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Traditional versus Project Insurance

Large construction projects create a mosaic of risks for all project participants—owner, architects, engineers, manufacturers, vendors, and contractors. In the standard form agreements for construction, the owner attempts to shift the risk to the construction manager/general contractor (CM/GC) via various provisions, including indemnification, consequential damages, cost, and schedule, just to name a few.

Despite this attempt to transfer the risks of the project contractually to third parties, the owner still may be liable for certain risks: extra hazardous operations, claims arising in common areas, owner-provided equipment, owner-retained contractors, or owner-provided design, assuming safety responsibilities or other liabilities or obligations in the construction agreement and vicarious liability arising out of the operations of the contractors.

Certain risks on the project are insurable, and the construction agreement requires the CM/GC and their subcontractors to provide certain insurance coverages and a certificate of insurance evidencing that the stated coverages are in force. This approach of having the CM/GC and all subcontractors provide the required insurance is often referred to as the “traditional insurance” approach and is used in many construction projects.

However, larger construction projects, generally over $50 million on commercial projects and $10 million-plus on “for sale” residential projects, lend themselves to be considered for insurance coverage on a project-specific basis, otherwise known as “wrap-up” insurance. Insurable risks that are commonly considered for project-specific coverages include the following.1

  • Commercial general liability and umbrella or excess liability
  • Workers compensation
  • Contractor’s pollution liability
  • Professional liability

The following advantages of project-specific coverage over traditional insurance are well documented.

  • Sponsor retains first-named insured status and more direct control over claims process
  • Completed operations extension or “tail” coverage (GL/XS/CPL/PL)
  • Higher catastrophic insurance limits
  • Broad coverage terms
  • Increases the size of the pool of bidders
  • Increased scrutiny on safety
  • Reduced internal time and expense devoted to insurance compliance
  • Potential for cost savings of the insurance line item by bundling the insurance spend of all the parties

Routinely, an owner is faced with two options to access the advantages of project-specific insurance coverages: the owner can purchase, or “sponsor” the coverage, known as an owner controlled insurance program (OCIP); alternatively, the CM/GC can purchase the coverage, known as a contractor controlled insurance program (CCIP). For purposes of this article, we will be limiting the discussion to OCIP versus CCIP insuring workers compensation and/or general liability/excess liability coverages.

OCIP versus CCIP—an Owner’s Perspective

Many midsized and large contractors have established CCIP programs, and it is common for them to propose utilizing their CCIP coverage for large projects.2 This is a good thing; it provides the owner with the options of relying on traditional insurance, purchasing an OCIP, or paying the CM/GC to provide the project-specific insurance coverage via a CCIP.

Once the owner’s chief financial officer or risk manager becomes aware of the capital project, it is quite common for them to engage their insurance broker or a consultant to prepare a financial pro forma to determine the extent of potential cost savings by sponsoring an OCIP. Routinely, the pro formas generate significant savings to the owner by assuming a large deductible or self-insured retention and controlling the claims expense; however, the owner should be cautious, relying on the projected savings as there are many variables and assumptions that go into the pro forma. This is particularly relevant if the owner is comparing the costs and savings in the OCIP pro forma to the cost of a CCIP.

Ideally, both parties (the owner’s broker or consultant and the CM/GC) will provide OCIP/CCIP cost estimates based on the same set of data, which can either be provided by the owner’s broker or consultant or the CM/GC.

  • Project description
  • Desired lines of coverage and limits
  • Project term (estimated start/end dates)
  • Project budget
  • Workers compensation payroll by workers compensation code

By having both the owner and the CM/GC provide pricing based on the same data set, it will enable the owner to evaluate the costs of both OCIP and CCIP on a consistent basis.

Advantages of a CCIP versus OCIP—an Owner’s Perspective

Bifurcation of construction risks. To me, this is the leading reason to consider project-specific insurance. Because an OCIP or CCIP insures all contractors and the owner under a single policy, it allows the owner to insulate its corporate insurance program from losses arising out of construction operations, which can prevent adverse loss experience arising out of the construction project from driving up insurance rates on its core business. The CCIP accomplishes this bifurcation of construction risk.

Expertise. Owners with large capital expenditure (CapEx) programs may have sponsored OCIPs in the past or may have a “rolling” OCIP program for their CapEx program. However, there are many other owners that build a large project every several years and have limited experience with OCIPs. Internally, they may not have the expertise to evaluate, implement, and manage an OCIP; whereas, the contractor deals with construction risk every day and likely has robust risk management programs and personnel experienced in implementing and administering their CCIP. A common contractor sentiment is “if I have the risk, I should be able to purchase my own insurance to protect my risk.”

Resources. Owners have indicated to me on numerous occasions that, while they are attracted to the potential cost savings of an OCIP, their staff is lean and they lack the capacity to administer an OCIP. While the insurance broker or OCIP administrator provides many of the transactional services of marketing the insurance coverages, providing program documents, enrolling subcontractors, and collecting certificates of insurance and monthly payroll reports, the owner retains certain responsibilities as the sponsor of an OCIP, often within the owner’s risk management department.

  • Selection of broker and/or OCIP administrator
  • Gather and provide underwriting information required to obtain the quotes
  • Review and approve OCIP documents prepared by the broker and/or administrator: underwriting submission, quotes, OCIP contractual addendum, and OCIP manual
  • Select insurer, coverages, and limits of coverage
  • Execute any legal agreements with insurer and post collateral, typically a letter of credit (LOC), if applicable
  • Review periodic OCIP reports
  • Review claims loss runs and participate in claims meetings
  • Make claims settlement decisions

If the contractor has experience sponsoring CCIPs, especially if they have a “rolling” CCIP insuring multiple projects, they have established protocols and experienced risk management and field personnel to manage all aspects of the program.

Collateral requirements. As mentioned above, if the OCIP is written with a large deductible program ($250,000–$500,000 each occurrence is common), the insurer will require the sponsor to post a clean, irrevocable LOC to securitize that claims obligation. If the sponsor does not reimburse the insurer for paid claims, the insurer can present the LOC to the owner’s bank and draw down on the LOC. While LOCs have a cost element (typically .75–1 percent annual rate on the amount of the LOC), the important item to note is that the LOC obligation will likely remain in force by the insurer, generally through the statute of repose, which can be 5–12 years after substantial completion, depending on the state. In the case of a CCIP, the CM/GC holds this obligation.

Upfront insurance premiums. As a sponsor of an OCIP, you will be responsible for paying certain costs upon binding coverage. Typically, the primary insurance coverage will have a deposit premium (25–40 percent), with the remaining balance spread throughout the project. Excess/umbrella insurance coverages are typically paid 100 percent upon binding, and the broker/administrator typically requires an initial installment as well. The CM/GC will also require a payment for the CCIP coverage, sometimes 100 percent upon binding coverage, or it may be spread out as the work is billed.

Known insurance costs. For the lines of insurance provided by the CCIP, the cost of the CCIP is known at the beginning of the project. CMs/GCs typically charge for the CCIP on a percent of construction costs (e.g., 2.5 percent of contract value).3 In addition, if the payroll estimates in the pro forma were lower than the final audited payroll, the owner may be subject to additional premium4—the CM/GC bears this risk under a CCIP.

Drawbacks of a CCIP versus OCIP—an Owner’s Perspective

Loss of first-named insured status. As a sponsor of an OCIP, the owner attains first-named insured status on the general liability/excess or umbrella liability policies. In contrast, some CCIP sponsors and some insurers limit the owner to additional insured status. Their biggest concern is that they do not want the CCIP to inadvertently insure the operations of the owner (e.g., manufacturing or hospital operations) under the OCIP. Suffice it to say, in the event the owner is listed as an additional insured, it must be satisfied that the language in the additional insured endorsement provides it with an adequate mechanism to attain protection under the CCIP.

Speaking of “insureds,” It is also important for an owner to confirm that there is no “insured versus insured” or “cross-liability” exclusion on the CCIP. This provision, which prevents one insured from suing another insured, is common on wrap-up programs, particularly those placed in the excess and surplus lines market, and may prevent the owner from suing the CM/GC. Some of the endorsements restrict “named insureds” from suing other “named insureds” and other versions restrict suits between any insured under the policy. In either case, if requested, the underwriters will typically carve out an exception to the exclusion by allowing cross-suits between the owner and CM/GC.

Indirect involvement in claims. OCIPs can be an effective tool for owners to address liability claims that arise from members of the public. Because the programs often have large deductibles, the owner has input in the claims settlement process, particularly when the value of the claim falls within the deductible. Municipalities, healthcare facilities, universities, and others with a sensitivity to public liability exposure prefer more direct involvement in the claims process. In contrast, when the project is insured under a CCIP, the CM/GC is the party directing the claims and has the financial incentive to minimize claims payments.

Project with multiple CM/GCs. If the project utilizes a multiprime delivery model or involves multiple CM/GCs, an OCIP lends itself better to drive consistent insurance coverage, administrative protocols, and claims management across the entire project.

CCIP may cost more than an OCIP or traditional coverage. The cost of the CCIP, established between the owner and CM/GC, may cost more than an OCIP or traditional insurance. In most cases, the OCIP cost is not known until the end of the project because the two greatest variables in the savings formula are the amount of insurance credits or deductions from the GC/CM and subcontractor bids along with favorable claims experience. Of course, if either of these elements is deficient, the OCIP can cost more than a CCIP or traditional insurance.

Additionally, the cost of the CCIP may include an array of services such as an on-site medical trailer, claims management services, CCIP administration, and internal administrative time, which may not be fully accounted for in an OCIP pro forma.

Loss of statutory immunity. In certain states, there is established case law that a sponsor of an OCIP (i.e., the owner) enjoys statutory immunity protection from civil claims from employees of contractors insured under the OCIP. This owner benefit is negated under a CCIP.

Loss of completed operations coverage. One of the greatest coverage benefits of an OCIP or CCIP is the dedicated single limit and the extension of time the general liability and excess/umbrella policies will insure bodily injury and property damage included in the products-completed operations (PCO) hazard, typically out through the statute of repose. This is accomplished via a completed operations extension endorsement, or it may be included in a wrap-up endorsement on the policy.

Each insurer has specific language in their policies that address when the coverage is effective and under what conditions the coverage is void. Common terms that void the PCO coverage extension include (varies by insurer) the following.

  • The policy is canceled or nonrenewed for any reason prior to the policy expiration date.
  • There is a failure to pay premiums, audits, or deductible losses when due.
  • The work is not complete or abandoned prior to the policy expiration date.
  • There is a material misrepresentation by the sponsor.
  • There is a failure to comply with loss control recommendations or peer reviews.
  • There is a failure to provide requested enrollment documentation.

These same exclusions are also commonly found in OCIP policies. However, in an OCIP, the owner has control over these variables. In the case of a CCIP, the owner has limited control and may be surprised if the PCO is canceled. If the PCO coverage is canceled, either due to one of the conditions stated on the policy or the CM/GC is replaced with another CM/GC, it will be very difficult to find an insurer to assume the PCO liability during the middle or the end of a construction project.

It is suggested that the reasons for cancelling the PCO extension be minimized and that the owner requires the CM/GC to warrant that the CCIP coverage remains in force both during construction and during the PCO extension period. The owner will also be well served by requiring the CCIP policies are endorsed to provide 30- or 60-days’ notice to the owner for nonpayment or cancellation.

Conclusion

Owners should weigh all available options available to them to ensure the risks arising out of construction projects are adequately protected. Project-specific insurance coverage, OCIP or CCIP, offers many coverage benefits over the traditional approach of having the CM/GC and subcontractors providing their respective insurance protection. Either OCIP or CCIP allows the owner to bifurcate its construction risk away from its core insurance program loss experience.

A CCIP affords the owner the opportunity to capture many of the protections of project-specific coverage without the internal time, expertise, expense, and resources required to administer an OCIP. That said, owners should also be aware of the drawbacks to the CCIP approach and address insurance coverage concerns during the decision process.


1Builders risk insurance is also commonly written on a project-specific basis.

2The owner will sometimes request the CM/GC provide pricing for a CCIP as part of their proposal to construct the project.

3The cost of the CCIP varies by contractor,  on the services provided, premiums, the state in which the project is located, limits, and project type.

4The OCIP insurer may offer a guarantee not to charge additional premium if the audited payroll is no greater than 10 percent of the payroll used to calculate the deposit premium.

Source: www.irmi.com


Builders Risk: Minimizing Uncertainty at Bid Time

At the bid preparation stage, contractors often do not have full information on the builders risk insurance that will be provided by the project owner. The insurance requirements may be unclear or missing altogether. This often results in misunderstandings down the road. But it does not have to be that way.

The clarity and completeness of builders risk insurance requirements can and do vary considerably. I have encountered bid documents that do not contain builders risk requirements at all. I have also seen builders risk insurance addressed by a single sentence. These are actual examples:

  • “Owner will provide builders risk coverage.”
  • “The Owner shall provide property insurance upon the Work, but Contractor is responsible for all deductibles and uninsured losses.”
  • “Intentionally left blank.”

These examples all have one thing in common: The contractors are left to speculate on what, if any, coverage will be provided to them in the event of damage to the project. This is not a good way to start a project.

On the other hand, the insurance requirements may be complete and each contractor knows what risks are transferred to the builders risk insurer. This removes uncertainty … and any time you remove uncertainty, bid pricing is more favorable for the project owner. (Owners, please take heed.)

Why Aren’t Insurance Requirements Clear?

Insurance requirements may not be clear for two reasons. First, if model contract forms are used (e.g., American Institute of Architects, ConsensusDocs, Engineers Joint Contracts Documents Committee, Design-Build Institute of America), the builders risk provisions may be unclear or lacking to begin with. Many people assume that if a provision is contained in a model contract form, it must be appropriate. This is not true. Depending on circumstances, some provisions may be inappropriate. Other important loss exposures may not be addressed at all.1

For example, the standard builders risk insurance requirement in one model contract form requires coverage on an “all risks” basis. This is desirable, but in the section that lists the causes of loss that must be covered, there is no reference to ensuing loss exceptions. Many say that the most commonly litigated provisions in builders risk policies are the exclusions applicable to faulty design, workmanship, and materials. The breadth of coverage is very different between a policy that has these exclusions and another that has these exclusions followed by ” … unless direct physical loss or damage by an insured cause of loss ensue and then this policy insures only such ensuing loss or damage.” The latter example has an ensuing loss provision, which is very beneficial to all those entities insured by a builders risk policy.

The second reason for unclear insurance requirements is that the drafter may not have the technical or practical experience necessary to properly structure the requirements. We have all reviewed insurance provisions that are poorly conceived and executed. Enough said.

What Can Contractors Do?

The construction bid process generally provides opportunities for a contractor to obtain clarifications or answers to questions. These are set forth in the bid documents and may include pre-bid meetings or procedures for submitting questions. With private work, a contractor may also qualify its bid to include certain assumptions regarding insurance.

Many contractors wisely seek additional information and answers to their questions. Others may know there are potential problems but hope for the best, and still others are not aware of the issues.

Checklist Tool

It is suggested that contractors compile a builders risk insurance checklist and request the owner to confirm what is contemplated/provided by the builders risk policy. A sample checklist is reproduced below. This template should be customized by the contractor to suit its needs. Regular use of a checklist can minimize uncertainty for all parties and further risk management programs.

Coverage or Feature Minimum Requirement/Comments
1 Owner Responsibilities
Insurer selection AM Best “A X” or better
Naming of insureds Owner, general contractor, subcontractors of all tiers
Premiums and deductibles Owner is responsible
Policy format Inland marine policy and forms
Provide copy of policy Within 60 days of project start
Policy term In compliance with the contract
Partial occupancy prior to project completion Secure approval of insurer
2 Covered Property Replacement cost; no coinsurance
Work at project site Full contract value and modifications; owner’s supplied property
Property in transit Limits to be agreed upon
Property at off-site locations Limits to be agreed upon
3 Covered Causes of Loss/Other Features
“All risks” Full policy limit
Wind Full policy limit
Collapse Full policy limit
Water damage (incl. sewer backup and sprinkler leakage Full policy limit
Collapse Full policy limit
Faulty design, workmanship, materials (resulting damage) Full policy limit
Terrorism Full policy limit
Flood Limits to be agreed upon
Earth movement Limits to be agreed upon
Equipment breakdown Limits to be agreed upon
Hot testing Limits to be agreed upon
Debris removal Limits to be agreed upon
Pollution, mold, fungus Limits to be agreed upon
Additional costs due to building laws Limits to be agreed upon
Extra expense (contractors) Limits to be agreed upon
Waivers of subrogation In compliance with contracts

Source: www.irmi.com


1 For a detailed analysis of builders risk insurance requirements in different standardized contract forms, refer to The Builders Risk Book, by Steven A. Coombs and Donald S. Malecki, published by International Risk Management Institute, Inc., in 2010.


How Well Does That Blanket Cover Your Client?

Blanket additional insured endorsements are useful tools for preventing administrative oversights and reducing paperwork, but they also carry risks for both the named and additional insureds. Discover methods contractors and subcontractors can use to minimize the risks of breaching their contracts when using blanket AI endorsements.

One of the age-old problems in obtaining additional insured status under a contractor’s or subcontractor’s insurance policy is making sure the appropriate actions have been taken to effect the required coverage. Certificates of insurance are commonly used to verify that the certificate holder has been added as an additional insured, but because they are not part of the policy, information contained on certificates may not be binding on the insurer. This article examines the use of blanket endorsements to effect additional insured status as a means of overcoming at least some of the imperfections of the process.

Additional insured status is a common and effective tool for protecting one party from certain risks arising out of another party’s activities. For example, municipalities typically require additional insured status from anyone holding a public event on city property, such as concerts, parades, and carnivals. The rationale behind this requirement is that the activities expose the city to certain risks that would not otherwise exist, so the person or organization that creates the risk should assume responsibility for any losses incurred as a result of the activities. In the case of a public concert, for example, if someone is injured when the crowd gets unruly, both the city and the concert sponsor will likely be sued. As an additional insured under the sponsor’s policy, the city can tender the claim under that policy instead of having to file the claim under its own insurance. The risk has been effectively transferred to the concert sponsor (assuming the available policy limits are sufficient to cover the claim.)

On a construction project, the owner typically requires additional insured status under the general contractor’s liability insurance policies; general contractors may do likewise with subcontractors. As in the example above, the rationale is that the construction activities create certain risks that would not otherwise exist and increase the magnitude of certain other risks. For example, a construction project in a retail district carries the risk that a pedestrian will be injured from flying debris, collapsed scaffolding, or a tool dropped from several stories up. These risks are directly related to the contractor’s operations on the site. Further, goes the rationale, the contractor (or subcontractor) performing the work is generally in the best position to prevent or control losses arising out of the work, and should therefore bear the corresponding financial risk.

However, requiring additional insured status does not necessarily guarantee that you will get it. The named insured (contractor or subcontractor) must notify the insurance company of the request, and absent a provision to the contrary, the person or entity requesting additional insured status must be listed, or “scheduled”, by name on an endorsement that is attached to the policy.

Because this requirement is so common in construction contracts, some contractors may handle hundreds of requests for additional insured status in a given year. Further, because the contracting process is often drawn out, and the insurance requirements given little more than a cursory review, this method of providing additional insured status carries inherent risks of error and oversight. Whether the result of failing to forward the request for additional insured status to the broker or insurer, failing to ensure additional insured status under a new or renewal policy, or some other oversight, a contractor (or subcontractor) can easily find itself in breach of a contract, among other unpleasant outcomes. Likewise, the would-be additional insured may find itself embroiled in a coverage dispute with the insurer and a contract dispute with the named insured contractor; meanwhile, it may be forced to tender the claim to its own insurer (or, if self-insured, fund its own defense). All of these possible outcomes frustrate the intent of the contracting parties.

Blanket additional insured endorsements were introduced as a means of avoiding administrative errors and oversights in providing additional insured status. These endorsements typically contain language indicating that additional insured status is automatically provided when the named insured agrees to provide such status. To avoid overly broad grants of coverage, these endorsements typically limit their application to certain types of written contracts, such as construction contracts or equipment rental agreements.

The obvious benefits of blanket, or automatic, additional insured endorsements are that they protect against failure to add a party as an additional insured in accordance with the contractual agreement, and reduce the administrative burden of making each request individually. However, from the additional insured’s perspective, there are also some potential drawbacks to obtaining additional insured status in this manner. First, in the past, blanket additional insured endorsements had to be manuscripted as no standard endorsements were available. Because they are not standardized, manuscript endorsements can differ from one policy to the next. Consequently, they offer less predictability in terms of scope of coverage, as well as how a court might interpret the language of the endorsement.

Because blanket additional insured endorsements typically require a contractual obligation on the part of the named insured to provide such status, those who obtain additional insured status through such an endorsement must retain proof of the contractual requirement to effect coverage. Even when the additional insured’s coverage does not apply to completed operations, claims arising out of occurrences that took place during the course of construction may not surface until years later. Some additional insureds assume that a certificate of insurance showing additional insured status at the time of the occurrence will be sufficient to trigger the insurer’s duty to defend and indemnify. That is not necessarily true. The additional insured will also need evidence that there was in fact a contract requiring such coverage. While a certificate of insurance indicating that the certificate holder has been added as an additional insured is evidence of a contractual requirement, a better approach may be to require the certificate to refer to the contract requirement. For example, the following language could be required on the certificate:

“In compliance with the contract requirements, certificate holder is an additional insured under the policy.”

If possible, the contracts themselves should be retained. (This should not impose a significant additional burden in most instances, as construction contracts are typically retained for access to indemnity and other provisions that may come into play well after the project is completed.)

Finally, blanket additional insured endorsements restrict insurers ability to provide notice of cancellation to additional insureds. Most insurance policies require such notice to be provided only to the named insured. Additional insureds often try to obtain a guarantee of notice of cancellation by modifying the certificate language, but this is an unreliable approach.

Summary

Blanket additional insured endorsements are useful tools for preventing administrative oversights and reducing paperwork, but they also carry some risks for both the named insured and the additional insured. Fortunately, these risks can be managed fairly effectively.

Owners and contractors requiring additional insured status should make certain the additional insured requirement is part of a written and properly executed contract, and retain copies of these contracts (as well as the certificates of insurance) for an appropriate period of time—at least 3-5 years if completed-operations coverage was required and included in the additional insured’s coverage. Further, they should stipulate in the contract insurance requirements a minimum scope of coverage to be provided to them as an additional insured.

Contractors and subcontractors using blanket additional insured endorsements to provide contractually required coverage can minimize the risks of breaching their contracts by sticking with language that has been tested, and making sure the endorsement extends the contractually required scope of coverage.

Source: irmi.com


Secure Favorable Wording in Contractual Liability Exclusion

Contractual liability exclusions are a fact of life in directors and officers (D&O) policy forms. While there is no getting around the existence of the contractual liability exclusion within standard policy wording, insureds can certainly benefit from variations in wording that can carve-back certain elements of coverage. Consider asking the following questions in order to determine potential ways to minimize the impact of the exclusion.

  • Is there a carve-back for liability that would have attached even in the absence of a contract or agreement? All policy forms should make this exception.
  • Does the exclusion bar coverage for written contracts only? Or does it also apply to oral contracts?
  • Does the exclusion only refer to “contracts,” or does it also apply to “agreements,” “warranties,” and/or “guarantees”? Inclusion of these other terms, especially when combined with wording excluding them in their oral forms, can significantly broaden the effect of the exclusion and thus constrict coverage.
  • Is there a carve-back for defense costs in the event of claims against insured persons (e.g., Side A defense coverage)?
  • Does the exclusion apply to both express and implied contracts? Much like the inclusion of some of the terminology shown above, implied contracts can extend the restrictive impact of the exclusion to a far greater range of the insured’s activities.
  • Does the lead-in wording to the exclusion bar coverage for claims “for” contractual liability, or does it bar coverage for claims “based upon, arising out of, or in any way related to” contractual liability? The former is the less common approach but is more favorable for an insured.
  • Does the exclusion explicitly state that it also applies to the liability of others that an insured assumes?
  • Is there an exception for contractual liability related to “employment claims”? With the blurring of some D&O and employment practices liability (EPL) risks in recent years and the frequency with which officers have employment contracts, this is particularly relevant.

Source: www.irmi.com


Builders Risk Protective Safeguard Endorsements and Warranties

Builders risk policies may contain protective safeguard and/or warranty endorsements that require insureds to implement specific measures to protect property during construction. Such requirements must be complied with by the insured as a condition of coverage. What do these requirements look like, and what are the implications to stakeholders?

Builders risk insurance underwriters may impose policy restrictions regarding the implementation of specific measures to protect property being constructed or renovated. These restrictions are typically memorialized by a policy condition or warranty1 (hereafter collectively referred to as a “condition”) set forth in an endorsement to a builders risk policy. The purpose of these endorsements (“protective safeguards”) is to impose an obligation on the insured to ensure it will fully comply with specific safeguard(s). Otherwise, coverage will be negated.

Protective safeguards endorsements are nonstandard, and substantial differences exist between insurers and policies. These endorsements are titled in a variety of ways. Some examples include the following.

  • Protective Measures and Safeguards Endorsement
  • Protective Safeguards Endorsement
  • Security and Protective Device Provision
  • Protective Safeguards Warranty Endorsement
  • Protective Safeguards and Services Endorsement

Why Do Underwriters Utilize Protective Safeguard Endorsements?

These endorsements are used for different reasons. Some insurers provide a premium discount for actions that reduce risk. Underwriters want to ensure that such safeguards are implemented and maintained by issuing an endorsement. Other underwriters contend that certain construction projects may not be insurable without imposing mandatory safeguards. Still others simply want to reduce their exposure to loss, and they view these endorsements as a tool to accomplish that.

These endorsements tend to be utilized more on smaller construction projects compared to larger ones. It is uncommon for builders risk policies that insure larger projects to incorporate such endorsements. This is because the loss prevention programs of large project owners, construction managers, and general contractors are more evolved and in tune with the demands of underwriters.

What Causes of Loss Do These Endorsements Apply to?

Each of these endorsements has introductory language that specifies how the endorsement restricts coverage. Some endorsements limit the applicability to one or more specific causes of loss (perils). Other endorsements apply to all perils.

Here is an example of language that applies to specified perils.

Protective Measures and Safeguards Endorsement

You agree to maintain the protective measure(s) or safeguard(s) shown below for the term of the policy. If you do not maintain the protective measure(s) or safeguard(s), we will not cover “loss” caused by or resulting from fire, theft, or vandalism during the period that the stated protective measure(s) or safeguard(s) are not in effect or in working condition.

If you fail to provide or maintain the stated protective measure(s) or safeguard(s), coverage for “loss” caused by or resulting from fire, theft, or vandalism is automatically suspended. This suspension will last until the measure(s) or safeguard(s) are back in operation. (Emphasis added.)

Here is an example of language that applies to all losses.

Protective Safeguards Warranty Endorsement

In consideration of the issuance of this policy, the insured hereby warrants that the Protective Safeguards described in the schedule below for which an X is shown in the corresponding box will be maintained at the job sites designated in the Declarations.

Failure to maintain the Protective Safeguards required would void insurance coverage for any loss which occurs at the jobsites at any time while such required Protective Safeguards are not maintained.

The undersigned authorized representative of the Insured hereby agrees, on behalf of the Insured, to maintain the Protective Safeguards specified above and further acknowledges and agrees that failure to maintain those Protective Safeguards will operate to void coverage for any loss which occurs at the job sites at any time while Protective Safeguards are not maintained there. (Emphasis added.)

The latter policy language is much more restrictive than the former because the warranty applies to any loss that occurs while a protective safeguard is not maintained—coverage is void during such period.

Types of Safeguards

Each of the endorsements set forth the applicable required protective measures/safeguards. These are segregated into the categories identified below. Within each category are actual safeguard wordings taken from builders risk policies and endorsements. Note that some of these requirements are very clear; others are ambiguous at best.

Fencing

  • You agree to maintain perimeter fencing at minimum of 8 feet surrounding entire jobsite and locked gate(s).
  • The entire Insured Project site will be surrounded with a chain link fence not less than 6 feet in height, suitably anchored in the ground a reasonable distance from insured property. Gates though the chain link fence will be securely locked during nonworking hours.
  • The active construction site is fenced.
  • You will maintain a fence around the entire perimeter of the insured premises. This fence may be constructed of chain link, wood or other suitable material, and must be locked at all times during which normal operations usual to the conduct of your business are not being performed.
  • Enclose the jobsite with a fence at least 6 feet in height.
  • Complete perimeter 6-foot chain link fencing with gates closed and locked during all “nonworking hours.”
  • Fenced jobsite means a fence, not less than 6 feet in height, that completely surrounds the jobsite, with no openings unless gated. All gates to such fence shall be closed and locked, to secure against entry to the jobsite, during all nonworking hours.
  • Perimeter fencing which completely surrounds each job site shown with gates closed and locked during all nonworking hours.
  • A fence with adequate strength and locking gates with a height of at least 6 feet must surround the construction site.

Lighting

  • You agree to maintain lighting on site.
  • The entire insured project site will be illuminated from sunset to sunrise, each day.
  • The active construction site is lighted from sundown to sunrise once power is available at the site.
  • You will maintain lighting around the entrances to the premises, including gates to fences.
  • Shall illuminate the jobsites sufficiently to reveal the presence of trespassers.
  • Exterior illumination (other than public street lights) providing illumination to all sides of the “project site.”
  • Exterior lighting means the premises shall be provided with lighting that shall illuminate the entire perimeter of the premises, and will be operational during all nondaylight hours.
  • Around the entrances of the building or structure, including fence gates.
  • The construction site must be illuminated by adequate lighting a night.

Detection Systems

  • Operable Burglar Alarm System. You agree to maintain a burglar system connected to central station or monitored by a public or private alarm company.
  • Operable Burglar Alarm System. You agree to maintain a burglar system connected to central station or monitored by a public or private alarm company.
  • Automatic Burglar Alarm. Protecting the entire building or structure, which signals to an outside central station or police station.
  • Automatic Burglary Alarm. Protecting the entire building or structure, which has a loud sounding gong or siren on the outside of the building or structure.
  • Operable Smoke or Fire Detection System. You agree to maintain a smoke or fire alarm system connected to a central station or monitored by a public or private alarm company.
  • Automatic Fire Alarm. Automatic Fire Alarm, protecting the entire building or structure, that is connected to a central station or reporting to a public or private fire alarm station.

Sprinklers

  • Automatic Fire Extinguishing System. You agree to maintain the automatic fire extinguishing system.
  • Operational Sprinkler Sprinkler/Standpipe System. When and as required by local fire department/building codes and/or contract documents.
  • Automatic Fire Extinguishing System. Automatic sprinkler system, including supervisory services.
  • Flow Alarm. The insured shall install and employ a water flow alarm on all automatic sprinkler system(s) from the time the system(s) are first filled. The insured shall exercise due diligence in maintaining the water flow alarm in good working order and the Insured shall immediately notify the underwriter in writing when the automatic sprinkler system(s) are impaired.

Fire Hydrants

  • Prior to start of construction, fire hydrants will be installed within the insured project site’s boundaries or within 100 feet thereof and will be connected to a public water supply, tested and fully operational.
  • There will be an operating fire hydrant operating under adequate water pressure within 100 feet of the premises, within __ days after policy inception.
  • Fire hydrants means hydrants installed such that no part of the insured project is more than 500 feet from the nearest hydrant. Installed hydrants must be connected to a public water supply, tested and fully operational.

Video Surveillance

  • Video/surveillance equipment with recording system.
  • Video surveillance monitoring that is around the perimeter and interior of the building or structure and supervised by an independent security service at all times during which normal operations usual to the conduct of your business are not being performed.
  • Internet-based video surveillance and recording be provided by an established supplier.

Security Services

  • Guard Person. You agree to maintain, at your expense, a watchperson at the indicated premise(s) at night and during non-working hours.
  • Guard Person. You will maintain a private watchperson, under your exclusive employ. The watchperson will be on duty on the premises at all times during which normal operations usual to the conduct of your business are not being performed. This watchperson will have a radio, cellular telephone or other communications device allowing instantaneous notification of law enforcement and fire protection authorities.
  • Guard Person. You will maintain a private watchperson, under your exclusive employ within the number of days after policy inception indicated below. The watchperson will be on duty on the premises at all times during which normal operations usual to the conduct of your business are not being performed. This watchperson will have a radio, cellular telephone or other communications device allowing instantaneous notification of law enforcement and fire protection authorities.
  • Guard Person. Employ a watchman to guard the job sites when insured or a contractor representative hired by the insured does not otherwise occupy the sites.
  • Guard Person. The named insured will employ a person, whose sole duty will be the security of any insured project site, who will be on the premises of the insured project site during all nonworking hours. This guard will be equipped with a telephone for immediate use.
  • Guard Person. Watchman or guard on clock stations whose regular patrol route covers all areas of the “project site” at least hourly during “nonworking hours.” The watchman or guard shall have a telephone on premises for his use.
  • Security Service. The named insured will employ a security service with one or more guards on the premises of the insured project site, with a recording system or watch clock, making no less frequently than hourly rounds covering the entire insured Project site during all nonworking hours. The guard or guards will record or have a watch clock record the time of each inspection round. The guard or guards will be equipped with a telephone for immediate use.
  • Security Service. Engage a guard service which shall maintain a representative on the job sites when the job sites are not occupied by the insured, one of the insured’s representatives or a contractor representative hired by the insured.
  • Security Service. Security service means a watchman, or watchmen, making no less than hourly rounds of the entire jobsite during nonworking hours, and maintaining appropriate log(s) of such hourly rounds. Security service shall be required once the erection of walls has commenced at any structure at the insured construction site.
  • Security Service. Private security guard service for each job site with regular patrols of the job site during all nonworking hours.

Activities

  • Cutting and Welding. All combustible materials will be moved at least 25 feet away from, the cutting and welding area(s) or will be covered or shielded by noncombustible material.
  • Cutting and Welding. All floor, wall, window and other openings including gaps, cracks, or spaces in the building or structure, within 25 feet of the cutting or welding area(s) will be covered by noncombustible material.
  • Cutting and Welding. Dedicated standby firefighting equipment will be provided at the cutting or welding area.
  • Cutting and Welding. A designated employee, trained in the use of the stand-by firefighting equipment, will be assigned the sole responsibility of fire watch and will remain on duty at the cutting or welding area during cutting and welding operations and at least 60 minutes after such operations are ceased. No hot work permits shall be issued and not hot work activities should be permitted within 2 hours of the end of the workday or the end of a shift.
  • Welding, Brazing, Soldering, and Thermal Cutting. A fire watch person with a UL listed portable fire extinguisher having a rating not less than 2-A/10-B, and trained in its use, will be present at all welding, brazing, soldering and thermal cutting operations and at least for 30 minutes following their completion; such operations shall cease 30 minutes prior to the end of the shift; 20 feet of clearance will be maintained between such operations and any combustible materials that are not permanently installed; adequate temporary protection shall be provided for any permanently installed combustible materials within 20 feet horizontally and for any combustible materials at any vertical distance below such operations.

Other

  • Storage. Fully enclosed locking metal containers whose locks are protected against cutting, or a fully enclosed locked room with double cylinder dead bolt locks will be used for storage of electrical wiring, lighting fixtures, plumbing fixtures, switch panels, and other pilfer able items.
  • Brush Clearance. Brush clearance means all covered property at the project location shall have brush, and any other vegetation, completely cleared, to a minimum of 500 feet, from such covered property.
  • Locks. All points of ingress and egress to and from the building or structure will be gates and locked when normal operations usual to the conduct of the insured’s operations are not being performed. If a gate is unlocked, the insured will ensure guarded access to check credentials.

Which Parties Do These Protective Safeguards Impact?

These endorsements apply to either “named insureds” or “insureds,” depending how the builders risk policy is structured. Since the majority of builders risk policies include the project owner, general contractor, and subcontractors as insureds, one should assume the requirements apply to all insureds.

From a practical standpoint, these endorsements can cause significant problems for stakeholders. Based on my experience with projects and builders risk insurance, the stakeholders are rarely aware that a protective safeguards endorsement is part of the policy.

Unlike builders risk policies issued in Canada and Europe, policies issued in the United States rarely have a “separation of insureds” or a “severability of interest” clause. Such clauses clarify that coverage will remain intact for insureds that do not contribute to a breach of a policy condition or warranty. If there is no such clause in a builders risk policy, it is likely that none of the insureds will be covered if there is a breach of the condition by one of the insured parties.2

What Can Go Wrong?

Stakeholders are commonly unaware that a protective safeguards endorsement is part of the policy. How does this happen? Many reasons exist.

  • The insurance agent or broker that placed the policy is unaware that the proposal and policy contain such an endorsement.
  • There was no mention of the endorsement in the proposal, but the policy is issued with an endorsement.
  • The insurance agent or broker is aware of the endorsement but does not point this out to the policy sponsor (typically the first named insured).
  • The policy sponsor is unaware of the endorsement because it does not read the policy.
  • The policy sponsor is aware of the endorsement but does not inform the other insureds.
  • The builders risk policy is not distributed to other insureds by the policy sponsor.

What Are the Consequences?

If there is a builders risk loss and it is determined that the insured did not adhere to the requirements of a protective safeguard endorsement, it is probable that the builders risk insurer will deny coverage. This often leads to litigation. Insurers are generally successful in denying coverage when unambiguous protective measures are required in a builders risk policy but not adhered to by the insured.

An example is Liberty Ins. Underwriters, Inc. v. Weitz Co., 158 P.3d 209 (Ariz. Ct. App. 2007). Liberty issued a builders risk policy to Weitz, the contractor for four dormitories being built at Arizona State University. The policy contained three warranties that required the contractor to (1) maintain adequate fire extinguishers on the job site, (2) conduct a fire watch during all welding operations or other hot process, and (3) inspect the premises for fire hazards. Each of the warranty endorsements specified that failure to comply with the warranty rendered coverage null and void. After a fire destroyed one of the dormitories under construction, Liberty filed a declaratory judgement action seeking to exclude the loss due to the contractor’s failure to adhere to the warranty endorsements. Liberty prevailed.

In those cases where insureds prevailed, courts found that (1) the protective safeguard endorsements were ambiguous, (2) the insurer knew before the loss that the insured was not complying with the protective safeguards but failed to do anything about it, or (3) the failure to adhere to the required safeguard was not the cause of the loss.

Best Practices

The following actions can help prevent problems and litigation following a loss.

  • If a builders risk underwriter imposes protective safeguard(s) in its proposal, the agent or broker should review the safeguard(s) to better understand what is being required.
  • The agent or broker should attempt to eliminate the safeguard(s) if possible, or at least ensure the safeguards are reasonable for the project.
  • To the extent that the agent or broker is unsuccessful in eliminating the protective safeguard requirements, he or she should educate the sponsor of the builders risk policy by making it aware of the safeguards.
  • The policy sponsor should inform the stakeholders about the safeguard(s).
  • The general contractor should make the subcontractors aware of the safeguard(s) and require its workforce and subcontractors to adhere to the safeguard requirements.
  • The policy sponsor should read the builders risk policy and make it available to all insureds.

Summary

Some builders risk policies contain conditions relating to mandatory protective safeguards. These safeguards must be adhered to preserve coverage. But the first step is to make sure that the stakeholders are aware of the safeguards. Agents and brokers can and should serve an important role in this regard.

Source: www.irmi.com

_____________________________________

1 Within the context of builders risk insurance, policies may contain warranties, such as a promissory warranty, that certain acts shall be done. Builders risk policies may also contain conditions (e.g., mandatory loss prevention measures) that, while not labeled specifically as a warranty, must be maintained after the risk attaches. For a full discussion of warranties and conditions, see Couch on Insurance, 3d, chapter 81, West Group Clark Boardman Callaghan Pub. 12/96.

2 See my IRMI Expert Commentary article titled “Builders Risk: Separation of Insureds Clause” (May 2015).


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