracts place requirements on your work for many years after the project is complete.
Becoming aware of various states’ statutes of repose is one vital step. Statutes of repose refer to the qualifying period for filing a claim for construction defects. Every state has its own time frame, so learning about those relevant to your business is essential. Having a construction-focused partner to help understand these statutes goes a long way in protecting your business. They will ensure you ask insurance carriers the right questions about completed operations and contractual privity.
Another important consideration is ensuring that you have the proper construction insurance policies. Work with a construction-savvy partner to help you navigate the ins and outs of contractual terms like completed operations and contractual privity. A partner specializing in construction helps save you and your business from financial and reputational damage. As you plan for next year and beyond, it’s important to be proactive. With insurance coverage, it’s critical that you protect yourself, your team and your business from risks, regardless of when they happen.
About the Author
Bri Souder CRIS CLCS is a Certificate Compliance Client Manager at Marsh McLennan Agency. Bri is a member of the Construction Specialty Practice, responsible for reviewing owner contracts and subcontracts for insurance requirements and matching those requirements to the certificates and
endorsements provided by subcontractors. Bri works with general contractors, subcontractors and insurance companies across the country to educate and assist with proper risk transfer. For more information, contact the author at bri.souder@marshmma.com or visit Marsh McLennan Agency’s website here.
