Prudent Owner/Developers should continually review their approach to risk management. In particular, changes to the always-evolving construction insurance coverage forms require Owner/Developers to rely more than ever on their insurance brokers to obtain the broadest form of coverage available in the marketplace. One construction insurance coverage issue that often falls through the cracks is commonly referred to as "horizontal exhaustion." Horizontal exhaustion, which has been endorsed by New York courts, requires that in the event of a claim, primary liability coverage available to each impacted trade contractor(s), construction manager, and perhaps, the Owner's primary layer of general liability coverage, be exhausted before any excess or umbrella liability policy held by the impacted trade contractor(s) be subject to exposure.
Owners of construction projects are typically under pressure to meet stringent deadlines for project completion, whether motivated by a construction loan's looming deadlines, strict terms of a regulatory agreement, demanding lease and/or sales goals or a combination of the above. Accordingly, when an Owner negotiates its contract with the project's General Contractor ("GC"), establishing, maintaining and incentivizing the GC to abide by a strict construction schedule often tops the list of Owner's priorities.
Ever-increasing insurance costs have led to many contractors to adjust coverage in order to reduce their premium. In many instances, contractors do not even know or understand all of the exclusions in their policy. It is critical that contractors, and more importantly general contractors (GC), construction managers (CM) and owners know what the contractors' policies contain and do not contain.
More often than not, owners request that a design professional carry a certain amount of professional liability coverage in connection with its services to the project. The amount owners request typically is tied to the scope of the design professional's services and the fee being paid. This is right approach but, unfortunately, most owners stop here when they see proof of the coverage. Owners need to take the inquiry one step farther and ask: (i) whether the policy has a deductible or self-insured retention; (ii) the amount of that deductible or self-insured retention; and (iii) how it is paid.
As discussed more fully here, the Rules of the City of New York have been amended to require certain new liability insurance conditions be met before contractors can procure permits. RCNY Section 101-08 now requires, inter alia, that contractors' insurance policies contain an endorsement requiring 30-days written notice be sent to the Commissioner of the Department of Buildings when a policy is cancelled, terminated, or modified. This provision, along with several additional policy obligations, may prove extremely difficult for contractors to obtain from their insurers. Going forward, it is imperative that parties work with counsel and their insurance brokers when procuring insurance policies.
The need for appropriate levels and types of insurance coverage is critical for any party involved in a construction project. Despite the importance of procuring construction insurance, all too often parties do not pay enough attention when securing coverage on a given project.
Owner-Developers who have a tower crane on their project site will have the obligation of procuring Eighty Million ($80M) Dollars in project specific general liability (GL) insurance, regardless of the project's scope of work. The regulation is silent on whether such GL insurance must be obtained wholly by the crane contractor, construction manager or owner or can be achieved by combining or aggregating these entities coverages. Until the DOB offers further guidance, we are advising Owners that they ultimately are responsible for showing the DOB that the project is in compliance with the new GL insurance obligations, and that it may be met by aggregating project specific coverages.
The Department of Buildings (DOB) has instituted new general liability insurance requirements for foundation, demolition and/or new building or major alteration permits. These new requirements are determined based on the height of the tallest adjacent building and the proposed height of the new construction project. The new rules go into effect on June 13, 2011, and proof of compliance will be required when pulling a permit at that time. Please click here for the official announcement from the DOB.