1. Auto Liability Exclusion
2. Pollution Liability Exclusion
3. Residential Exclusion
4. Sales and Use Tax Exemption Categories
5. Indemnification in Construction Contracts
6. Are Completed Operations Excluded?
7. Is Subcontracted Work an Exclusion?
8. Essential Clauses in a Construction Contract

Construction contract exclusions are necessary in many cases. Some of the more common exclusions that a contractor should consider include:

  • Indemnification
  • Vehicle liability
  • Watercraft or aircraft
  • Damage to the product
  • Hazardous materials
  • Design-build project elements
  • Pollutants

Auto Liability Exclusion

Auto liability coverage is typically an exclusion in a construction contract. OCIPs, or owner-controlled insurance programs, often omit auto liability coverage; therefore, the contractor must continue the coverage they already have lined up. Additionally, contractors should get written confirmation that they can exclude the cost of continuing the coverage from any credits the OCIP would normally demand the contractor to give the owner.

Pollution Liability Exclusion

Another affected coverage is pollution liability. OCIPs usually do not ensure the contractor for pollution liability risks, including, but not limited to, any risk of disturbing pollutants or of them being released into the environment. If this coverage is excluded by the OCIP, the contractor will need to continue their own coverage for pollution liability or purchase additional coverage. This is especially important in situations where the construction contract has hold harmless and indemnification clauses.

Residential Exclusion

There is a trend with even reputable insurance carriers that they are not fond of insuring residential contractors. Look through your policy, especially on the extra pages, to scan for any terms like “Excluded Operations,” or “Residential Exclusion.” Contractors who only take commercial work might not care whether that exclusion is in place or not. Just remember that insurance companies typically classify condos and apartments as residential.

Sales and Use Tax Exemption Categories

The majority of exclusions that are applicable to construction contracts center around services. Many sales and use tax exemptions can be categorized as sales that are:

  • Intended for resale by the purchaser
  • To government entities or non-profit agencies
  • Outside the seller's state
  • Qualified for exemption, like agriculture or manufacturing
  • Exempted due to their nature (food products)
  • Only occasional, capital contributions, or are part of a business reorganization.

Indemnification in Construction Contracts

Indemnification clauses can affect coverage in a number of areas:

  • Commercial general liability
  • Pollution liability
  • Workers' compensation
  • Aviation liability
  • Builders' risk
  • Watercraft liability
  • Umbrella coverage
  • Errors and omissions

Contractors need to verify which has the broader indemnification clause, the contract or the insurance coverage that is provided through OCIP. Some research might show that the indemnification clause holds the contractor liable for any losses the owner might sustain from:

  • Professional errors or omissions;
  • Environmental pollution;
  • Railroad exposures; or
  • Contractor's employment practices.

There is a risk of the contractor being held liable even though the OCIP excludes these types of risks. If the contractor has a broader duty to defend and indemnify the owner, then they should keep any broader coverage already purchased, or purchase the additional coverage.

An indemnification clause can be added to:

  • Construction Prime Contract
  • Construction Subcontracts
  • Instructions to Bidders/Request for Proposals
  • Insurance Manual

Are Completed Operations Excluded?

Once the contractor leaves the job site, has completed a large portion of the work, or the completed project is now functioning in its intended purpose, a majority of policies will terminate coverage for the contractor. You are responsible when obtaining coverage to verify whether said coverage includes completed operations.

A number of reputable carriers have this coverage type as optional and agents must specifically request it before it will apply. Remember that the bulk of construction-related claims are derived from something that happened long after you completed the job.

Is Subcontracted Work an Exclusion?

It's expected that subcontractors have their own insurance coverage. Your policy may provide coverage in the event the subcontractor's policy limits are exhausted or their carrier denies the claim, unless you have a policy that excludes subcontracted work. In some policies, it is hard to locate this exclusion. Sometimes, it's buried in a company's general liability policy. Other carriers list the exclusion in a numbered endorsement. This is important for general contractors to take note of.

Essential Clauses in a Construction Contract

Review your contract's definition of scope. It is not uncommon to find out that the scope is probably much broader than is spelled out in the proposal. Construction contracts often require a contractor to not only perform the work listed on the proposal but any other work that is also necessary or implied by the drawings presented. If your contract's definition of scope is in conflict with the proposal's scope, it could present a risk for potential disputes over scope-related change orders.

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