(November 2019
Underwriting always begins by identifying exposures. The challenge in underwriting the Insurance Services Office (ISO) CG 00 09–Owners and Contractors Protective Liability Coverage Form–Coverage for Operations of Designated Contractor is to take the time to underwrite both the named insured and the contractor. However, the overall scope of underwriting is relatively limited because CG 00 09 covers only bodily injury and property damage liability for the operations that the designated contractor performs at the designated location. In addition, there are no products or completed operations exposures to underwrite because coverage ends as soon as the construction or work is put to its intended use.
Many insurance companies make the underwriting process and related decisions much easier on themselves by only writing CG 00 09 for existing commercial general liability accounts. The existing account may be the contractor, general contractor or owner of the project to which the requested CG 00 09 is to apply. The reasoning is that the company has already thoroughly underwritten one of the parties, and all it has to do is underwrite the other party.
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Example: Pablo is a very successful property owner and owns 14 different industrial complexes in the region. Friendly Insurance Company has insured Pablo continuously since he purchased his first building many years ago. Pablo hires Creative Contractors to construct his 15th property and requires that Creative purchases a CG 00 09 with Pablo as the named insured. Friendly's underwriting job is fairly simple when Creative's insurance agent submits the application for this project because it only has to ask questions about Creative. Good Buys Insurance Company writes all of Creative Contractors' insurance coverage. When Creative's agent approaches Good Buys with the application for this construction project, Good Buys asks for only the details of the contractual arrangement between the parties and the extent of supervision Pablo exercises over the project before it makes its underwriting decision. |
The important thing to remember is that both insurance companies already cover the construction project exposure because each writes Commercial General Liability coverage for their respective customers. In the example above, the only difference is that each agrees to be the primary insurance company on the named insured's behalf for the limit of insurance provided if a loss occurs and a claim is submitted.
The next step in underwriting the exposure is to thoroughly review the contract for the work and the relationship between the two parties. Stated as simply as possible, the more control the named insured exercises over the contractor, the more likely that CG 00 09 will be involved if a loss occurs. This exposure increases dramatically when the named insured visits the project location daily and makes comments and suggestions. On the other hand, if the named insured participates only at a distance and takes a hands-off approach, as evidenced by the contract’s terms and its actions, the vicarious liability and supervision exposure is much lower. The contract between the parties plays an important part in determining and apportioning liability. The exposure is considerably higher if the named insured contractually accepts responsibility for the contractor’s actions.
The last underwriting step is to consider the total limits of insurance from all policies for the construction project. If the insurance company writes the contractor's Commercial General Liability coverage, those limits may possibly double if it also writes CG 00 09 on that project. If it also writes the named insured's Commercial General Liability coverage, the limits may triple! If the insurance company also writes commercial umbrella or excess policies for either or both of the parties, it could well find itself significantly overextended in terms of the total limits of insurance at the construction project.
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Example: Good Buys Insurance Company writes CG 00 09 with Pablo as the named insured and Creative Contractors as the contractor. A loss occurs and both Pablo and Creative are sued. The Creative Contractors’ CG 00 09 has a $1,000,000 limit for its direct liability and Pablo’s CG 00 09 has a $1,000,000 limit for its vicarious liability as a result of Creative's operations. In this case, Good Buys provides the defense and the limits for both parties. If Creative must pay $1,500,000 and Pablo must pay $250,000, Pablo is still fully protected even though Creative’s limits are used up. |
The limits issue can be even more interesting if the general contractor hires a number of subcontractors and requires each of them to provide CG 00 09. The insurance company that writes CG 00 09 for the subcontractors, primary Commercial General Liability coverage on the same subcontractors, and primary Commercial General Liability coverage on the general contractor could find itself far more exposed by the total amount of the limits than it desires.