Part 3—Aggregate Limits and Key Endorsements to Watch

Refining Insurance Requirements in Construction Contracts

Our ongoing effort to establish best-in-class insurance requirements within construction contracts continues, with a focus on refining the Commercial General Liability (CGL) policy requirements for subcontractors. A key component of this refinement involves understanding and managing aggregate limits and exclusion language.

Aggregate Limits – Understanding Their Function

Commercial General Liability policies are not unlimited in coverage. These policies include aggregate limits, which cap the total amount an insurer will pay for claims during the policy period. Once this limit is exhausted, the insurer ceases to pay further defense costs and damages. Think of the aggregate limit as a financial reservoir that diminishes with each claim paid.

The standard ISO CGL policy contains two aggregate limits.  The Products & Completed Operations Aggregate is the maximum the policy will pay for all claims arising from losses resulting from those hazards.  The General Aggregate applies to all other claims covered by the policy.

For example, consider a policy with a $2,000,000 General Aggregate Limit. Each claim paid reduces this limit. The following chart illustrates this concept:

Claim # | Amount Paid              | What Remains of the $2M Aggregate

————–|———————————|————————————————–

1             |         $750,000             |    $1,250,000

2             |         $930,000             |       $320,000

3             |         $145,000             |       $175,000

If a fourth claim arises for $250,000, the insurer will only pay $175,000, leaving $75,000 uninsured due to the depleted General Aggregate. This scenario underscores the importance of ensuring that your project is not affected by claims from other projects. One effective solution is to require a Per Project Aggregate limit on your subcontractor’s CGL policy.

In the United States, the Insurance Services Office (ISO) offers an endorsement known as CG 25 03 – Designated Construction Project(s) General Aggregate Limit. This endorsement allows subcontractors to designate your specific project, ensuring that the aggregate limit is preserved for your project alone. Some insurers offer proprietary versions of CG 25 03, so it may be prudent to simply require a Per Project Aggregate endorsement.

One final note about aggregates on a Commercial General Liability Policy.  You have a General Aggregate and a separate Products and Completed Operations Aggregate.  The ISO CG 25 03 Designated Construction Project(s) General Aggregate Limit only applies to the General Aggregate Limit.  This leaves the Products and Completed Operations Aggregate Limit for all the projects that you or your subcontractors as the sole Aggregate limit.

Critical Exclusions to Avoid

Certain insurance carriers, particularly those operating in the Surplus Lines or Non-Standard Insurance Marketplace, and some low-cost direct-to-consumer insurers, may include exclusions in their CGL policies that are detrimental to contractors. The following exclusions should be explicitly avoided:

1. Exclusion for Damage to Completed Work by Subcontractors

Standard ISO CGL policies exclude coverage for damage to the contractor’s own work under Completed Operations Coverage. This exclusion exists because insurers do not intend to guarantee workmanship. For instance, if a contractor uses insufficient nails during framing, resulting in structural issues, the insurer will not cover the damage.

However, ISO policies typically include an exception for damage to your work caused by subcontractors. For example, if a subcontractor improperly installs window flashing, leading to water damage that compromises the general contractor’s work, the resulting damage is covered. Unfortunately, some insurers are introducing endorsements like CG 22 94 – Exclusion for Damage to Work Performed by Subcontractors On Your Behalf, which removes this coverage. Subcontractors should be prohibited from having such endorsements on their policies. 

2. Cross Suits or Insured vs. Insured Exclusion

Some insurers add exclusions that deny coverage for claims between insured parties. If you are listed as an Additional Insured on a subcontractor’s policy, you become an insured. Should you need to sue the subcontractor, coverage may be denied due to an Insured vs. Insured exclusion. These are often labeled as Cross Suits Exclusions. Subcontractors must ensure their policies do not contain such provisions.

3. Action Over Exclusions

When a subcontractor’s employee is injured on the job, Workers Compensation typically covers the injury. However, if your negligence contributed to the injury, the employee may sue you. With a strong indemnification clause, you can tender the claim to the subcontractor, making it a CGL claim. Some insurers attempt to exclude such claims through Action Over Exclusions or an exclusion for Employers Liability, Injury to Subcontractors Employees or Non-Employees. These exclusions should be avoided.

4. Prior Work Exclusion

A Prior Work Exclusion eliminates coverage for work completed before the policy’s effective date. This poses a significant risk. Suppose a contractor includes you as an Additional Insured for completed operations for three years post-project. If they switch insurers and the new policy includes a Prior Work Exclusion, you lose coverage for past work—even if the policy includes an Additional Insured completed operations endorsement. This exclusion is surprisingly common and must be avoided.

Summary

Let’s recap what we covered in this section:

1. Subcontractors should carry a Per Project Aggregate endorsement.

2. Subcontractors’ CGL policies should not include:

• Exclusion for damage to work performed by subcontractors.

• Exclusion for Cross Suits or Insured vs. Insured

• Endorsement or Action Over Exclusion

• Exclusion for Employers Liability

• Exclusion for Injury to Subcontractors Employees or Non-Employees

• Exclusion for Prior Work

In Part IV of this series, we will continue refining insurance requirements to achieve a truly best-in-class standard.

Image by Kindel Media on Pexels.

About the Author:

Scott T. Harrigan (CIC, CRM, CCIC), currently at Rue Insurance, has over 30+ years of experience in the insurance industry.  He creates comprehensive insurance and risk management portfolios for clients.  In addition to creating portfolios, he enjoys writing and teaching about various insurance coverages and risk management topics.  Scott is an active member of the Rue Insurance Educational Team, providing continuing education classes to Rue Insurance professionals on an annual basis.