Who is insured, and why being insured can cost you

The schedule of insureds on a construction policy looks like an administrative formality, and it decides three things with no apparent connection. Who may claim against the insurer, first. Against whom the insurer loses its recourse, next, since one does not sue one's own insured. And whose knowledge of a fact binds the contract, last, which connects back to disclosure of the risk. Three effects, one schedule, and a schedule usually drafted while thinking about something else. It is the parties on site who discover it at the first loss, and they each discover it from one angle.

That schedule comes in three families, from narrowest to widest. Naming the parties, which names the project owner and the main contractor, leaves each subcontractor outside. The open formula, covering contractors and subcontractors of any tier working on the site, brings them all in without needing to know them. Between the two lies an intermediate wording, the most common and the hardest to read, which brings them in for the works they perform only, each as their interests may appear. That last formula does not say whether the subcontractor is insured for its own plant, for its liability, or only for the works it builds, and that is precisely where files get lost.

A counterintuitive consequence must then be understood: being an insured can reduce the cover you enjoy. A construction policy covers the works under construction and, almost always, excludes or sub-limits construction plant, machinery, temporary installations and equipment belonging to the insureds. A subcontractor that becomes a co-insured therefore moves its crane into the category of property belonging to an insured, where it is excluded, whereas it would have remained third-party property had it not been. And in the same movement, the waiver of subrogation among co-insureds takes away the action it could have brought against the main contractor. It loses two routes at once, and it loses them through a clause written to protect it.

The waiver of subrogation is in fact the most misunderstood mechanism in the class, because it is credited with a wider effect than its own. It extinguishes the insurer's subrogated recourse against the named person, nothing more. It does not remove the contractual liability binding the parties to one another: the main contractor remains entitled to claim from its subcontractor the deductible it bore, the delay penalties provided for in the subcontract, and everything insurance did not pay. A subcontractor believing itself protected because it is a co-insured therefore discovers, after a fully indemnified loss, a contractual claim bearing on sums the policy was never meant to cover.

The distinction between insured property and liability deserves to be held firmly, because the schedule of insureds does not operate the same way on both sides. On the damage side, being an insured gives a right to indemnity and takes away the status of third party. On the liability side, often carried by a separate section of the same contract, being an insured gives cover for damage caused to third parties, and the contract's other insureds are precisely not third parties. A subcontractor that damages adjacent works built by another subcontractor therefore lands in a zone where the liability section does not respond, for want of a third party, and where the damage section may respond, depending on the definition of the insured works. These are two successive readings, never one.

The supplier and the design office hold a position of their own, and it is unstable. They take part, but often without performing works on site, which drops them outside formulas built on the idea of working on site. The supplier of heavy equipment is present on erection day and then gone; the design office is never physically there. Yet they carry the design risk, that is, the one feeding the heaviest litigation in the class. A schedule of insureds that includes them protects the works against them while removing recourse against them; a schedule that excludes them keeps the recourse but leaves them without cover under this contract. Both choices are defensible, neither is neutral, and the only bad choice is not knowing which was made.

That leaves the act that makes all of this legible, and it is simple to state. Take the parties one by one, and for each answer four questions in this order: are they insured under the contract, and for which works; is their own property on site covered or excluded as an insured's property; has the insurer waived recourse against them, and for which damage; does their knowledge of a fact bind the contract for disclosure purposes. Four answers per party, a short table, done once at the start of the job. None of these four points is settled at the time of the loss, because by then everyone has an interest, and an interest is a poor reader of contracts.