Providing Contract-Required Insurance Coverage

Parties using American Institute of Architects (AIA) contract document forms should carefully study the provisions relating to insurance cover age. AIA forms require owners to provide specified insurance coverages. They also require that the other party to the contract (contractor or architect) be named as an additional insured on the policies, i.e. they are likewise afforded insurance protection.

The penalty for the owner's failure to obtain the insurance coverage is that the owner assumes the risks which would otherwise have been covered by insurance.

An example of the owner' s penalty for failure to obtain required insurance appears in the recent Colorado Court of Appeals decision in Steamboat Development Corp. v. Bajac Industries, Inc., 701 P.2d 127 (Colo. App. 1985). In that case, the owner sued the general contractor to recover damages for a fire loss at the project under construction. The general contractor had the case dismissed by proving that the owner had failed to obtain the insurance required by their contract that would have covered the loss.

AIA contract documents also provide that the parties waive all rights to make claims against each other for losses which would be covered by required insurance. That provision may be tricky. Like the other insurance requirements, it should be reviewed with an insurance professional familiar with construction-related insurance.

By not having complied with the insurance provisions of its contract, the owner involved in the above-mentioned case suffered the entire loss when a substantial portion of his project was destroyed by fire. Even though the contractor's negligence may have caused the fire, the insurance requirements of their contract shifted the risk of loss to the owner-which he could have satisfied by obtaining insurance as agreed. By standing on the terms of the contract, the contractor completely avoided responsibility for the fire loss.

Lesson: Know your contract and insurance requirements-and comply!


Update Note: In Hartford Insurance Company v. CMC Builders, Inc., 752 P.2d 590 (Colo. App. 1988) the court ruled that a contractor was not obligated to indemnify the owner's insurance carrier which paid a loss because of the contract requirement that the owner carry insurance.