Another Insurance Claim Bites the Dust: “Construction Management For a Fee”

Written By: Randy J. Heller


A construction manager that purchased a general liability insurance policy containing an endorsement with an exclusion for certain construction managers found itself with a policy that provided neither a defense nor coverage.

It seems that each week another court comes down with a case denying coverage based on a new or unusual exclusion in an endorsement to an insurance policy. This time the culprit was a “Construction Management for a Fee” exclusion.
In this case, Cavan Corporation entered into a construction management (CM) agreement with the project owner in which it would be compensated in the form of a fixed fee of $600,000 plus $1,700,000 as reimbursement for all staffing and overhead costs it would incur. It obtained commercial general liability insurance from Houston Casualty Company. When the principal of a trade contractor suffered a personal injury on the site, it sued Cavan and the project owner, among others. Cavan gave notice to the insurer which refused to provide either a defense or coverage.
The insurer pointed to an exclusion in one of its endorsements which provided that the insurance does not apply to losses “arising out of construction management, regardless of whether such operations are conducted by you or on your behalf.” The endorsement defined “construction management” as the “planning, coordinating, supervision or controlling of construction activities while being compensated on a fee basis by an owner or developer.”
The appellate court held that since Cavan was compensated on a fee basis, as opposed to, say, being paid on the basis of “progress payments covering the cost of the work done by trade contractors plus an additional increment to provide it with a profit,” the exclusion applied and the insurer had no obligation to step in. In essence, Cavan had paid for insurance which, by its very definition, would not provide coverage or a defense.
It is hard to discern the logic behind making a distinction between a CM earning a “fee” [no coverage] and a CM being reimbursed for its costs plus an “increment [for] profit” [coverage]. But when it comes to insurance coverage, logic is irrelevant. All that matters is the language of the policy and its endorsements.
This is why one can no longer rely solely on a Certificate of Insurance or even a “declaration page” or a “binder.” Without reading the entirety of the policy and each endorsement, one can find oneself having paid for a policy that provides no coverage and no remedy except a lawsuit against one’s insurance broker for not obtaining an appropriate policy.

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Randy J. Heller


For over forty years, Mr. Heller has specialized in construction law and litigation, representing some of the largest and most successful contractors in the nation.

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