Gone But Never Forgotten: Antique Insurance Requirements Can Torpedo Your Contract

A long time ago, a law school professor of mine remarked that “transactional attorneys are on the cutting-and-pasting edge of the law.” When structuring contracts, there is much to be said in favor of not rewriting the wheel, so to speak. Good attorneys constantly evolve their contract provisions, whereby lessons learned, changes in the law, and shifting industry practices are captured and incorporated sensibly. But, like biological evolution, contract evolution hates to discard pieces that were once useful. This can result in your contract having the equivalent of the human appendix: a piece no longer of any positive use and that harbors the potential for harm.

A prime example in construction contracts is the insurance requirement that the contractor (or subcontractor) obtain an endorsement for what is commonly referred to as XCU risk—that is, coverage for explosion, collapse, and underground liability. This contract language evolved from the 1986 version of the Insurance Services Office’s (ISO) CGL policy, which excluded coverage for liability arising from explosion, collapse, and underground work. In 1986, contractors could indeed buy an endorsement that extended coverage to these types of risk, and therefore contract language requiring the purchase of such an endorsement was important and valuable. However, it has been many years since the ISO CGL policy form contained this exclusion—XCU coverage is now simply part of the standard coverage afforded by this policy, and has been for over a decade. And yet, many contracts still require contractors to obtain an endorsement that no longer exists, in order to solve a coverage problem that they don’t really have.

These sorts of provisions, which set requirements that cannot actually be fulfilled, create the potential for delays in submitting bids and finalizing contracts, and can convince both sides to not carefully review or enforce the insurance provisions in the contract. Finally, although the current ISO CGL policy includes XCU coverage by default, that coverage can be eliminated via an endorsement. Thus, by asking the contractor to provide a positive XCU endorsement (a request that will be met with “that’s not necessary” by most contractors, and “that doesn’t exist” by sophisticated contractors), the contract language fails to inform both parties about the true risk they should be looking for: an endorsement eliminating the standard XCU coverage.

These sorts of outdated contract provisions linger in the “standard form” contracts used by many contractors and owners. The presence of such a provision in your standard contract is a sign that some additional evolution is necessary in order to bring your contract up to current laws, standards, and industry practices.