Construction Risk Construction Risk, Wrap-ups, and the challenges of the current economy.
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Transcript of Construction Risk Construction Risk, Wrap-ups, and the challenges of the current economy.
Construction Risk
Construction Risk, Wrap-ups, and the challenges of the current economy
Susan Bryan, AIC, ARMRegional Underwriting ManagerConstruction Specialty ExcessAIG Excess Casualty
Ms. Bryan currently acts as the Regional Underwriting Manager for all excess construction liability coverage for the Western Region at AIG/American Home. This includes underwriting both wrap-up and program coverages for a wide variety of developers, contractors and trade subcontractors involved in all types of construction as well as the development of new products and coverages for those risks. Ms. Bryan spent 13 years as an adjuster handling construction defect, complex coverage and severe exposures in the Construction Defect and Major Case Units at Aetna and Royal Insurance Companies. She also spent four years as an insurance broker specializing in program design and placement construction risks including both renewable programs and wraps, working with all size of accounts and routinely consulting throughout the country. Ms. Bryan is routinely consulted for her expertise in coverage issues and has testified as an expert in coverage litigation and spoken at numerous seminars and conferences throughout the country.
Alan H. PackerNewmeyer & Dillion LLP
Newmeyer & Dillion, LLP is a California-based law firm provides a full range of litigation and transactional services to businesses and individuals, including home builders, real estate development firms, and others.
Alan Packer is a partner in the firm’s expanding Northern California office. He has practiced law in California for over 20 years, most of it representing parties involved in real estate, home building, construction, and insurance matters.
Mr. Packer represents home builders, property owners, contractors, and business clients in a broad range of legal matters, including risk management, insurance matters, wrap consultation and documentation, efforts to coutner solicitation of homeowners, subcontract and prime contract documentation, as well as complex litigation matters involving construction projects, product defect claims, construction defect claims, cost recovery actions, additional insured coverage matters, and creative dispute resolution. He also handles mechanic’s lien, stop notice, real estate, and payment and performance bond issues in residential and commercial contexts.
Today’s Topics
Topics for Today
Analysis of the types of risks particular to the construction industry& associated legal and underwriting issues
OCIPs, CCIPS, ROCIPS Brief overview of some of the impacts of
current economic conditions on construction
Construction Industry Risks
Construction Industry Catastrophic Risks Catastrophic injury potentials
Course of construction / Jobsite injuriesPost Construction/Products Completed
Operations Exposures: Bodily injury arising out of negligent construction Construction defect Property Damage claims
Catastrophic Risk
Catastrophic risk potentialCourse of Construction Hazards
Sources of exposure Moving parts and activity:
cranes, heavy machinery, height exposures, failures of structural components
that can lead to collapse hazards
#1 Course of Construction Losses
Personal injury & wrongful death claims Most commonly onsite construction workers are the injured
parties, although sometimes bystanders are also hurt The construction industry has one of the highest mortality rates
of all industries in the US. Workers are in danger from: Falls, Electrocution, Heat-related deaths Pollutants (asbestos and others) Lots of other causes
Other losses Property damage Business interruption Delay damages Multiple bond claims
Catastrophic Risk
Catastrophic Risk
Catastrophic Risk
#2 Post Construction Calamities (big and small) create long tail exposures After Construction is completed, liability
exposure for injuries can continue for decades. For instance,
Builder sued in 2003 for asbestos exposure of a janitor who worked in a high school in the 1950s that the builder built in the 1920s. An 80 year tail!
Contractor sued 15 years after construction when someone fell down a flight of stairs and claimed that the stairs were not built to code.
Catastrophic Risk
Bridge collapses
Potentially liable parties Inspectors Retrofit contractors Design professionals Construction managers Original construction (even
decades later)
Losses potentially insured: Personal injuries Death Property damage to bridge Property damage to
vehicles Business interruption
losses Replacement costs Multiple bond claims
Catastrophic Risk
Catastrophic Risk: pub with no beer*
* Australia (as if you had to think about it)
Station fire (fireworks/rock band)
Potentially covered losses Injuries & deaths Property damage Business interruption Rebuild Band reputation
Potentially liable parties Band Promotors Landlord Pyrotechnics Contractors who installed flammable
foam Building contractors
Construction Defect Exposures
Construction Defect Exposures
#1 issue in the hearts of carriers that causes fear from residential exposures in California Strict liability Expansion of residential claims Attorney solicitation Continuing exposure issues (Montrose) Efforts at liability reform (SB 800) Inherently uneconomic litigation models prior to wraps Impact of wraps
Potential liabilities Strict liability, negligence, breach of contract = explained
Kasdan
Milstein
Shinnick & Ryan
Sample Complaint
Sample Cross-Complaint
Sample Cross-Complaint, p. 2
The “Montrose” Effect
3. The “Montrose” Effect (cont’d)
“Occurrence” typically means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
C.N.A. POLICY SCOTTSDALE UNDERWRITERS @ LLOYDS RANGER AMERICAN SAFETY
Project begins Lawsuit FiledCompletion
Wraps and OCIPs
What is a “Wrap” Anyway?
No, what is a Wrap, really?
CIP – Controlled Insurance Program
OCIP – Owner CIP
CCIP – Contractor CIPSponsor (owner or contractor) provides insurance to all contractors and subcontractors for the project for general liability (sometimes w/c as well) for the term of construction and beyond into completed operations period
What is a wrap? (cont)
Owner or General Contractor will purchase insurance and “enroll” subcontractors into program. All parties who work on contruction will be covered under a single program.
Owner or GC responsible for premium and SIR or deductibles but will spread cost through contract “deducts” and/or indemnity provisions for deductible and/or SIR obligations
Single carrier for all claims will presumably enable ONE lawyer to represent all parties for any claim avoiding the “count the lawyers” game.
History of Wrap-Ups
1940s – Introduced on the U.S. defense plants 1950s – Applied to other projects (such as Lincoln
Tunnel) 1990s – Significant increase in popularity on commercial
and public works projects Late 1990s – Start of use on residential projects in
western United States
Benefits of Wraps
Covers all defined project risks under one policy. In theory, limits the number of parties, attorneys,
and claims professionals on any given claim. Reduces uncertainties arising from
subcontractor insolvencies Reduces uncertainties arising from insurer
insolvencies Reduces uncertainties arising from varying
subcontractor insurance (Montrose, residential exclusions, prior work exclusions, etc.)
Wraps – Underwriting complications
Underwriting information on insureds Setting premiums Differing types of projects Mixed use vs. conventional projects Aggregates and limits SIR’s and deductibles What happened to the loss history?????
Wraps – Legal Considerations
All relevant documents need to be carefully coordinated through legal counsel familiar with wrap issues.
Subcontract indemnity provisions SIR/deductible provisions Warranty provisions Subcontract insurance provisions Non-wrap exposure insurance and indemnity provisions Even the wrap policies themselves may require modification
based on the program involved. (Not all cookies are from the same mold.)
New Wrap Disclosure Obligations
AB 2738
Also new SIR limitations
Many older residential wrap-up programs are believed to potentially have inadequate limits as a result of both availability and cost
Defense Costs: Unified Defense is Still a Myth
New Wrap Disasters
Example
Builder buys $10,000,000 wrap-up policy covering builder and all trades
Builder and trades build the project and sell it A few years later, builder goes bankrupt (2008) The policy has a $1.0 million SIR before any
obligation to the subcontractors, who have NO OTHER INSURANCE because their practice policies exclude any project on which a wrap-up policy exists.
EXAMPLE – Actual wrap policy
Aggregate Limit: $25,000,000 for completed operations
Coverage Territory: All projects in California Defense Fees: INSIDE limits Number of Homes Constructed in Coverage
Territory: Over 10,000 per year Coverage per Unit Constructed (actual):
$1,750, including defense fees Coverage per Unit Constructed (actual),
assuming 20% litigation: $8,753, including defense fees
Defense Costs: Unified Defense is Still a Myth
Covering the gaps in the wraps
Excess and DIC wraps Current “hot” coverage enhancement Provides excess wrap coverage to
contractors, occasionally without additional premium Various limitations in varying endorsements
Excess applies only for non-residential projects
Applies only to projects with minimum limits
Looking Forward
Current Market Conditions
So how bad can it really be? December 2008 statistics:
Sales of new homes dropped by their biggest margin since 1994, falling 14.7%
New home sales (seasonally adjusted rate, homes per year):
December 2008: 331,000 homes.
July 2005: 1.389 million homes
Nationally, spending on home construction fell 27.2% in 2008
In California –CBIA forecasts that only 63,400 units will be produced in 2009, down from 2008. (Comparison: The low point of the homebuilding recession in the early 1990s was 84,656.)
Impact in California alone
Some more of the Numbers
California builders sold 3,500 units in November ‘08
California sales were .859% of national sales; historically California made up 12.5% of National sales figures
Inventory: 374,000 new (11.4 Months) competing with and extra 1.5M existing and unoccupied units for sale (Nationally)
Foreclosure activity
Market driven losses - example
Abandoned, incomplete structures Safety concerns Attractive nuisance issues CalTrans example Ownership & completion
Who is responsible for what after completion
Who retains responsibility during recess? What about contractual indemnity and AIs???
Increased homeowner dissatisfaction Translating into more homes in
litigation New claims for advertising, sales
negligence, predatory lending, etc.
Market Driven Losses
Impact on Builders & Trades
Bankruptcies on the rise Many trade contractors have gone bankrupt or are on the edge
of the cliff Some builders have gone under
Impact on: SIR payments Premium payments Quality of ongoing warranty reponses – and resulting impact on
claims
Automatic stay in bankruptcy.
Looking towards the future Residential Market Coma: Projected to last at least another 1-2 years Reduced ability to pay for appropriate levels of insurance (not buying
umbrellas/excess) SIR’s and ability to pay Decreased staff for customer service leading to more claims Evolving impact of legislative, policy, underwriting, and construction practice
changes Potential for high volume of coverage litigation under wraps and recent, non-
ISO/manuscript policy forms Shifting landscape of insolvencies among builders, subcontractors, insurers Increased product defect litigation Increased bankruptcies Newer technologies Commercial side
Credit markets keeping projects on hold More competition squeezes profit margins Residential contractors spreading their “wings” Uptick in infrastructure from government stimulus
Impact of the “Green” Revolution
Solar paneling Insulation “Tight” buildings – Title 24 and impacts
on construction Potential “dirty” green technologies Advertising claims Definitional problems
New Building Products
One of the following products really did get marketed:
Siding that disintegrates into cottage cheese-like substance
Lightweight fake roof shingles with paper inside Exterior stucco made mostly from styrofoam
New Building Products
New Products – New Problems
We’ve already seen: EIFS Hardboard siding Shakertown siding Centaur pipe PEX pipes/Kitec fittings Atlas Shingles
New ideas sometimes lead to great results.Other times, just new kinds of claims….
Impacts from the economy
Impacts on construction defect litigation Foreclosures Falling values Bankruptcies of developers, trades
Impacts of governmental economic stimulus projects Huge public works dollars Exposure on wraps vs. non-wrap; feasibility of wraps
Impacts on insurance market Uncertainty as to construction volume/exposures Return premiums or additional premiums How many homes, roads, bridges are you going to build this year?
For some contractors, it depends on the market The “pork barrel” problem
Questions?