At any given time, many Michigan school districts are undergoing construction or renovation. Districts invest millions of dollars annually to update and renovate their facilities. The expertise of architects and general contractors helps to create a wonderful facility that can be enjoyed by staff, students and the community. However, districts also must be prepared for the considerable property and liability risks inherent to construction projects.
Before embarking on any new construction, the MASB-SEG Property/Casualty Pool recommends school districts complete the following steps:
- Thoroughly understand all language in a construction contract; and consult with legal counsel concerning your district’s particular situation.
- Ensure that liability for problems resulting from construction remains with the contractor:
- Scour the construction contract for a waiver of subrogation clause. Refuse to sign a contract that contains such a clause.
- Make sure the construction contract includes indemnification and hold harmless language that favors the district.
- Obtain proof of commercial general liability, auto liability, and workers’ compensation coverage from your contractor.
- Obtain comprehensive Builders Risk coverage.
What is a Waiver of Subrogation clause?
Many American Institute of Architects standard construction contracts contain a clause referred to as a “Waiver of Subrogation.” The Waiver of Subrogation clause contains language stating the district gives up its right to seek recovery of damages from a contractor for problems that a contractor may cause. When a district signs a contract containing the clause, it waives its right—and the right of the organization that issues the Builders Risk coverage—to recover damages due to negligence on the contractors’ part. The district and its Builders Risk insurer then become financially responsible for remedying the contractors’ errors or negligence. The MASB-SEG Property/Casualty Pool believes all contractors, sub-contractors, architects, engineers and other service providers should be held responsible for their own actions. Districts and their legal counsel need to review all contracts carefully, as waiver of subrogation language is often hidden. Districts also should review the contract to ensure it includes indemnification and hold harmless language favoring the district. And, the contractor(s) should provide a certificate of insurance to the district confirming general liability, auto liability, and workers’ compensation coverage. Districts also should consider requesting that the contractor(s) name them as an additional insured under the contractor’s general liability coverage. Most contractors will remove the objectionable clause; however, some contractors are refusing districts’ requests to delete the waiver of subrogation. Be aware that signing a construction contract with this waiver will result in paying more for your Builders Risk coverage.
Why buy Builders Risk coverage?
Builders Risk coverage will protect your district from losses or damage to its buildings and structures while they are under construction. You should always expect the unexpected during building projects! Building supplies could be stolen from the job site; wind or fire could destroy partially completed structures; and water damage might occur if the construction site is not properly protected. By obtaining Builders Risk coverage, your district will guard its financial interests.
Builders Risk coverage is available from several sources. Commercial insurers also provide Builders Risk protection. Educational organizations that are members of the MASB-SEG Property/Casualty Pool may obtain Builders Risk from the Pool; however, this coverage is available only if there is no waiver of subrogation clause in the construction contract. Expect to pay considerably more for Builders Risk coverage if an insurer assumes responsibility for the quality of the contractor’s workmanship.
Consider the ramifications of having your district’s property protected by coverage from one organization, and its building project insured by another. In the event of a property damage claim that involves both the construction project and existing property, your organization will have to work with two insurance providers to settle the claim. This will add another layer of complexity to recovering from the loss and moving your building project forward. Placing Builders Risk coverage with your current property coverage provider makes it easier to resolve such claims, if they do arise.
Learn more about Builders Risk coverage
To learn more about Builders Risk coverage, listen to a podcast provided by the MASB-SEG Property/Casualty Pool. Simply visit www.setseg.org, select Property/Casualty, and then follow the link to Coverage Comments podcasts. The Pool also is available to assist its members by reviewing construction contract language, and will identify the Waiver of Subrogation language if it is included.