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Snakes in the Grass
Understanding Contractors Risk
Management and Insurance
Michael J. O’Neill, CPCU, ARM
James M. Shay, ARM, CRIS
American Contractors Insurance Group, Inc.
Snakes in the Grass
Introduction
• In today’s presentation I am going to explore some of
the hidden risks for contractors.
• Provide details of an effective Risk Management and
Insurance Program.
Snakes in the Grass
1. Contractual Risk
2. Construction Delivery Methods
3. Risk Transfer
4. General Liability Risks
5. Owner Controlled Insurance Programs
6. Joint Ventures
7. Umbrella Liability
8. Professional Liability
9. Pollution Liability
Contractual Risk
• Contractor and Surety’s perspective
– Contract provisions, clauses and conditions be
reasonable and bondable.
• Owner attempts to expand liabilities to include “Killer
Provisions”.
• This is true of insurance risks as well, whether
specified in the Prime Contract or inherent in the
Contractor’s program design.
Risk Management and Insurance
• Most important goals of risk management are to:
– Protect the assets, and
– Financial viability of the company
– Minimize the cost of risk
– Retain only those risks the contractor can
reasonably control or finance
– Know when to say “No”
Risk Management and Insurance
• Construction industry recognizes the relationship
between risk management and sustained profits.
• Risk management requires “beyond the edge”
thinking.
• Managing risk has evolved from a one-time a year
insurance bidding process into a serious profit
initiative.
• Managing risk will boost profits, reduce costs and
change the way contractors compete.
Risk Management and Insurance
• Every project faces a full spectrum of risk.
• The level, depth and scope of those risks vary by the
context and content of the project.
Risk Management and Insurance
RISK MANAGEMENT versus INSURANCE MANAGEMENT
RISK MANAGEMENT INSURANCE MANAGEMENT
• Active/Initiative • Reactive
• Dynamic • Passive
• Risk/protection oriented • Security oriented
• Financially/analytically • Administratively oriented
oriented • Seeks safety
• Seeks responsibility • Narrow in scope
• Curious/Creative • Responsive to others
• Must be involved in the • May be involved or may rely
construction activity of the on others
company
• Broad Based – includes
multiple disciplines
Breadth of Risk Management
RISKS
• Strategic risks • Program design
• Risk financing
• Safety management
• Operating risks • Quality assurance
• Claims cost management
• Information/communication
• Financial risks systems
• Risk allocation methods
• Services
• Information risks • Risk assumption/transfer
• Risk costs recovery
• Benchmarking
• Management practices
Risk Management and Insurance
Risk Matrix
Construction Delivery Systems
I. Traditional General Contracting
Construction Delivery Systems
I. Traditional General Contracting
Characteristics
1. Single source of construction responsibility
2. Presumed checks and balances between A/E and
contractor
3. Less construction risk for owner
4. Simple and objective selection process
5. Less administration required by owner
6. Owner and contractor's interests are not aligned
7. Lack of contractor input in design phase of project
8. Loss of fast-track ability, which increases cost
9. Design risk for owner is more
10. Risk of "unknown subcontractors"
Pure “Agency” CM
with Single General Contractor
Construction Delivery Systems
II. Construction Management
Characteristics
1. As defined
2. Various forms: a. Agency CM
b. "At Risk" CM
3. Team relationship
4. Construction input during design phase
5. Early construction start, reduce schedule
Construction Delivery Systems
II. Construction Management
Characteristics
6. Savings to owner
7. Pure agency CM
8. Fast tracking
9. Eliminates duplication of Construction Manager/GC's
services or costs
10. Potential conflict of interest between CM's role as
owner's advisor
Pure “Agency” CM
with Multiple Prime Contractors
Pure “Agency” CM
The process by which a qualified General Contracting Firm is
retained as Construction Manager by an Owner to furnish
services in connection with the administration of the contract
throughout the planning, design and construction phases of a
project. The Construction Manager is generally authorized by
the Owner to:
1. Act on behalf of that Owner with respect to contract
matters, including overview of the design and
construction phases of the project
2. Transact business on behalf of that Owner
3. Render an account of its activities
The actual construction work is performed by others under
direct contract to the Owner. The Construction Manager is
typically not responsible for construction means and methods
nor does he guarantee construction cost, time or quality
aspects of the project.
“At Risk” CM with Trade Contractors
“At Risk” CM
The process by which a qualified general contracting
firm is retained as Construction Manager by an owner to
provide advice and construction leadership on a project
during the planning and design phases and to provide
construction leadership, contract management,
direction, supervision, coordination, and control of the
work during the construction phase. The actual
construction work is performed by trade contractors
under contract to the Construction Manager. The
Construction Manager is responsible for construction
means and methods and delivery of the completed work
within the Owner's objective of cost, time and quality.
Construction Delivery Systems
III. Design-Build
Construction Delivery Systems
III. Design-Build
Characteristics
1. A single source of responsibility for design and
construction
2. Providing all services necessary to design and construct a
facility or structure
3. Guaranteed max price
4. Valuable input by A/E and contractor from beginning to end
5. Reduced time to complete
6. Potential savings back to owner
Construction Delivery Systems
III. Design-Build
Characteristics
7. Reduced claims - by 30% or more for professional
liability
8. Loss of checks and balances
9. Difficult and costly selection process
10. Limited flexibility
11. Competitive bid advantages can be retained
12. Owner loses control over project and becomes sole
watchdog
Risk Transfer Illustration
Risk Financing Illustration
CG 20 10 11 85 - “Liability Arising out of
Your Work”
• One hurdle - “Your Work”
• No trigger of negligence
• Includes completed operations
• Broadest form around – was widely used and is still
quoted as a requirement
CG 20 10 10 93 – “Liability Arising out of
Your Ongoing Operations”
• One hurdle - “Your Ongoing Operations”
• No trigger of negligence
• No completed operations
• Widely provided
CG 20 10 10 01 / CG 20 37 10 01
• Forms often used together
• Provides ongoing operations on 20 10
• Provides completed operations on the 20 37
CG 20 10 07 04 / CG 20 37 07 04
• Similar to 10 01 forms above for grant of coverage
• Provides ongoing operations on 20 10
• Provides completed operations on the 20 37
• Requires showing that liability was “caused” by the
subcontractor
Risk Transfer
4. Additional Insured Goals for General Contractors
• Primary risk transfer mechanism
• Quick resolution of defense/indemnity obligations
The CGL Policy
• CGL policy provides the insured with protection
against legal liability imposed by violations in tort.
• May include violations of the:
– Insured
– Insureds employees
– Others
Tort Liability
• Tort - civil wrong, other than a breach of contract, for
which the law provides monetary damages as a
possible remedy.
• In order for a tort to occur, there must be an
unjustified breach of a legal duty causing direct
damage.
• Intentional and unintentional tort.
– Assault and Battery
– Slip and Fall
Policy Limits
• CGL policy will pay on behalf of the insured for:
– damages up to the policy limits
– defense and investigate cost in addition to the
policy limits; and
– certain supplementary payments.
CGL - Coverage Requirements
• Insured must be legally liable to pay damages to a
third party.
• Occurrence of injuries or damage for which the
insured is legally liable.
• Compliance of the insured with various provisions of
the policy, e.g., payment of premium, reports events
that may lead to claims.
• Triggering event must take place.
CGL - Policy is Design to Cover
• Tort Liability
• Contractual Liability
• Independent Contractor Liability
• On-going Operations
• Completed Operations
CGL - Policy
1. Damage to Property Exclusions
A. Found in policy as Coverage A, Exclusion J (see
handout).
B. Major issues for contractors.
CGL - Policy
1. Damage to Property Exclusions
A. Alienated premises.
B. Loaned property.
C. Care, custody or control.
D. That particular part.
E. Faulty workmanship.
CGL - Policy
2. Damage to Your Work - Found in the policy as
Coverage A, Exclusion L.
“Property damage” to “your work” arising out of it or
any part of it and included in the “products-
completed operations hazard.”
This exclusion does not apply if the damaged work
or the work out of which the damage arises was
performed on your behalf by a subcontractor.
CGL - Policy
2. Damage to Your Work
– This exclusion precludes coverage for property
damage to the named insured’s work after it has
been completed, arising out of the work or any
part of it.
– By specific exception, the exclusion does not
apply if the work that is damaged or that causes
the damage was done on behalf of the named
insured by a subcontractor.
CGL - Policy
2. Damage to Your Work
By virtue of the subcontractor exception, the insured
has coverage, despite Exclusion I., with respect to
the following exposures.
– Property damage to work performed by the
insured when the damage results from the work of
the insured’s subcontractor.
– Property damage to work performed by the
insured’s subcontractor when the damage results
from that subcontractor’s work.
CGL - Policy
2. Damage to Your Work
– Property damage to work performed by the
insured’s subcontractor when the damage results
from work performed by the insured.
– Property damage to work performed by the
insured’s subcontractor when the damage results
from the work of another contractor or
subcontractor.
CGL - Policy
Damage to Work
• Look out for a CG 22 94 (10-01) exclusion that
removes the subcontractor exception.
CGL - Policy
3. Common Exclusions for Contractors
A. Mold, fungi or bacteria exclusion - CG 2167
(12 04) (see handout).
1. Dramatic increase in the number of claims.
2. Likely to be added to general contractors
policies.
CGL - Policy
3. Common Exclusions for Contractors
B. Silica or Silica Related Dust Exclusion
1. Silicon dioxide, tiny, airborne crystals, occur
naturally in soil and has an ingredient in
construction material including:
– Bricks
– Concrete
– Asphalt
CGL - Policy
3. Common Exclusions for Contractors
2. Insurance industry wary of the exposure.
3. Silica or Silica Related Dust Exclusion CG
2196 (03 05).
CGL - Policy
3. Common Exclusions for Contractors
C. Subsidence or Earth Movement
1. Marked increase in the use of subsidence
exclusion for:
– General Contractor
– Excavation Contractors
– Grading Contractor
2. California is a target state, but many
underwriters apply nationwide.
3. No Standard Form Exclusion.
4. Sample Exclusion.
CGL - Policy
Subsidence Exclusion
• In consideration of the premium charged, it is hereby
understood and agreed that liability for bodily injury
or property damage caused by, resulting from,
attributable to or contributed to, or aggravated by the
subsidence of land as a result of landslide, mudflow,
earth sinking or shifting, resulting from operations of
the Named Insured or any other subcontractor of the
Named Insured is excluded.
CGL - Policy
3. Common Exclusions for Contractors
D. Residential Exclusions
1. Some insurers are unwilling to cover any
form of residential construction.
2. Carve out the residential coverage via an
exclusion.
3. No coverage under the GC’s policy.
4. No coverage under the subs policy if it
contains a residential exclusion.
CGL - Policy
Residential Operations Definition
• Underwriter’s definition of residential - “all single or
multi family housing properties including apartments,
custom single family homes, tract housing,
condominiums, town houses, military housing,
school dormitories, retirement communities and
nursing homes.”
CGL - Policy
Residential Operations Definition
• Sample Definition (more favorable/narrow)
– The term “residential construction” shall mean
the construction or renovation of any “for-sale”
unit, including single or multi-family homes,
condominiums, row-houses or town-homes. It
does not include apartment buildings, assist
living facilities (unless units are made available
for sale to individuals), hotel construction,
dormitory housing, military housing or other
habitational dwellings that are not made available
for sale to individuals.
CGL - Policy
3. Common Exclusions for Contractors
E. Exterior Insulation and Finish Systems (EIFS)
1. EIFS gained attention due to moisture
intrusion.
2. Faulty installation allowed water to penetrate
the walls.
3. Trapped moisture produced wood rot and
mold.
4. Insurance industry migrated to the ISO EIFS
Exclusion CG 21 86.
5. Many manuscript EIFS exclusions are used
by underwriters.
OCIP’s
Owner Controlled Insurance Program (OCIP’s)
• If you are working under a OCIP, the owner will want
you to provide a credit for the general liability
premiums since they are providing the coverage.
• The OCIP will provide the general and umbrella
liability for ongoing operations and for a specified
period for completed operations.
• Practice policy will exclude the project by attaching
an endorsement CG 21 54 (01 96).
OCIP’s
Owner Controlled Insurance Program (OCIP’s)
Six Snakes
• Limits shared by ALL insured parties, and between
multiple projects.
• Short completed operations tail, less than the statute
of repose.
• Self-insured retention (SIR).
• Mid-term non-renewal.
• Mid-term cancellation.
• Bankruptcy/liquidation of Insurer (non-admitted).
OCIP’s Limits
Exposure Beyond
the Limits in the
OCIP
OCIP
$25,000,000
Limits
Shared per occurrence
by and aggregate
All
Parties
OCIP’s Coverage
Standard Broadened
Coverage Coverage
OCIP Coverage DIC Coverage
OCIP’s Completed Operations
Short Tail
OCIP Contractor
OCIP
3 Year Completed
Ongoing
Completed Operations to
Operations
Operations the Statute
2007 2009 2012 2019
OCIP’s
Owner Controlled Insurance Program (OCIP’s)
Possible Solutions
• Modify the contractors general liability policy to
provide coverage excess of the OCIP’s limits.
• Modify the contractor’s general liability policy to
provide Difference in Conditions - effectively
wrapping around the OCIP general liability coverage.
• Modify the contractor general liability policy to
provide completed operations coverage once the
OCIP’s coverage is terminated.
• Escrow account for SIR obligation.
• Contract remedy for insufficiency of limits, program
cancellation, non-renewal or insurer liquidation.
Joint Ventures, Partnerships and Limited
Liability Companies
A. Joint ventures are routinely used on construction
projects for a number of reasons.
1. Surety credit.
2. Reduced risk.
3. Out of market projects.
4. Skill set needs.
Joint Ventures, Partnerships and Limited
Liability Companies
• The ISO CGL policy excludes joint ventures,
partnerships or LLC’s, unless named on the policy.
Joint Ventures, Partnerships and Limited
Liability Companies
Active Projects
• Coverage for active joint ventures, partnerships and
LLC’s are typically provided by a separate general
liability policy for ongoing operations.
• Coverage can be arranged with existing insurers on
existing programs.
Joint Ventures, Partnerships and Limited
Liability Companies
Past Projects
• Coverage for past joint ventures, partnerships or
LLC’s can be provided by endorsement to the
contractor’s general liability policy.
– Blanket Completed Operations
– Coverage is excess over any other policy
covering the joint venture, partnership or LLC
• Watch change in renewal terms with regard to joint
ventures.
• Many CGL and Excess policies require that each is
scheduled by endorsement.
Policy Limits
A. Owner insurance requirements will specify the
minimum limits of liability.
B. These minimum limits do not cap the contractors
exposure.
C. Request for per project policy limits - CG 25 03
(03 97) (see handout).
Umbrella Liability
Two Roles of Umbrellas
1. Provide catastrophe coverage on a per
occurrence basis.
2. Provide drop down coverage once the underlying
policy limits are exhausted by payment of claims.
Umbrella Liability
• Covers multiple lines of coverage.
– General Liability
– Auto Liability
– Employers Liability Liability
• True umbrella forms included coverage for losses not
covered by the underlying policies.
• There is no standard umbrella liability form. Each
insurer develops their policy form and there are major
differences amongst the insurers.
Umbrella Liability Limits
$25,000,000
Umbrella
$2,000,000 $2,000,000
General Liability Auto Liability $1,000,000
EL Liability
Umbrella Liability
• In many cases, the umbrella provides less coverage
than the primary policies.
• Contractors limitations endorsement are different
from carrier to carrier.
• Key exposures to review:
– Professional Liability
– OCIP’s
– Joint Ventures, Partnerships and LLC’s
Umbrella Liability
• The recent trend in the umbrella liability market is to
reduce coverage and not provide “broader than
primary” coverage.
• Following form coverage is also not readily available
in the market.
• Non-drop down over eroded aggregate with broader
primary policy.
Umbrella Liability
Drop Down Provisions
• There is no standard industry umbrella policy form.
• Drop down provisions recognize a reduction in an
underlying policy’s aggregate limit and how it applies
to the reduced or exhausted limits.
Umbrella Liability
Two Most Common Provisions
1. Drop down on terms of umbrella.
a. If underlying policy is broader than the umbrella
results in a reduction of coverage.
b. If underlying policy is narrower than the
umbrella results in an expansion of coverage.
Umbrella Liability
2. Drop down on terms of underlying policy.
a. Terms and conditions of the underlying policy
govern coverage.
b. Favorable if the underlying policy is broader
than the umbrella.
Umbrella Liability
Quick Checklist of Exclusions
• Mold
• Terrorism
• EIFS
• Construction Defects
• Damage to Your Work
• Professional Liability
• Joint Ventures, Partnerships and LLC’s
• OCIP’s
• Additional Insured
Professional Liability
A. The standard ISO CGL policy does not contain a
professional liability exclusion.
B. Underwriters routinely will add an exclusion to
the policy of contractor.
C. Note: The CGL policy does not provide
“Economic Loss” coverage.
Professional Liability
Possible Solutions
• Professional liability under the general liability policy.
– Add CG 22 79 07 98.
– To provide coverage for “means, method”
techniques…in your capacity as a contractor.
Professional Liability
• Add CG 22 80 07 98.
• Professional liability exclusion with an exception for
“your operations in connection with construction
work by you or on your behalf.”
Contractors Professional Liability
Key Issues
• Coverage Form
– Claims-made
– Retro active date
• Insuring Agreement
– Pay on behalf (preferred)
– Indemnity
• Legal Standard
– Negligence not a condition of coverage
(preferred)
– Negligence is a condition of coverage
Contractors Professional Liability
Key Issues
• Duty to defend
– Duty to defend all covered claims (preferred)
– Duty to defend where deductible has been met
– No duty to defend
Contractors Professional Liability
Key Issues
• Policy territory
– Worldwide (preferred)
– U.S., its possessions and Canada
• Person Insured
– Named insured and spouse
– Joint venture
• Blanket coverage (preferred)
• As named
– Officers, directors and employees
– Former employees, partners
Contractors Professional Liability
Key Issues
• Limits of liability
– Per claim limit $5,000,000
– Aggregate limit $5,000,000
• Defense
– Covered outside the limit (preferred)
– Covered inside the limit
• Services
– Performed by insured
– Performed by others (subconsultant on insureds
behalf) (recommend for all general contractors)
Contractors Pollution Liability
• Since the general liability policy is not designed to
provide coverage for pollution conditions arising out
of a contractor operations, many contractors
purchase a separate contractors pollution liability
policy.
• There is no standard contractors pollution liability
policy. Each insurer has their own unique manuscript
policy form.
Contractors Pollution Liability
Key Issues
• Who is insured?
– Contractor
– Newly acquired or formed organizations
– Joint ventures
• Named joint ventures only
• Blanket joint ventures (preferred)
– Executive officers, stockholders and employees
Contractors Pollution Liability
Policy Limit
• Each pollution incident $5,000,000
• Annual aggregate $5,000,000
• Defense inside or outside the limit. (Preferred
approach is outside the limit.)
Contractors Pollution Liability
Coverage Trigger
• Occurrence (preferred)
• Claims-made
• Sudden and accidental only
Contractors Pollution Liability
Coverage Territory
• Anywhere in the world (preferred)
• U.S., its territories and Canada
Contractors Pollution Liability
Covered Operations
• Blanket coverage (preferred)
• Designated activities
• Subcontractors operations on insured behalf
(recommend for all general contractors)
• Remediation operations
• Completed operations
Contractors Pollution Liability
Covered Damages
• Bodily injury and property damage
– Damage to the work during construction, after
construction
• Loss of use of damaged property
• Clean-up costs
• Contractual liability
• Fines and penalties
• Specific coverage for mold (recommend for all
general contractors)
Contractors Pollution Liability
Covered Damages
• Asbestos
• Lead
• Auto, watercraft, aircraft or rolling stock
• Underground storage tanks
• Off-site disposal of waste
Contractor Deductible and SIRs
L.O.B. Per Occurrence Aggregate
W/C $250,000 $1,650,000
G/L $250,000 $1,750,000
A/L $250,000 $750,000
Builders Risk $25,000 No cap
Hurricane 2% of Values No cap
Flood 2% of Values No cap
Earthquake 5% of Values No cap
Professional $100,000 $300,000
Pollution $100,000 $200,000
Summary
• Contractual risks are expanding.
• Contractors liability policies contain many
exclusions and limitations.
• Contractors are retaining more risk.
• Income statement and balance sheet under
pressure.
Enjoy the remainder of the
NASBP Conference!
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