Virtually every construction contract requires a subcontractor to indemnify the general contractor and add the GC (and sometimes other parties) as an additional insured on the sub’s liability insurance policies. This common practice creates hidden coverage gaps for both the GC and the sub. These gaps defeat the purpose of indemnity provisions and AI requirements, which is to shift the risk of certain liabilities from the GC (or other upstream parties, like the owner) to the sub. While a comprehensive review of these issues involved is beyond the scope of this article, so instead we provide a summary of often overlooked issues.
First, recent versions of the various AI endorsements drafted by the Insurance Services Office – an organization that drafts “standard” policies widely adopted by insurance companies – limit the scope of the AI coverage to that of the construction contract’s indemnity provisions. Prior versions of the ISO endorsement did not contain this limitation, meaning the AI coverage likely was broader than the sub’s indemnity obligation. Thus, you should carefully coordinate the indemnity provisions and the AI requirements.
Second, recent versions of the ISO AI endorsements attempt to limit the coverage to the named insured sub’s “ongoing operations.” Obviously, many construction-related claims – especially construction defect claims – occur after the project is complete. While the term “ongoing operations” is undefined, the obvious intent of this language is to preclude coverage for claims arising from completed operations. This limitation conflicts with most contractual indemnification provisions, which do not limit the indemnitor’s obligations to ongoing operations.