Construction Insurance, Contracts, Mitigating Risk & Related Issues - Workshop Capital Planning, Design and Construction November 4, 2008
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Construction Insurance, Contracts, Mitigating Risk & Related Issues - Workshop Capital Planning, Design and Construction November 4, 2008 Introduction and Agenda • Panelists • What is Construction Risk Management • Key Components – Contract Relationships – Property Preservation – Insurance • Information Sources • Questions / Open Discussion Panelists • Jim Castle, President, Driver Commercial Group, Alliant Insurance Services • Girard Fisher, Esq., (of Counsel) Pollack, Vida & Fisher • Robert E. Powers, ARM, Vice President – Liability, Gregory B. Bragg & Associates • Joseph C. Risser, CPCU, ARM-P, California Polytechnic State University • Craig Schweikhard, ARM, Liability Claims Manager, Gregory B. Bragg & Associates • Raymond Szczucki, P.E., ARM, ACE USA Global Property & Specialty Lines Jim Castle • President • Driver Commercial Group • National Construction Practice Group Leader • Surety and Insurance Services to Construction Industry • Contractor Practice Policies • Controlled Insurance Programs Girard Fisher, Esq. • Pollak, Vida & Fisher • Member of California Bar – California U.S. District Courts – U.S. Court of Appeals, Ninth District & Supreme Court • 45 jury trials, 40 appeals – exposures in 7 figures, published opinions • Author and Speaker – Government, public entity liability – Design Immunity, Tort Claims, Negligence Robert Powers, ARM • Vice President – Liability • Gregory B. Bragg & Associates, Inc. – Carl Warren & Company • Public Entity and Nationwide Multi Jurisdiction Claims Administration • Licensed Independent Adjuster • Presenter: – Public Agency Risk Management Association – Risk & Insurance management Society Craig Schweikhard, ARM • Ventura Liability Claims Manager • Gregory B. Bragg & Associates, Inc. – Carl Warren & Company • Critical Public Entity Account Manager • Public Entity Liability and Administration • Presenter: – Public Agency Risk Management Association Raymond Szczucki, P.E. ARM • Account Engineer, Inland Marine • ACE Global Underwriting Group – Design Engineer – public & private projects • • • • • Engineering Evaluation Construction Risk Management Services National and Local Professional Engineering International Bridge, Tunnel & Turnpike American Society of Civil Engineers Joe Risser, CPCU, ARM-P • • • • Risk Manager California Polytechnic State University University’s Insurance Programs - CSURMA Construction Contract Insurance Compliance – Facilities Planning & Facility Services – Contracts, Procurement & Risk Management • Presenter: – Public Risk Management Association – University Risk Management & Insurance Association – Public Agency Risk Management Association What is Risk Management • Technical Component – Identify, Analyze, Address Risk • Practical – Prevention & Response – Contractual Transfer – Purchase Insurance What is Insurance? • Insurance is CASH!!! • CASH for: – Replacing / repairing your property – Replacing / repairing others property – Medical Costs / Lost wages – Defending you from others Traditional Project Structure • • • • • Multiple Parties Multiple Contract Types Various Skill Levels Gaps Hope WC GL BR GL WC WC WC WC WC GL GL GL GL BR BR BR BR Key Components • Pre-Construction • Construction Duration • Post Construction Pre Construction • • • • • Project Evaluation The Contract Insurance Project Safety Requirements Project Claim Procedures Project Evaluation • • • • • • Who is the Project Owner / Team What are they Building When are they Building Where are they in the Process Why are they Building How??? The Contract • • • • • • • Most Important Construction Document Scope & Timeline Responsibilities Indemnification Language Insurance Requirements Project Safety Requirements Administration Requirements Risk Management of Construction Projects and Managing Insurance Relationships • Robert Powers – Bragg & Associates • Craig Schweikhard - Bragg & Associates • Girard Fisher – Pollak, Vida and Fisher The Need for a Clear Picture • Large Scale Projects are Very Complex • They are “Generally” outside the Area of Expertise of Education Officials • Contractor know how to manipulate the process to squeeze more money out of the State The Model by Jim Wiederschall Two Phases of Project • Design Phase – Architect is primary contractor – Numerous sub-contractors • Construction Phase – Main Contractor – Numerous sub-contractors • Other Contracts – Construction Manager – Inspectors – Consultants Design Phase • Contract Provisions with your Architect – Contractual Indemnity – Additional Insured on GL Coverage – Certificate of Insurance for all coverage – E&O Insurance Certificate Subcontractors in Design Phase • • • • • Engineers Mechanical Engineers Soil Engineers Structural Engineers Subcontractor Engineers – Usually no contractual or insurance relationship with these contractors Remedies v. Architect • Breach of Contract • Contractual Indemnity • Claim on GL as additional Insured – Early Notice to carrier is essential. – Defense costs are only reimbursed as of tender • E&O – Timely notice is essential Construction Phase • Primary Contractor will retain numerous Subcontractors. • Subcontractors may have subcontractors • Contractual Relationship between primary and subcontractors that may require indemnity to P.E. • Entity may or may not have a contractual relationship with subs and their insurance Contract Provisions • Contractual Indemnity • Additional Insured on GL Coverage • Certificate of Insurance for all Coverage • Bonds – Performance – Payment Bonds Remedies v. Contractors • Breach of Contracts • Claim of Performance Bonds • Claims on insurance coverage • Contractual Indemnity Contractor’s Remedy Against You • Contractor’s thrown off of projects sue for constitutional taking. • Conversion – Coverage??? • Contract Payment Claims Claims Filing Requirements Public Contracts Code Section 20104.2 • Contractual Payments Due – Breach of Contracts do require claims • Claim must be in writing before final payment • Public Entity has 45 or 60 days to respond – Additional info requested within 30 days • If contractor disagrees with finding a meet and confer will be scheduled within 30 days • Claim statute is tolled from the time the written claim is filed until the meet and confer process is completed. Other Contractors • Same contract provisions as Design Phase • Same Remedies as Design Phase • Need for Close Supervision of these functions. Bonds • Not Insurance but standing on their own • Performance Bonds – Guarantee the specific performance of the contract or completion of the contract • Payment Bonds – Guarantees the payment of subcontractors on the project. Performance Bonds • For use when the project is not completed as contracted. • Bonds are not insurance and Bond holders will go after contractor for nonperformance • Goals of the Bond Holder may be Different than Yours – Step in and defend • Do not release bond too early Payment Bonds and Stop Notices • No mechanics liens on public projects • Stop notices – Must hold payments to cover stop notice until dispute is resolved • Use “Stop Notice” Bonds to release payments Leverage • Unfair Claims Practices act • First Party “Bad Faith” • Bonding Capacity Insurance • • • • • Insurer Requirements Coverage Requirements Limit Requirements Premium / Deductible Responsibilities Documentation Requirements Traditional Project Insurance • • • • • • Duplication of Cost Stack Markups Cross Litigation Gaps in Coverage Inadequate Limits Uninsured Contractors WC GL BR GL WC WC WC WC WC GL GL GL GL BR BR BR BR The OCIP Alternative • One Program • Control • Consistent Coverage • Dedicated Limits • No Cross Litigation • Consistent Services • Decreased Markups • Available Coverage • Builders Risk • Workers’ Compensation • General Liability • Excess Liability • Auto Liability • Design Professionals Errors & Omissions • Pollution Liability • Surety / Subguard OCIP Key Components • Program Design • Documents / Manuals / Forms • Insurance Placement • Enrollment Process • Claim Management Pending Legislation • California SB 195 - Calderon • OCIP Disclosure Requirements – Coverage Terms / Exclusions – Exposure Basis of Policy – Contractor Participation – Deductible Application – Design Professional Limitation of Liability – Insurance Deductive Change • Allows Contractor to Void Contract Insurance Summary • Commercial General Liability – Bodily Injury, Property Damage – Ongoing and Completed Operations & Products • Business Automobile Liability – Bodily Injury, Property Damage • Workers’ Compensation and Employer’s Liability – Bodily Injury and Illness of employees, work related • Professional Liability (Architects, engineers, construction managers, etc.) – Injury or Damages due to errors & omissions • Builder’s Risk (Property) – Damages or Losses to Property under construction Insurance Placement • Property / Inland Marine – Pays for damage to your “stuff” – Building & Contents at Main Office – Builders Risk Coverage – Tools & Equipment • Scheduled Equipment • Miscellaneous Tools • Leased and Rented Equipment CSU Construction Project Coverage Program • “All Risk” Builder’s Risk Insurance – Property Damage – Materials in Transit – Off site storage • Direct physical loss to Insured Project(s) – Construction – Reconstruction – Renovation The Building Construction Process and Property Loss Exposures Raymond Szczucki ACE USA Inland Marine Disclaimer Any information or discussion arising from this presentation shall not prejudice, waive or otherwise forestall any legal right of ACE USA Inland Marine, ACE USA or any of The ACE Group of Companies concerning the terms, conditions, exclusions or provisions contained in an issued policy of insurance. The information or materials provided herein shall not amend or alter in any way the terms, conditions, exclusions and limitations of any policy delivered. Please consult the policy for exact terms and conditions. The materials and information contained herein are not intended to offer or provide any legal advice concerning the topics covered. Topics of Discussion – Building Construction Process – Property Loss Exposures – Project Management Issues – Project Constraints – Property Preservation Management & Planning – Property Preservation Assessments – Construction Dynamics – Economics Building Construction Process – Construction management demands have increased in past 20 years; major shift in last 10 years – “Techno-time” vs. “steel and concrete time” – Dynamic environment of construction – Economic vs. exposure-based scheduling Property Loss Exposures – Water is a Primary Cause of Loss $$ • Flooding from surface water • Water penetration through incomplete building envelope or temporary openings • Condensation/moisture – – – – – Wind Rigging & Lifting Collapse Equipment Damage Fire Project Management – Project management team that is proactive in management of subcontracts and property preservation. (Values the process.) – Pre-construction planning to “eliminate” property loss exposures. (Schedule project to avoid loss exposures.) – Implement plan to “control” property loss exposures during construction. (Mitigation of exposures that cannot be eliminated.) Project Constraints – Maintenance of schedule is a priority – CP activities control schedule (“criticality” ) – Time is more valuable than money – Changes in schedule/scope of work create changes in property loss exposures – Increasing complexity of construction – Wide range of project stakeholders Project Constraints Project Constraints Property Preservation Management & Planning 1. Discuss property preservation (new and existing) at all project scheduling and coordination meetings. (Make it a formal part of the agenda.) 2. Require field supervisory personnel to evaluate property related exposures and monitor protection requirements. 3. Involve all parties (design, construction, operations) in planning process. Property Preservation Management & Planning 4. Confirm subcontractor management controls and require pre-installation reviews for critical equipment/materials. 5. Implement severe weather monitoring program and formal notification procedures with emergency response plans. Property Preservation Management & Planning 6. Identify weather sensitive equipment, materials and finishes during pre-construction planning and progress meetings with contractors. Monitor compliance with vendor/manufacturer required storage/warranty requirements. 7. Develop and implement contingency plans for delays in material delivery or schedule changes that impact contractor work completion and expose work in progress to damage. Property Preservation Management & Planning 8. Evaluate security and access controls to project sites. Fire Protection and Emergency Response Plans. 9. Focus on ‘elimination’ of property loss exposures. If not practical to eliminate exposures, implement and document ‘control’ of exposures. Property Preservation Management & Planning 10. Conduct periodic property preservation assessments (similar to safety assessments) of project site. Monitor property preservation controls at subcontract interfaces, project boundaries & temporary facilities/structures. Property Preservation Assessments Construction & Erection Associated Hazards – Evaluate exposures and controls in assessment categories. Include future exposures that are anticipated as project progresses through completion. Property Preservation Assessments 1. Transit - Evaluate transit exposure and controls that are in place or required. 2. Storage - Review storage of materials associated with the project on and off the site. Exposure and controls to be implemented. 3. Security - Evaluate site access controls and theft and vandalism potential. Property Preservation Assessments 4. Fire Protection - Review adequacy of fire protection that is provided on the site. 5. Rigging and Lifting / Equipment Exposures - Evaluate rigging and lifting exposures and other equipment related exposures that exist on the project and controls to be implemented. 6. Collapse - Monitor collapse exposures that may exist on the site and adequacy of controls; e.g.: support of excavation, formwork/shoring, temporary bracing of structural members. Property Preservation Assessments 7. Adjacent Hazards – Evaluate adjacent exposures and required controls. 8. Water Hazards – Evaluate water damage exposures that may exist on the site. Work in progress or materials exposed to damage from water. Property Preservation Assessments 9. Flood - Review flood exposure to the project site and adequacy of control of surface runoff or underground utilities. Action plans to minimize damage and control flooding. 10. Severe Weather Exposures - Review controls to protect stored materials and work in progress from elements. Project Housekeeping –Daily Clean-Up –Dumpster Placement –Segregation of Materials –Debris Removal from Building First-Aid & Fire Protection –Fire Extinguishers > Types & Use –Other First-Aid –Placement –Training –Maintenance & Inspection Fire Department & Emergency Services –Notification –Scope of project –Plans/Site Access –Communication/Advise of Progress Control Sources of Ignition –Temporary Electrical –Smoking Controls –Hotwork > Firewatches –Temporary Heat Flammable Liquids & Gases –Types & Uses –Storage –Dispensing –Disposal Permanent Fire Protection –Alarm Systems –Sprinkler Systems –Standpipes –Hydrants Flooding Exposures –Flood Zones –Site Grading, Drainage, Diversion Berms –Retention Basins –Consideration of Project Stage Project Scheduling –Charging of Water Lines –Protection from Freezing –Weather Sensitive Systems –Making Buildings Weather Tight –Contract Coordination Project Scheduling –Daily Weather Reports • Manage schedule of high exposure activities –Materials for Weather Protection –Severe Weather Plan –Emergency Response Plans Site Security Considerations –Concentration of Values –Target Property –Job Stage & Size –Neighborhood –Labor or local area issues Site Security Controls – Limit Points of Vehicle Access – Project Trailer Security – Site Storage Inside Secured Structures – Police/Guard Service & Communication – Fencing – Lighting – Alarm Systems Construction Dynamics • Schedule compression & exposure accretion Closely monitor concurrent work activities Construction sequencing for optimum productivity Building envelope delays and increases in interior exposures Weather-dependent work activities CPM logic change vs. decrease time for critical items Construction Dynamics Building envelope exposures –Water, water everywhere…. –Lack of construction industry awareness –Potential problems for completed facility Construction Dynamics Design & construction complexity –Architectural/structural details –Atrium space planning –Shop drawings & fabrication delays –New building materials/methods Construction Dynamics Building systems exposures – Building systems technology improvements – Sensitive systems (dust, moisture, vibration, heat) – Start-up testing and coordination – Multiple contractor involvement in complex systems – LEED or “Green Buildings” Construction Dynamics Craftsmanship & quality assurance –Craft shortages –Craft expertise –Work-force development takes time –Formal QA programs –Project management oversight Construction Dynamics Construction coordination & project interfaces – Project boundaries and contract interfaces – Overlapping responsibility – Coordination of all stakeholders – Maintain sequencing and account for variances Construction Dynamics Project delivery systems –Traditional, design-build, fast track, turn-key –Opportunities & challenges –Incorporate property preservation planning into project design development and project schedule Economics Economic effects of losses – Direct & Indirect Loss Costs – Productivity & quality issues – Employee and public injury exposures – Schedule delays – Loss cost reduction benefits with PPP Property Preservation Management & Planning SUMMARY Pursue elimination of exposures; if not possible, implement controls to mitigate exposures. Evaluate the construction efforts at the project site from a macro perspective. Maintain controls across project boundaries and disciplines. Property Preservation Management & Planning • SUMMARY Evaluate changes in loss exposure as project progresses. Monitor contract interfaces, work coordination and construction sequencing. Review subcontractor management controls and impact of schedule/scope changes. Property Preservation • Property preservation planning should be an ongoing component of construction project management. • Include “property preservation” when estimating, planning and scheduling the project work. Builder’s Risk Application • Project Enrollment Form • Builder’s Risk Application • General Building Supplement Insurance Documentation • • • • • • Certificates Endorsements Declaration Sheets Claims Reporting requirements Entire Policy NOTICE OF CANCELLATION - 30/10 Insurance Limits • • • • • Occurrence and Claims Made Annual Aggregate Policy vs. Project limits Deductible vs. Self Insured Retention(SIR) What Limits? – Why $1, 2, 5, 10 Million? • What Deductible? – 1%, 2%, 5%, 10%..... Insurance Placement • Business Auto Coverage – Auto Liability Limit $1,000,000 • Include Owned, Hired & Non-Owned vehicles – – – – Uninsured & Under Insured Motorists - $1,000,000 Medical Payments - $5,000 Auto Physical Damage Coverage Endorsements • • • • Additional Insured Waivers of Subrogation Primary Wording Non Contribution Insurance Placement • General Liability – Limits: • • • • $1,000,000 Per Occurrence $2,000,000 General Aggregate $2,000,000 Products / Completed Operations Agg $1,000,000 Personal & Advertising Injury – Provides certain project requirements • • • • Additional Insured Waivers of Subrogation Primary Wording Non Contribution Insurance Placement • General Liability – Major Exclusions – Pollution Liability – Mold (Fungus) – Subsidence – Asbestos – Professional Products and Services Liability – Employment – Related Practices – Operations covered by a Wrap-Up – Environmental Enforcement Action - FINES Insurance Placement • Workers’ Compensation – Provides medical and disability payments to an injured employee – Limits: • Part A: • Part B: Statutory $1,000,000 (Employers Liability) – Rate Basis: • Payrolls • Insurer Rates • Experience Modification Factor – Waiver of subrogation endorsement Insurance Placement • Excess / Umbrella Liability – Provides extra protection ($$$) in the event of a severe claim. – Provides Limits Above • Business Auto Liability • General Liability • Workers’ Compensation – Part B – Declaration Sheet Insurance Placement • Professional Liability – Addresses the Design Liability assumed by Prime Architect either directly or through the use of Sub-Consultants. – Declaration Sheet • Retro Date • Reporting Period – Claims reporting procedure Insurance Placement • Pollution Liability • • • • Additional Insured Waivers of Subrogation Primary Wording Non Contribution – Significant Increased Limits – Transportation • Auto liability coverage – MCS-90 • Sudden and Accidental Pollution – Disposal Sites Project Safety Requirements • • • • • Contractual Responsibility for Design Application of Requirements Inspection Adjustments Environmental Requirements • Owner or Contractor responsible • Owner or Contractor statutory liable –Air Pollution –Water Pollution –Hazardous Materials • Not Covered by Insurance Construction Duration • Contract Administration • Insurance Documentation Process • Safety Program Administration / Adjustments • Claim Administration Introduction • What is Insurance • Why Request Insurance Documentation • When Subcontractor Insurance is Inadequate • How to Prevent Inadequacies – Communication – Compliance Methods – Subcontractor Pre-qualification Owner Responsibilities • Understand Contract Requirements – Indemnification Clause – Insurance Requirements • Communicate Insurance Requirements – Transfer of Owner Requirements – Accuracy in Set-up of Document – Minimal Acceptable Contractor Insurance • Compliance Contractor Responsibilities • Understand Contract Requirements • Properly Price Insurance Requirements • Provide Appropriate Documentation – – – – – Certificate of Insurance Additional Insured Endorsement Primary / Non-Contributory Language Waiver of Subrogation Endorsements Other Coverage • Language in Policy • Blanket Endorsements Certificates of Insurance • • • • • What is a Certificate of Insurance Reviewing a Certificate of Insurance Standard Limits Attachment A - Compliance Cancellation Clause Additional Insured Endorsements • What is an Additional Insured • Why Attach the Endorsement • Types of Endorsements – Your Work – Ongoing Operations • Contractor Cost for the Endorsement – Range $0 to $1,000 – Typically $0 to $250 Primary Language • What is this Endorsement • Why Attach the Endorsement • Contractor Cost for the Endorsement – Same as Additional Insured Endorsement Waiver of Subrogation • What is this Endorsement • Why Attach the Endorsement • Contractor Cost for the Endorsement – GL: Same as Additional Insured Endorsement – WC: Flat Charge or Percentage of Project Premium • WC Cost Example: – – – – Subcontractor Project Payroll: $100,000 Subcontractor WC Rate: $10 per $100 Project Premium: $10,000 Waiver Charge (3-10%) $300 - $1000 Other Insurance Items • Owner Operators & Workers’ Compensation • No Owned Vehicles • Professional Liability Coverage • Environmental Coverage • Others Compliance Methods • Sample Contractor Insurance Packet • Standard Operating Procedures – Contract Standardization – Checklist / Deficiency Letters – Non- Compliance Situations • What to Expect from the Contractors • What to Expect from their Brokers Post Construction • • • • • Project Close Out Transfer of Risk / Insurance Claim Management Documentation Storage Results / Lessons Learned Additional Information Sources • Contact your Risk Manager or Agent • Insurance Risk Management Institute – Construction Risk Management Reference – Courses / Designations Available – Annual Convention – www.irmi.com • Alliant Construction Team – Jim Castle (619) 849-3807 Resources • “Insurance Requirements In Contracts Manual” – Alliant Insurance • http://www.alliantinsurance.com/Services/Specialty/Public/PropertyCasualty/default.aspx • “Construction Risk Management”, “Design-Build Insurance”, “The Wrap-Up Guide” - International Risk Management Institute – IRMI • http://www.irmi.com/Products/Marketing/Construction.aspx • Materials and Presentations on Surety Bonds The Surety and Fidelity Association of America • http://www.surety.org/content.cfm?lid=13&catid=3 Downloads • Presentation Power Point • Handouts – – – – The Model – Contract Relationships CSU Builder’s Risk Coverage Summary CSU Builder’s Risk Project Enrollment Form CSU Builder’s Risk Application & General Building Supplement – ACE Property Protection Recommendations for Subcontractors – ACE Property Preservation Assessment Checklist Downloads – ACE Builder’s Loss Control & Prevention Series • • • • • • • • Fire Hot Work Indirect Controls Temporary Heating Theft & Vandalism Water Wind Crane Outrigger Pads Questions?