Let's Connect

Understanding Contractual Insurance Requirements

04.11.23  |  By Lee J. Sacket

Virtually every construction contract includes a section or clause requiring the design professional, or contractor, to procure certain insurance before proceeding with the contracted for services.  While not all insurance requirements are the same, the contracting party typically is obligated to procure certain insurance policies covering a variety of risks, including but not limited to, general liability insurance, professional liability insurance, and workers’ compensation insurance.  The primary intention is that these policies will protect the owner, while also protecting the design professional and/or contractor for any damages resulting from the design professional’s and/or contractor’s services, which of course also has the dual effect of protecting the owner.  To this end, the design professional and contractor are typically required to name certain entities (i.e., the ownership entities) as an additional insured(s) to the insurance policies.  While that requirement is relatively self-explanatory, other important insurance requirements are often overlooked and/or misunderstood by the contracting party.  Utilizing an insurance broker to comply with an insurance requirement is good practice.  However, should the required insurance and/or form of insurance not be procured and maintained, the owner will look to the design professional and contractor for recovery through a breach of contract claim.  Thus, at a minimum, the design professional and contractor should have a basic understanding of what they are agreeing to provide.  This article focuses on a commonly misunderstood insurance requirement.

Generally, a design professional’s and/or contractor’s insurance is required to be “primary and noncontributory” pursuant to the controlling contract.  These are two separate but related requirements which, if not understood, could create exposure even when the contractually required insurance policies are procured.  The term “primary and noncontributory” addresses the priority of insurance coverage.  It decides which policy will respond as primary insurance, and which policy will respond as excess insurance.  For example, an injured individual brings a personal injury lawsuit against an owner and design professional.  The owner and design professional each have a general liability insurance policy which will cover this claim.  However, the contract between the owner and design professional required that the owner be a named additional insured on the design professional’s general liability policy, and that the policy be primary and noncontributory.  In this situation, the owner theoretically has two general liability policies providing coverage for this claim, i.e., the owner’s general liability policy and the design professional’s general liability policy as an additional insured.  The “primary” requirement dictates that the design professional’s general liability policy is the primary insurance, rendering the owner’s general liability insurance as excess.  Compliance with this insurance requirement is often impacted through an “other insurance” clause in the insurance policy.  For example, an “other insurance” provision could state that any coverage provided to an additional insured under the policy is excess unless the underlying contract that required additional insured coverage also required the additional insured coverage to be primary and noncontributory.  Alternatively, the “other insurance” clause could dictate the opposite.

“Noncontributory” has nothing to do with allocation of fault among insureds but is concerned only with preventing an insurer from seeking its equitable or contractual independent right of recovery from other insurers.  Using our above example, the “noncontributory” requirement means that the design professional’s general liability insurer cannot seek recovery, or contribution, from the owner’s general liability insurer for the claim.

Significantly, while it is not always clear in construction contracts, a primary and noncontributory contract requirement does not apply to a professional liability insurance policy.  To this end, a professional liability insurance policy provides coverage for the professional only.  Since the policy is not providing coverage to the owner, there is no issue of priority of insurance coverage.  Along the same lines, a contract should not have an additional insured requirement for a professional liability insurance policy since a non-professional (i.e., the owner) will not be covered by such a policy.

Insurance is critical to the construction industry.  It provides the necessary protection for your business and to satisfy certain conditions to provide services on a project.  At a minimum, it is good practice to understand what you agreed to provide, which will allow you to determine if you are in compliance with your contract while simultaneously protecting your business.

Lee J. Sacket is a Partner at the law firm of L’Abbate Balkan, Colavita and Contini, LLP, with offices in New York and New Jersey.  His practice focuses on commercial litigation and professional liability litigation.  Mr. Sacket is the Co-Chairperson of the Design Professional Group, which focuses on the defense of architects, engineers, and related design professionals.  Mr. Sacket also drafts and negotiates contracts and regularly counsels his clients on risk management and presents seminars tailored to their specific practices.

Back to all Articles