Construction

Construction Risk



Construction Risk, Wrap-ups,

and the challenges of the

current economy

Susan Bryan, AIC, ARM

Regional Underwriting Manager

Construction Specialty Excess

AIG Excess Casualty



 Ms. Bryan currently acts as the Regional Underwriting Manager for all excess

construction liability coverage for the Western Region at AIG/American Home. This

includes underwriting both wrap-up and program coverages for a wide variety of

developers, contractors and trade subcontractors involved in all types of construction

as well as the development of new products and coverages for those risks. Ms.

Bryan spent 13 years as an adjuster handling construction defect, complex coverage

and severe exposures in the Construction Defect and Major Case Units at Aetna and

Royal Insurance Companies. She also spent four years as an insurance broker

specializing in program design and placement construction risks including both

renewable programs and wraps, working with all size of accounts and routinely

consulting throughout the country. Ms. Bryan is routinely consulted for her expertise

in coverage issues and has testified as an expert in coverage litigation and spoken

at numerous seminars and conferences throughout the country.

Alan H. Packer

Newmeyer & Dillion LLP



Newmeyer & Dillion, LLP is a California-based law firm provides a full range of litigation and

transactional services to businesses and individuals, including home builders, real estate development

firms, and others.



Alan Packer is a partner in the firm’s expanding Northern California office. He has practiced law in

California for over 20 years, most of it representing parties involved in real estate, home building,

construction, and insurance matters.



Mr. Packer represents home builders, property owners, contractors, and business clients in a broad

range of legal matters, including risk management, insurance matters, wrap consultation and

documentation, efforts to coutner solicitation of homeowners, subcontract and prime contract

documentation, as well as complex litigation matters involving construction projects, product defect

claims, construction defect claims, cost recovery actions, additional insured coverage matters, and

creative dispute resolution. He also handles mechanic’s lien, stop notice, real estate, and payment and

performance bond issues in residential and commercial contexts.

Today‟s Topics

Topics for Today



 Analysis of the types of risks particular to

the construction industry

& associated legal and underwriting issues

 OCIPs, CCIPS, ROCIPS

 Brief overview of some of the impacts of

current economic conditions on

construction

Construction

Industry Risks

Construction Industry Catastrophic

Risks

 Catastrophic injury potentials

 Course of construction / Jobsite injuries

 Post Construction/Products Completed

Operations Exposures:

 Bodily injury arising out of negligent construction

 Construction defect Property Damage claims

Catastrophic

Risk

Catastrophic risk potential

Course of Construction Hazards







 Sources of exposure

 Moving parts and activity:

 cranes,

 heavy machinery,

 height exposures,

 failures of structural components

that can lead to collapse hazards

#1 Course of Construction Losses

 Personal injury & wrongful death claims

 Most commonly onsite construction workers are the injured

parties, although sometimes bystanders are also hurt

 The construction industry has one of the highest mortality rates

of all industries in the US. Workers are in danger from:

 Falls,

 Electrocution,

 Heat-related deaths

 Pollutants (asbestos and others)

 Lots of other causes

 Other losses

 Property damage

 Business interruption

 Delay damages

 Multiple bond claims

Catastrophic Risk

Catastrophic Risk

Catastrophic Risk

#2 Post Construction Calamities

(big and small) create long tail

exposures

 After Construction is completed, liability

exposure for injuries can continue for decades.

 For instance,

 Builder sued in 2003 for asbestos exposure of a

janitor who worked in a high school in the 1950s that

the builder built in the 1920s. An 80 year tail!

 Contractor sued 15 years after construction when

someone fell down a flight of stairs and claimed that

the stairs were not built to code.

Catastrophic Risk

Bridge collapses



 Losses potentially

insured:

 Personal injuries

 Death

 Property damage to bridge  Potentially liable parties

 Property damage to  Inspectors

vehicles  Retrofit contractors

 Business interruption  Design professionals

losses  Construction managers

 Replacement costs  Original construction (even

 Multiple bond claims decades later)

Catastrophic Risk

Catastrophic Risk: pub with no beer*









* Australia (as if you had to think about it)

Station fire (fireworks/rock band)

 Potentially covered losses

 Injuries & deaths

 Property damage

 Business interruption

 Rebuild

 Band reputation

 Potentially liable parties

 Band

 Promotors

 Landlord

 Pyrotechnics

 Contractors who installed flammable

foam

 Building contractors

Construction Defect

Exposures

Construction Defect Exposures

 #1 issue in the hearts of carriers that causes fear

from residential exposures in California

 Strict liability

 Expansion of residential claims

 Attorney solicitation

 Continuing exposure issues (Montrose)

 Efforts at liability reform (SB 800)

 Inherently uneconomic litigation models prior to wraps

 Impact of wraps



 Potential liabilities

 Strict liability, negligence, breach of contract = explained



Milstein









Shinnick

Kasdan

& Ryan

Sample Complaint

Sample Cross-Complaint

Sample Cross-Complaint,

p. 2

The “Montrose” Effect

3. The “Montrose” Effect (cont‟d)



C.N.A. POLICY SCOTTSDALE UNDERWRITERS @ LLOYDS RANGER AMERICAN SAFETY







Project begins Completion Lawsuit Filed









“Occurrence” typically

means an accident,

including continuous

or repeated exposure

to substantially the

same general

harmful conditions.

Wraps and OCIPs

What is a “Wrap” Anyway?

No, what is a Wrap, really?



CIP – Controlled Insurance

Program

OCIP – Owner CIP

CCIP – Contractor CIP

Sponsor (owner or contractor) provides

insurance to all contractors and

subcontractors for the project for general

liability (sometimes w/c as well) for the

term of construction and beyond into

completed operations period

What is a wrap? (cont)

 Owner or General Contractor will purchase insurance

and “enroll” subcontractors into program. All parties who

work on contruction will be covered under a single

program.

 Owner or GC responsible for premium and SIR or

deductibles but will spread cost through contract

“deducts” and/or indemnity provisions for deductible

and/or SIR obligations

 Single carrier for all claims will presumably enable ONE

lawyer to represent all parties for any claim avoiding the

“count the lawyers” game.

History of Wrap-Ups







 1940s – Introduced on the U.S. defense plants

 1950s – Applied to other projects (such as Lincoln

Tunnel)

 1990s – Significant increase in popularity on commercial

and public works projects

 Late 1990s – Start of use on residential projects in

western United States

Benefits of Wraps

 Covers all defined project risks under one policy.

 In theory, limits the number of parties, attorneys,

and claims professionals on any given claim.

 Reduces uncertainties arising from

subcontractor insolvencies

 Reduces uncertainties arising from insurer

insolvencies

 Reduces uncertainties arising from varying

subcontractor insurance (Montrose, residential

exclusions, prior work exclusions, etc.)

Wraps – Underwriting

complications

 Underwriting information on insureds

 Setting premiums

 Differing types of projects

 Mixed use vs. conventional projects

 Aggregates and limits

 SIR‟s and deductibles

 What happened to the loss history?????

Wraps – Legal Considerations

 All relevant documents need to be carefully

coordinated through legal counsel familiar with

wrap issues.

 Subcontract indemnity provisions

 SIR/deductible provisions

 Warranty provisions

 Subcontract insurance provisions

 Non-wrap exposure insurance and indemnity provisions

 Even the wrap policies themselves may require modification

based on the program involved. (Not all cookies are from the

same mold.)

New Wrap Disclosure Obligations



 AB 2738



 Also new SIR limitations

Defense Costs: Unified Defense is

Still a Myth



Many older residential wrap-up

programs are believed to potentially

have inadequate limits as a result of

both availability and cost

New Wrap Disasters



 Example



 Builder buys $10,000,000 wrap-up policy covering

builder and all trades

 Builder and trades build the project and sell it

 A few years later, builder goes bankrupt (2008)

 The policy has a $1.0 million SIR before any

obligation to the subcontractors, who have NO

OTHER INSURANCE because their practice policies

exclude any project on which a wrap-up policy exists.

Defense Costs: Unified Defense

is Still a Myth

EXAMPLE – Actual wrap policy

 Aggregate Limit: $25,000,000 for completed

operations

 Coverage Territory: All projects in California

 Defense Fees: INSIDE limits

 Number of Homes Constructed in Coverage

Territory: Over 10,000 per year

 Coverage per Unit Constructed (actual):

$1,750, including defense fees

 Coverage per Unit Constructed (actual),

assuming 20% litigation: $8,753, including

defense fees

Covering the gaps in the wraps



 Excess and DIC wraps

 Current “hot” coverage enhancement

 Provides excess wrap coverage to

contractors, occasionally without

additional premium

 Various limitations in varying endorsements

 Excess applies only for non-residential

projects

 Applies only to projects with minimum limits

Looking Forward



Current Market Conditions

So how bad can it really be?

 December 2008 statistics:

 Sales of new homes dropped by their

biggest margin since 1994, falling

14.7%

 New home sales (seasonally

adjusted rate, homes per year):

 December 2008: 331,000

homes.

 July 2005: 1.389 million

homes

 Nationally, spending on home

construction fell 27.2% in 2008

 In California –CBIA forecasts that

only 63,400 units will be produced in

2009, down from 2008. (Comparison:

The low point of the homebuilding

recession in the early 1990s was

84,656.)

Impact in California alone

Some more of the Numbers



 California builders sold 3,500 units in

November „08

 California sales were .859% of national

sales; historically California made up

12.5% of National sales figures

 Inventory: 374,000 new (11.4 Months)

competing with and extra 1.5M existing

and unoccupied units for sale (Nationally)

Foreclosure activity

Market driven losses - example

Market Driven Losses

 Abandoned, incomplete

structures

 Safety concerns

 Attractive nuisance issues

 CalTrans example

 Ownership & completion

 Who is responsible for what

after completion

 Who retains responsibility

during recess? What about

contractual indemnity and

AIs???

 Increased homeowner

dissatisfaction

 Translating into more homes in

litigation

 New claims for advertising,

sales negligence, predatory

lending, etc.

Impact on Builders & Trades

 Bankruptcies on the rise

 Many trade contractors have gone bankrupt or are on the edge

of the cliff

 Some builders have gone under



 Impact on:

 SIR payments

 Premium payments

 Quality of ongoing warranty reponses – and resulting impact on

claims



 Automatic stay in bankruptcy.

Looking towards the future

 Residential Market Coma: Projected to last at least another 1-2 years

 Reduced ability to pay for appropriate levels of insurance (not buying

umbrellas/excess)

 SIR‟s and ability to pay

 Decreased staff for customer service leading to more claims

 Evolving impact of legislative, policy, underwriting, and construction practice

changes

 Potential for high volume of coverage litigation under wraps and recent, non-

ISO/manuscript policy forms

 Shifting landscape of insolvencies among builders, subcontractors, insurers

 Increased product defect litigation

 Increased bankruptcies

 Newer technologies

 Commercial side

 Credit markets keeping projects on hold

 More competition squeezes profit margins

 Residential contractors spreading their “wings”

 Uptick in infrastructure from government stimulus

Impact of the “Green” Revolution



 Solar paneling

 Insulation

 “Tight” buildings – Title 24 and impacts

on construction

 Potential “dirty” green technologies

 Advertising claims

 Definitional problems

New Building Products

 One of the following products really did get

marketed:



 Siding that disintegrates into cottage cheese-like

substance

 Lightweight fake roof shingles with paper inside



 Exterior stucco made mostly from styrofoam

New Building Products

New Products – New Problems



 We‟ve already seen:

 EIFS

 Hardboard siding

 Shakertown siding

 Centaur pipe

 PEX pipes/Kitec fittings

 Atlas Shingles



New ideas sometimes lead to great results.

Other times, just new kinds of claims….

Impacts from the economy



 Impacts on construction defect litigation

 Foreclosures

 Falling values

 Bankruptcies of developers, trades

 Impacts of governmental economic stimulus projects

 Huge public works dollars

 Exposure on wraps vs. non-wrap; feasibility of wraps

 Impacts on insurance market

 Uncertainty as to construction volume/exposures

 Return premiums or additional premiums

 How many homes, roads, bridges are you going to build this year?

 For some contractors, it depends on the market

 The “pork barrel” problem

Questions?