Snakes in the Grass Understanding Contractors Risk Management and
Shared by: rha19995
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!