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ACREL SPRING MEETING
MARCH 17-19, 2005
LOEWS VENTANA CANYON
TUCSON, ARIZONA
THE INSURANCE PROVISIONS OF
AIA FORM CONTRACTS
A-201 (GENERAL CONDITIONS OF THE
CONTRACT FOR CONSTRUCTION)
B-141 (STANDARD FORM OF AGREEMENT
BETWEEN OWNER AND ARCHITECT)
Arthur E. Pape, Esquire
The Pape Law Firm
Building A-3, Suite 102
100 West Roosevelt Road
Wheaton, IL 60187
Phone: (630) 933-9300
Fax: (630) 933-9301
Email: apape@papelaw.com
Website: papelaw.com
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THE INSURANCE PROVISIONS
OF AIA DOCUMENTS A-201 AND B-141
From an owner‟s perspective, the most recent (1997) editions of AIA Document A-201
(General Conditions of the Contract for Construction) and the AIA Document B-141 (Standard
Form of Agreement Between Owner and Architect) have severe substantive deficiencies. The
provisions of these contracts which govern insurance are no exception. An analysis of the
insurance provisions demonstrates the existence of a bias against owners and a lack of effort by
the AIA to make these contract forms even-handed. In this article, the General Conditions are
called “A201” and the Standard Form of Agreement Between Owner and Architect Contract is
called “B141”. Note that this article reflects the owner‟s perspective. Were I to represent an
architect or a contractor, I would accept these documents virtually as written. References to a
Commercial General Liability Policy (“CGL Policy”) are to CG 00 01 10 01, which is the ISO
form of Commercial General Liability Policy most often used. References to a Builder‟s Risk
Policy are to CP 00 20 10 00 published by ISO.
LIABILITY INSURANCE
Requirements:
Article 11 of A201 governs the owner‟s and the contractor‟s obligations to obtain and
maintain insurance. The contractor is obligated to maintain insurance against various risks
including (i) claims for damages because of bodily injury, sickness or disease, or death of any
person who is either a contractor‟s employee or is other than a contractor‟s employee, (ii) claims
for damages other than to the work itself because of injury to or destruction of tangible property,
including loss of use and (iii) claims or bodily injury for property damage arising out of
completed operations. These are risks covered under CG 00 01 10 01. A201 imposes no
requirement that the owner maintain any particular coverage except that ¶11.2.1 provides that the
owner is responsible to purchase and maintain the owner‟s usual liability insurance.
A201 ¶11.1.2 permits the contractor‟s liability insurance to be triggered on an
“occurrence” basis (i.e., the insurer pays claims whenever made, resulting from an occurrence
which happened during the policy period) or a “claims-made” basis (i.e., the insurer pays only
those claims made during the policy period which result from occurrences which happened
during the policy period). Given the potential delay between an occurrence and any claim
resulting from it, it should be clear that to an owner, and for that matter to a contractor, a claims-
made policy has severely limited utility. The thinking owner should require that the contractor‟s
liability policy have an occurrence-based trigger.
Additional Insured:
Normally, the owner requires that it be named an additional insured under the
contractor‟s CGL Policy. Thus, the owner, as an insured, is provided defense and indemnity
against liability arising out of the contractor‟s negligence in connection with the job and, often,
out of the owner‟s negligence as well. However, A201 ¶11.3.3 prohibits the owner from
requiring the contractor to include the owner or others as additional insureds under the
contractor‟s liability coverage. Instead, A201 ¶11.3.1 provides that the owner may require the
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contractor to purchase and maintain something called “Project Management Protective Liability
Insurance” (the “PMPL Policy”). This is coverage which was devised to protect the owner, the
contractor and the architect from “vicarious” liability for construction operations. Most
insurance agents with whom I have spoken do not know what the PMPL Policy is, and the reason
for that is that at the time 1997 revisions to the AIA construction documents were prepared, only
one company in the United States (CNA Commercial Insurance) carried this product, and since
then, this policy has not jumped off agents‟ shelves. The contract sum is to be increased by the
cost of this mysterious coverage.
In a press release captioned “C-Risk in the News” dated September 22, 1999, David L.
Grenier credited himself with introducing the PMPL Policy into the construction insurance
marketplace. It was described as a “project specific” policy to protect all parties (owner,
architect, and contractor) against third party claims arising out of “the „general supervision‟ of
the construction process”. See C-Risk, Inc.‟s Press Release dated 9/22/99 “C-Risk in the News”
http://www.c-risk.com/C-Risk_PR_092299.htm, 12/27/04. In an effort to determine the scope of
the coverage provided by the PMPL Policy, I called CNA in Chicago. A nice lady there, who
had never heard of the policy, transferred me to another nice lady in Dallas, who had also never
heard of the policy. The Dallas lady transferred me to a third nice lady in Chevy Chase,
Maryland with the firm of Victor O. Schinnerer, who, it turns out, is the Managing General
Underwriter of CNA‟s construction and construction-related products. Unfortunately, the
Schinnerer lady had also never heard of the policy, although she promised to see what she could
find out. Ultimately, I spoke with Tom Porterfield of the Schinnerer company, who advised me
that CNA initially worked with the AIA to develop the coverage format for the PMPL Policy.
However, CNA no longer offers this policy as part of is array of construction-related policies due
to lack of demand. Thus, the AIA has spawned an absurd situation by specifying a type of policy
which, at the time specified, was issued by only one insurer which today no longer writes the
policy.
The upshot is that by following A201, the owner and its liability insurer remain exposed
to the special risks inherent in construction projects. Every owner should require the deletion of
A201 ¶11.2.1 and ¶11.3.3 and substitute a provision which requires the contractor to name the
owner as an additional insured under the pre-2004 form of ISO CG 20 10 additional insured
endorsement. That way the owner will have its liability insurance risks covered by a contractor‟s
insurer which is experienced in and focuses on underwriting construction risks, and the owner is
covered for the acts and omissions of the contractor as well as in many instances its own
negligence in connection with the construction project.
However, the owner must exercise care in using ISO CG 20 10 to make the owner an
additional insured under the contractor‟s CGL Policy. Before 2004, the endorsement insured an
additional insured “with respect to liability arising out of [the contractor„s] ongoing operations
performed for that insured.” Courts commonly interpreted the language “arising out of” to
provide coverage to the additional insured, i.e., the owner for its sole negligence. (See
International Risk Management, Inc. Commercial Liability Insurance Volume II, Section VI,
H, 11.) In 2004, the ISO decreed that the additional insured‟s sole negligence was never
intended to be a covered loss exposure under standard additional insured endorsements. (Id.
VI.H.11). It introduced a revised version of ISO CG 20 10 which eliminates the “arising out of”
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language and substitutes language providing that additional insured coverage exists only “. . .
with respect to liability caused in whole or in part by: (1) [the named insured contractor‟s] acts
and omissions or (2) the acts or omissions of those acting on [the named insured contractor‟s]
behalf.” The extent to which this endorsement has invaded the marketplace and has been
accepted by owners is not clear. However, whether or not the owner‟s sole negligence was
intended to be covered by the previous endorsement, the existence of that coverage has not
stopped the insurance companies from making money. Owners should seek to obtain the
pre-2004 form of ISO CG 20 10.
In addition to insuring the risks which are covered by a typical CGL Policy, ¶11.1
requires the contractor to provide workers‟ compensation insurance and employer‟s liability
insurance. Also, the contractor is required to insure against personal injury (libel, slander, false
imprisonment and other things which are not bodily injury) which is typically covered by a CGL
Policy, Coverage B.
Defense Costs:
Besides providing indemnity, the CGL Policy provides that the insurer is required to
defend the insured against any claims which allege facts which could be covered by the
CGL Policy even if it is ultimately determined that some or all of the claims are not covered by
the policy. The insurer is required to defend at its expense any “Suit”. The CGL Policy defines
a “Suit” as “a civil proceeding in which damages. . . to which this insurance applies are alleged.
Suit includes an arbitration proceeding . . . to which the insured must submit or does submit with
[the insurer‟s] consent or . . . any other alternative dispute resolution proceeding . . . to which the
insured submits with [the insurer‟s] consent.” All disputes arising under A201 must be decided
by arbitration under A201 ¶4.6. Notwithstanding individual attitudes about arbitration, it is clear
that a CGL insurer is obligated to provide defense in arbitration proceedings.
The creators of the 1997 version of A201 added a requirement that arbitration be
preceded by non-binding mediation. The CGL insurer is not obligated to defend anything other
than a Suit or an obligatory arbitration unless it consents to so defend. It stands to reason that
notwithstanding that mediation is non-binding, being a required prior step in the dispute
resolution process, mediation will consume considerable energy and expense in developing the
facts to present to the mediator, which expense shall be paid by the insurer only if it consents to
pay this expense. This is one time that the contractors may have outsmarted themselves. Were
I representing a contractor, I would consider either eliminating the mediation requirement or
obtaining, before executing the contract, the CGL insurer‟s agreement to cover mediation costs.
PROPERTY INSURANCE
Requirements:
Although you will occasionally encounter a contractor who prefers to obtain the property
insurance for a project (it can be a profit center for the contractor), A201 places the requirement
to obtain property insurance squarely on the shoulders of the owner. The property insurance is to
be written on a builder‟s risk, “all risk” or equivalent policy form. A couple of comments:
ISO Policy No. CP 00 20 10 00 is the builder‟s risk coverage form most often used.
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“All risk” is a term no longer used. Builder‟s risk, just like the completed property form,
comes in three flavors: basic (CP 10 10 10 00), broad (CP 10 20 10 00), and special form
(CP 10 30 10 00). The first two are “named perils forms”, i.e., they cover named causes
of loss. The special form covers all perils which are not specifically excluded. In that
sense, it is a descendant of the all risk form.
The insurance is to be in an amount equal to the “initial contract sum plus value of
subsequent contract modifications and cost of materials supplied or installed by others
comprising total value (A201 ¶11.4.1) on a replacement basis without optional deductibles.” A
couple of comments:
The initial construction sum often exceeds the appropriate amount of builder‟s risk
coverage because the contract sum nearly always includes “general conditions” items
which are necessary to the project, but often are not property.
Construing the requirements strictly means that each time the owner approves a change
order which adds to the cost, the amount of insurance should be likewise increased. The
cost of administering this is an unnecessary burden on the owner.
No deductibles are permitted except those required by the policy (A201 ¶11.4.1).
Deductibles are tools to lower premiums, and the owner (possibly with direction from its
lender) should be able to establish deductibles reflecting its financial capability.
Incidentally, A201 ¶11.4.1.3 obligates the owner to pay costs not covered due to required
deductibles.
A201 ¶11.4.1.1 reiterates that the property covered must be in “all risk” form and lists a
series of required coverages, some of which deserve mention as they go beyond the coverages
provided under the builder‟s risk policy with special causes of loss:
Theft -- certain types are not covered.
Earthquake damage is excluded from coverage.
Flood damage (and much other water damage) is excluded from coverage.
Testing and start-up?
Debris removal including demolition occasioned by enforcement of . . . legal
requirements is excluded from coverage.
See Builder‟s Risk – Causes of Loss – Special Form CP 10 30 10 00.
Further, if the owner does not intend to purchase all of the insurance required by A201, it
must so inform the contractor, which may obtain the missing insurance at the owner‟s expense
(A201 ¶11.4.1.1). This provision should be stricken.
The Boiler and Machinery Insurance required under A201 ¶11.4.2 is increasingly being
called Equipment Breakdown Insurance. The latter is a name essentially descriptive of the
coverage provided by this insurance. This coverage is the responsibility of the owner only if it is
required elsewhere by the contract documents. One might reasonably ask: If this covers
equipment breakdowns, how does it apply to new construction? Often a contractor may use
building systems, particularly HVAC, prior to achieving substantial completion. In these
situations, equipment breakdown coverage may be useful, but arguably at the contractor‟s
expense. A preferred solution to this risk is to require that the warranty on the system in
question begin at substantial completion, notwithstanding the contractor‟s prior use, and to
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require that the contractor put the equipment in a condition that the equipment supplier will
permit this to happen.
A201 ¶11.4.1.4 provides that the owner‟s property insurance shall cover portions of the
work stored off the site and also portions of the work in transit. As to materials stored offsite,
the ISO Builders Risk Form provides that its coverage may be extended to building materials and
supplies that are owned by others (but in the insured‟s care, custody or control) located within
100 feet of the building premises and intended to become a permanent part of the building
(Builder‟s Risk Form - ¶A5(a)). The most the insurer will pay for this coverage extension is
$5,000 unless additional coverage is purchased. Materials in transit are typically covered under a
separate Inland Marine Policy which, notwithstanding its watery name, is specifically designed
to cover this risk. The upshot is that although A201 begins by specifying a Builder‟s Risk
Policy, the contract itself, via the back door, requires considerably more. This is another
instance where the requirements of the policy should be thoroughly analyzed by the owner‟s
insurance counselor and the appropriate coverages added or tailored to suit the needs of the
owner and appropriate revisions should be made to A201.
Evidence of Insurance:
A201 ¶11.4.6 provides that the owner, “before an exposure to loss may [sic] occur shall
file with the contractor a copy of each policy that includes insurance coverage as required by
¶11.4.” Each policy must provide that it shall not be cancelled, allowed to expire or its limits be
reduced until at least 30 days prior written notice has been given to the contractor. Receiving
and having its insurance counselor review the owner‟s policies is the best way to fully
understand the nature and scope of the owner‟s coverages. Contrast this provision with ¶11.1.3,
which provides that the owner is entitled to only certificates of insurance acceptable to the owner
prior to the commencement of the work. The certificates and the insurance that the contractor
must provide shall contain a provision that coverages will not be cancelled or allowed to expire
except upon 30 days written notice to the owner. There is no requirement regarding reduction of
limits. The contractor is only obligated to furnish to the owner “information concerning
reduction of coverage on account of revised limits or claims paid under the general aggregate or
both . . . with reasonable promptness in accordance with the contractor‟s information and belief.”
For discussion of the potential shortcomings of certificates of insurance see “Certificates of
Insurance: The Illusion of Protection”, Probate & Property, January/February 1995, Vol. 9,
No. 1, pp. 54, and “Certificates of Insurance”, an article for the September 1995 Meeting of the
American College of Real Estate Lawyers by Arthur E. Pape and Alfred S. Joseph, III.
Waiver of Subrogation:
Waivers of Subrogation under the property insurance are covered by A201 ¶11.4.7. The
owner and contractor waive all rights against each other and their subcontractors at all levels,
agents, and employees and to the architect, any separate contractors (described in Article 6) and
their subcontractors at all levels, agents and employees for damages covered by property
insurance obtained pursuant to ¶11.4 or other property insurance applicable to the work. Each of
the owner and the contractor (as appropriate) is to require of the architect, its consultants and any
separate contractors and the subcontractors on any level, by appropriate agreement, similar
waivers in favor of the other enumerated parties. The waivers of subrogation shall be effective
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as to a person, even though that person or entity would otherwise be obligated to indemnify and
did not pay the insurance premium and has no insurable interest in the property.
A201 ¶11.1 and ¶11.2, which cover liability insurance, contain no provision for waivers
of subrogation, notwithstanding that waivers of subrogation before loss would be permitted
under both the owner‟s and the contractor‟s commercial general liability policies. These waivers
should be provided for.
Loss of Use:
A201 ¶11.4.3 provides that the owner has the option to purchase insurance covering the
loss of use of the owner‟s property due to fire or other hazards, however caused. The Paragraph
goes on to say that the owner waives all rights of action against the contractor for loss of use for
the owner‟s property including consequential loses due to fire or other hazards, however caused.
NOTE: This waiver is complete and is not limited to the insurance recovery.
Settling the Claim:
A201 ¶11.4.8 provides that “a loss insured under the owner‟s property insurance shall be
adjusted by the owner as fiduciary and made payable to the owner as fiduciary for the insureds.”
The insureds are “the owner, the contractor, subcontractors and sub-subcontractors in the project
(¶11.4.1). What does it mean to say that the owner is a “fiduciary” for the insureds? As a
practical matter it means that: (i) a “party in interest” may require the owner to post bond for
proper performance of owner‟s duties (A201 ¶11.4.9); (ii) proceeds must be deposited in a
separate account (A201 ¶11.4.9); and (iii) a “party in interest” may object within five days after a
loss to the owner‟s settling and adjusting the loss with the insurers, in which event arbitrators are
chosen (with or without mediation) who are empowered to direct the owner as to how to settle
(A201 ¶11.4.10).
A201 ¶11.4.8 says that the interests of the insureds are subject to the requirements of any
applicable mortgagee clause. This passage must be revised to read “subject to the rights of the
mortgagee contained in its mortgage” so that it does not refer to the mortgagee clause in its
technical sense. Otherwise, the mortgagee should not permit the owner to settle any claim nor
should the mortgagee approve in advance the ability of the owner to use the insurance proceeds
to repair.
Accepting the AIA approach is detrimental to the owner for these reasons:
1. The owner becomes a “fiduciary” for the contractor and its subcontractors. Even if it
were not a fiduciary, the owner should acknowledge the obligation to pay those who have
worked on the project. If it does not, they can sue and, in some cases, enforce mechanics
lien rights. There appears to be no substantive reason for the owner to become a
fiduciary.
2. The owner has directly involved the contractor, subcontractors and possibly an arbitrator
in its settlement discussions. It is not clear whether arbitration is to be preceded by
mediation? In any event, the owner has considerably complicated and added
unnecessarily to its relationship with its primary player, the insurer.
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3. The owner has also complicated its relationship with the other primary player, its lender.
The lender is nearly forced, if it understands the implications of A201, to deprive the
owner of flexibility in the reconstruction process at a time when flexibility is necessary to
give the owner the maximum insurance recovery and the smoothest, least expensive
repair and restoration.
AIA DOCUMENT B-141
Evaluating the insurance provisions of AIA Document B-141 Standard Form of
Agreement between Owner and Architect with Standard Form of Architect‟s Services is much
easier than evaluating A201. The reason is that there is virtually no mention of insurance in
B141, and there is no requirement that the architect carry any insurance. The architect should be
required to provide the following coverages in appropriate amounts (my experience is that a
significant percentage goes bare):
(a) professional liability insurance
(b) commercial general liability insurance
(c) workers‟ compensation insurance
(d) employer liability insurance
(e) automobile liability insurance
B141 ¶1.3.4.1 requires mediation as a condition precedent to arbitration, which is the
required method of dispute resolution (B141 ¶1.3.5).
B141 ¶1.3.7.4 provides for a mutual waiver of subrogation by owner and architect (and
by their respective contractors, consultants, agents and employees) to the extent damages are
covered by property insurance. NOTE: Contractors are often reluctant to waive subrogation for
the benefit of architects.
B141 ¶1.3.9.2.6 requires that the architect be reimbursed for the cost of professional
liability insurance dedicated exclusively to the project in question or the expense of any
increased or other coverage requested by the owner which exceeds that normally carried by the
architect and its consultants. NOTE: B141 ¶1.5.3 permits the architect to charge a multiple of
its actual cost.
INSURANCE SPECIFICATION
Attached is a Schedule of Insurance taken from a design/build construction contract in
which the contractor subcontracted the architectural services to a licensed architect. The project
consisted of three one-story medical office buildings. Had high-rise construction been involved,
the limits would have been increased substantially. The owner maintained the builder‟s risk
insurance and upon completion, the permanent property insurance. I would appreciate any
criticisms, comments and suggestions.
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Schedule of Insurance
of Design/Build Construction Contract
The Contractor shall maintain the following insurance as specified.
1. Workers‟ Compensation Statutory Coverage in accordance with the laws of the state
with jurisdiction, including Voluntary Compensation and
Other States‟ Coverages.
2. Employer‟s Liability Limits of not less than $1,000,000 each accident/injury,
$1,000,000 each employee/disease, $1,000,000 disease/policy
limit.
3. Commercial General Liability Bodily Injury Liability and Property Damage Liability on an
occurrence basis in an amount not less than $1,000,000 each
occurrence.
Use ISO CG 00 01 10 01 or equivalent. Include Blanket Contractual Liability,
Products/Completed Operations (with $1,000,000 limit), Independent Contractors, Personal
Injury (Employee Exclusion Deleted), “X”, “C”, and “U” Exclusions deleted, Incidental
Medical Malpractice, and Host Liquor.
If the Policy is written on a general aggregate form, the general aggregate limit shall apply
separately to this project and be in an amount not less than $2,000,000.
It is agreed that the following entities will be covered as additional insureds under ISO
CG 20 10 (pre-2004 form):
(owner) ;
(sponsor) ; and
(lender)
plus any others as required, with an insurable interest but only with respect to liability arising
out of the operations performed for such Insured by or on behalf of the Contractor or any
Subcontractor.
4. Automobile Liability Bodily Injury Liability and Property Damage Liability in an
amount not less than $1,000,000 Combined Single Limit.
Above to include Employer‟s Non-Owned and Hired Car Coverage.
5. Umbrella Liability $4,000,000 each occurrence and in the aggregate excess of
Items 2, 3 and 4 above on no less than a following form
basis.
6. Professional Liability All design professionals providing services with respect to
the project, shall provide satisfactory evidence of
professional errors and omissions coverage equal to as least
$1,000,000, such coverage to be provided for at least 7 years
following final completion of the work through renewal of
such policies or through “tail coverage”.
With respect to the policies described in paragraphs 3, 4 and 5 above, the “other insurance” clause
shall be endorsed to specifically state that the insurance is primary for Owner and all other insureds
covered by the Contract or policy.
The Contractor, before commencing work, will supply Owner with evidence of insurance, showing
compliance with the minimum requirements listed above. Each Policy shall state that the insurance
evidenced by such evidence will not be canceled or reduced without thirty (30) days‟ prior written
notice to the Owner.
The Contractor shall require Subcontractor to maintain similar insurance coverage as required of the
Contractor, with limits of liability subject to Contractor‟s judgment.
The Contractor shall maintain a file of Certificates of Insurance received from each Subcontractor.
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