Construction projects are inherently dangerous activities, and the owners of such projects are exposed to a variety of risks that change daily as the project progresses. These risks include injury to the contractor’s employees, injury to third parties, physical damage to the project during and after construction, damage to adjacent property, damage to the contractor’s equipment and damage caused by construction defects. It is therefore critical that owners recognize and properly allocate these risks among the owner and contractor and contractually require that such risks be properly insured. This article will address insuring against these risks.
Transfer of Risk
Ideally, the entity that is best suited to control a particular risk should be the entity that is contractually responsible for such risk. In most cases, the owner is not in a position to control risks on a construction site, and should therefore transfer the risk to the contractor and require it to maintain insurance for such risk. The transfer of risk is accomplished in the contract’s indemnification clause in which the contractor (or subcontractor) agrees to assume responsibility for certain judgments resulting from third-party claims against the owner. In such arrangements, the owner benefits from a broader indemnification clause. The transfer of risk, however, is of little consequence if the contractor lacks the proper insurance coverage (or the financial ability) to support the obligations.
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