Construction Insurance, Contracts, Mitigating Risk & Related Issues - Workshop Capital Planning,...

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

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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 RequirementsPublic 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 non-performance

• 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

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The OCIP Alternative

• One Program• Control• Consistent Coverage• Dedicated Limits• No Cross Litigation• Consistent Services• Decreased Markups

WC

GLBR

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 ProjectCoverage 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

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.


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.


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.


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.


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.


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.


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.


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.


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


Building envelope exposures

–Water, water everywhere….

–Lack of construction industry awareness

–Potential problems for completed facility


Design & construction complexity

–Architectural/structural details

–Atrium space planning

–Shop drawings & fabrication delays

–New building materials/methods


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”


Craftsmanship & quality assurance–Craft shortages–Craft expertise–Work-force development takes time–Formal QA programs–Project management oversight


Construction coordination & project interfaces– Project boundaries and contract

interfaces

– Overlapping responsibility

– Coordination of all stakeholders

– Maintain sequencing and account for variances


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


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.


• 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: Statutory• Part B: $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

http://www.alliantinsurance.com/Services/Specialty/Public/PropertyCasualty/default.aspx

http://www.irmi.com/Products/Marketing/Construction.aspx

http://www.irmi.com/Products/Marketing/Construction.aspx

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?

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