Insurance Concerns Under Precon Agreements

Posted by: Evan Wagowski

During the preconstruction phase of larger construction projects, a construction manager (CM) almost always is retained by an Owner to act “as agent” under a Preconstruction Services Agreement (Precon). In addition to off-site preconstruction phase services, the GTH Precon also contemplates the possibility of the CM’s oversight of certain early phase construction trade work, such as demolition, excavation, and foundation work. This Precon form enables the Project to commence while a formal CM Agreement (with full fee, general conditions, insurance and bonding details) is negotiated and executed.

The question of liability becomes relevant in the event of an exposure caused by an early phase trade. While an Owner will have the right to look for coverage to the trade’s insurance based on its status as an additional insured under the trade’s general (and excess) liability policies, those policies tend to provide less coverage and lower limits than would the CM’s policies. An Owner also runs the risk of the trade causing the exposure carrying coverage which may be depleted or even completely exhausted by other claims. Because a CM acting “as agent” is not liable for the acts of the trades under a Precon, the CM’s insurers most likely will not defend and indemnify the Owner from exposures arising from the work of a trade.

As a practical matter, the Precon “as agent” Owner/CM relationship necessarily results in the Owner having to adequately insure itself. For major projects, an Owner may elect to implement an owner controlled insurance program (OCIP), which will provide high limits of coverage for Owner, the CM, and all on-site trades performing work at the designated project. In the alternative, an Owner may elect to purchase commercial general liability (CGL) and an excess or umbrella liability policy. These coverage scenarios both will provide protection to an Owner if, in the event of an exposure caused by a trade, the exposure exceeds the trade’s available coverage (and assuming the CM’s insurer disclaims coverage, as discussed above). In either circumstance, the proposed policy terms must be carefully reviewed and approved prior to binding of coverage, as often times there exist exclusions and/or limitations in insurer-proposed policy forms that may not be acceptable to Owner, and must be negotiated. GTH has extensive experience in assisting project owners and contractors in putting together a cost effective insurance program, including setting appropriate coverage while the CM remains in an “as agent” capacity under a Precon. For further information and/or assistance, please contact us at Greenberg, Trager & Herbst, LLP.