Category Archives: Construction Insurance

Cyber Risks in the Construction Industry

Posted on November 7, 2017 by Marijana Dabic

While you may think construction firms are not an attractive target for cyber criminals, the truth is no business is safe from cyber crime.

Regardless of how big or small your construction firm is, chances are you store valuable information—information cyber criminals can use for personal gain. Additionally, hackers are just as interested in proprietary information, and construction firms could lose their competitive advantage with just one data breach.

In order to protect your business and customers, it’s imperative to learn about the common cyber risks in the construction industry.

Loss of Files and Personal Information

In order to make their business more streamlined, almost all construction firms store some type of personal information. Because of this, the files and data they keep on hand is particularly vulnerable and a common target for hackers.

The average contractor stores and transmits sensitive information such as employee records, customer lists, bid data and financial records. Criminals can easily use this information to steal identities and credit card information. They could even ransom these files against a firm, blocking your access and demanding large sums for their release.

In addition, contractors often have login credentials for systems outside of their immediate control. If these contractors are hacked or decide to use their credentials for malicious purposes, your firm could be held liable.

Loss of Proprietary Data

One of the greatest assets a construction firm has is proprietary corporate data. At any given time, your organization could be holding valuable information related to privileged contracts, architectural designs and intellectual property.

In some cases, you could lose this information to cyber criminals without a breach ever occurring. This type of theft can occur through social engineering and phishing schemes, which are strategies criminals use to entice employees into transferring corporate funds or assets.

Infrastructure Exposures

As technology advances, buildings are becoming more connected. Smart technologies allow businesses and homeowners to automate processes that control a variety of systems, including heating, ventilation, air conditioning, lighting and security.

While these new advancements are a major leap forward and provide your clients with opportunities to lower their costs and increase their efficiency, they also create cyber exposures. When hackers gain control of a connected building, they can access things like IP addresses, security codes, automated building processes and camera footage.

In some cases, construction firms that provide smart technologies to their clients may be liable for any damage done by cyber criminals long after work is completed. At the very least, organizations that install products that negatively impact the privacy and security of customers could face serious reputational damage.

Be Proactive in Reducing Your Cyber Risk

In addition to the unique risks listed above, construction firms are subject to the same cyber exposures as the average business. Financial loss, business interruption and third-party liability are very real after-effects of a data breach, and your firm needs to be ready.

The best way to protect your firm from cyber exposures is with cyber liability insurance. These policies can and should be customized to meet your specific needs. Contact your broker today to learn more about cyber risks and what types of protection are available to you.

Does Your Builders Risk Policy Cover Soft Costs?

Posted on April 21, 2017 by Marijana Dabic

Builders risk insurance provides valuable protection in the event of a direct property loss experienced by a contractor, project owner or other insured party during the construction process. However, when a catastrophic loss delays a project, indirect costs, such as soft costs and lost business income, can create substantial financial exposures for the businesses involved. Complicating matters further, many builders risk policies do not include coverage for soft costs or lost income related to construction delays.

Thankfully, firms can close this insurance gap with the addition of a soft costs endorsement to their builders risk insurance policy.

What are Soft Costs?

Construction projects are typically broken down into different categories of costs. The direct construction costs are the physical materials and supplies required to complete the structure. Labour costs are also included as a direct cost. These direct costs are referred to as the hard costs of construction.

On the other hand, soft costs are expenses not directly incurred for the physical construction of the project. Examples of soft costs that could be incurred include, but are not limited to: interest, real estate taxes, accounting and legal fees, developer’s fees, contractor’s general conditions, inspection fees, consulting and marketing fees, and additional insurance costs.

In the event that a loss occurs and the completion of a construction project is delayed, soft costs can represent significant expenses to the project owner and other parties working on the project.

To demonstrate how quickly expenses from soft costs can add up, consider an example of a project to build a new apartment complex. In the event of a catastrophe, the architects and engineers may charge a fee to redraw changes to plans. Legal fees may continue as well during this time, and new permits may need to be pulled. The site may need to be resurveyed, and insurance costs will increase if the term needs to be extended as a result of delay from a loss. Additionally, the apartment complex may lose potential renters when construction is delayed from the loss.

How Are Soft Costs Insured?

Insurance coverage for soft costs is most commonly obtained by adding an endorsement to a builders risk policy. The endorsement will specify which soft costs will be covered if a loss occurs. In the event of a loss that results in additional soft costs for the insured party, there are four requirements that typically must be met for coverage to apply:

The delay must result solely from covered physical damage.
The types of soft costs must be set forth in the policy endorsement
Proof that the soft costs were necessary and reasonable must be provided.
Proof that the costs would not have been incurred but for the delay must be provided.

Under a builders risk policy, soft costs are covered during the delay period. The delay period is typically defined as a period of time that commences with the anticipated completion date and ends when the project is actually completed.

Business Income Coverage

Another consideration for businesses purchasing builders risk insurance, especially project owners and developers, is whether their policies cover lost rental income or lost business income. This coverage, which can be added to a builders risk policy through an endorsement, replaces lost revenue or profits that would have been earned by the policyholder had the project been completed on time.

How Much Cover Do I Need?

When it comes to coverage for soft costs, a good understanding of project economics is key. Firms will need to account for potential delays based on worst-case scenarios. Potential exposures to soft costs can be assessed by reviewing the operational budgets that were established for the project.

In general, organizations seeking soft costs coverage should answer the follow question when assessing their coverage needs: If the worst possible loss occurred at the most inopportune time, how many and what type of extra expenses would be incurred?

Preventing Construction Job Site Theft

Posted on March 24, 2017 by Marijana Dabic

Although it is important for companies to trust their workers and the general public, the unfortunate reality is that theft can happen at any time. This is particularly true in the construction industry, where expensive tools and machinery are often left in plain sight or are easily accessible to criminals.

Construction site theft is especially damaging, as the theft of materials and tools can quickly delay a project, sometimes bringing production to a halt. What’s more, many construction workers pay for their own tools and, in the event of a robbery, may have to recoup losses out of their own pockets.

General Tips

While every job site presents its own set of unique challenges, there are a number of general tips firms can use to better secure a construction site.

The following are some basic strategies you can use to protect your materials and tools from thieves:

Create a written security policy and job site security plan. These written plans should assign supervisory responsibilities, encourage awareness and establish basic best practices for securing tools and materials.
Contact nearby property owners and local law enforcement officials whenever you start a new project. These parties can help monitor your job site, particularly during off-hours.
Establish a means for your employees to report theft or suspicious activity. Be sure to maintain complete records of any security incidents, as they can be beneficial to law enforcement in the event of theft, vandalism or similar occurrences.
Conduct thorough background checks on your employees before hiring them on full time. You should also keep a list of people authorized to be on the job site on hand at all times.

Worksite Protections

Equipping your worksite with theft-prevention features is mandatory if you expect to ward off potential criminals. Whenever possible, consider doing the following:

Enclose your worksite with a security fence and provide limited access at all times. Use lockable gates whenever possible. Avoid using low-quality locks or leaving keys in the locks themselves.
Ensure that your worksite is well lit at night to deter criminals.
Utilize signage to keep unauthorized personnel off your worksite.
Walk around the worksite at the beginning and end of each day to ensure that no items are missing.
Consider hiring security guards to patrol the construction site, particularly at night.

If possible, install security cameras to safeguard your job site. Overall, training employees on how to best keep materials and equipment out of the hands of thieves is your first line of defence against losses.

Controls for Equipment, Tools and Materials

The number of tools and machinery found on a construction site can vary heavily from day to day, making it difficult to keep track of valuables. That’s why the first step in any good protection program is to inventory the equipment you have.

An inventory should be made available for each job site and should accomplish the following:

Inventories should track all newly purchased items. Copies of the inventory should be kept in a secure location.
Inventories should be up to date and include photos of the larger, more important equipment.
To aid in the settlement and recovery of any stolen equipment, inventories should include the following:
- The original date of purchase
- The original cost of the equipment
- The equipment’s age and serial number
- Relevant manufacturer information

Firms should assign one employee to be in charge of managing the inventory. This person would be responsible for keeping track of all materials, tools and deliveries.

Other major steps to securing equipment, tools and materials include the following:

Utilize a secured area to store your equipment.
Mark and label all tools in a distinctive manner for easy identification.
Implement a checkout system of all tools and equipment so you can track their whereabouts.
Establish a key-control system for heavy duty machinery.
Install anti-theft devices on mobile equipment.
Lock all oil and gas tank caps.
Park all equipment in a centralized, well-lit and secure area.
Avoid using your worksite for storage. Remove any tools, materials or equipment that are not in use.

In general, it’s important to keep inventory levels low on-site to discourage thieves. In addition, creating and maintaining an equipment program can make all the difference when it comes to safeguarding your tools.

Equipment programs should make employees, managers, supervisors and foreman responsible for equipment losses. Under such programs, all losses are must be reported, regardless of how small. You should review equipment programs at least annually.

Protect Your Projects

Theft is unpredictable, but there are many workplace controls that firms can implement in order to protect themselves. In addition, it’s important to speak to a broker to seek the appropriate insurance coverages.

5 Common Types of Construction Fraud

Posted on February 6, 2017 by Marijana Dabic

Fraud of all kinds is prevalent across every type of construction project. And while cases of construction companies defrauding their clients are the most reported, it is the companies themselves that often lose money to fraud perpetrated by employees, contractors and partners.

To protect themselves, businesses should be aware of the following most common fraud schemes:

Non-payment of subcontractors and material suppliers done by delaying or falsifying lien waivers, or using project cash receipts to pay bills for other projects.
Billing for unperformed work—often by exaggerating the units of production accomplished or the labour and equipment actually used.
Manipulating the schedule of values (SOV) and contingency accounts in one or more of the following ways:
- Failing to update SOV line items
- Charging phony bills
- Failing to associate subcontractors or vendors with SOV items
Substituting or removing material. This can include doing things like installing low-grade materials that would require future repairs.
Stealing tools or equipment from a worksite. This is often done by billing for equipment or tools for the jobsite that are then used for other subcontractor projects or personal use, or billing for unnecessary tools.

For further protection, it’s a good idea to implement a compliance and ethics program, set up an anonymous reporting system, properly define project scopes and ensure segregation of duties.

Understanding Construction Contracts

Posted on August 10, 2016 by Marijana Dabic

Construction contracts can contain terms that impact your company’s bottom line. Reviewing them carefully prior to signing is indispensable, and can save your company time and money. This contract review guide is meant to be a starting point for reviewing contracts in general. It highlights some common contract terms and their potential impact. You can begin to understand which terms are most often negotiated in contracts. Then, with the help of licensed inside or outside counsel, you can analyze the commercial risks associated with construction contracts in depth and understand terms and conditions in order to protect your company’s assets.

Scope of the Agreement

Examine the definition of services to be provided in order to ensure the language is clear enough for an unrelated third party to understand the scope. The contract should include a time frame for completion of services. The rights and obligations of both parties should be clearly outlined. Any mechanism for changing the scope of the contract, as well as any of the terms, if allowed, should also be outlined within the contract

Terms of Payment

Terms of payment should be clearly listed within the contract so that the expectations of both parties are clear. The contract should specify the agreed payment schedule for goods received.

Warranties

There are two types of warranties: express and implied. Both types are assurances regarding particular issues, such as performance.

Express warranties are those that are defined specifically in the contract. Implied warranties are based in statutory and/or common law, depending on your jurisdiction.

They are two-fold: a warranty of merchantability, which requires that goods/services must reasonably conform to an ordinary buyer’s standards, and a warranty of fitness for a particular purpose, which states that if a seller knows the intended purpose for the product or service, the act of selling the product to that customer implies that it is fit for that purpose.

Be aware of warranty disclaimers and understand how the disclaimer limits your statutory rights. If it disclaims all warranties, express and implied, then you will likely be limited to the remedies in the contract for issues related to things like performance. You should also examine any disclaimer in the context of the contract. While it may require you to disclaim your statutory rights, other contract language may give you adequate rights and remedies regarding the points about which you are most concerned.

Damages, Limits of Liability and Indemnification

These three items are often in close proximity to one another in a contract, as they are interrelated. Damages may be defined as certain types of losses that could create liability under the contract. A limit on liability would restrict the amount of damages that a party would be required to pay if found liable for such damages. Sometimes this may also include a limit for indemnification.

Indemnification provisions allocate risk and cost between the parties. It is important to examine whether the party assuming the risk is the party with the most control over that risk. For instance, when a company’s employees are required to work at a customer’s location, the company is often asked to release the customer from all liability relating to the employees’ presence at the customer’s location.

In some cases, indemnification is limited to negligence or to a specific dollar amount, under a heading of “Limits of Liability.”

Insurance

Some contracts will contain minimum bodily injury and property damage liability coverage amounts that the party must possess and they also may require that customers are added as an additional insured on those coverages.

Prior to consenting to any contract, it is prudent to examine insurance coverage against the amount of liability exposure in a particular contract.

Terms and Conditions

Governing Law and Jurisdiction – Look at the governing law provision to make sure that you are comfortable with the implications of the provincial law chosen by the drafter. This can impact the interpretation of the contract from warranties to indemnification.

Additionally, when specific laws are referenced in the body of a contract, it is as though that statute or regulation is wholly contained within the contract itself. It is vital to read and understand that language prior to giving your consent. This happens regularly in government contracting situations.

Dispute Resolution – This is another clause with which you must be comfortable with the laws of the province or forum chosen by the drafter. The rules chosen to govern dispute resolution can impact the outcome. Additionally, you should consider whether dispute resolution is right for your situation.

Intellectual Property – When you are disclosing and/or licensing your company’s intellectual property, be it trademarks, copyrights or patents, it is important to include a clause that recognizes the owner of such intellectual property and affirmatively states that the agreement does not transfer any rights.

Standard of Care – A standard of care clause may appear in certain types of contracts. The standard of care that is provided by the law should provide the minimum standard of care for the provision of services under the contract.

Term/Termination – The contract should provide both parties with the right to terminate the contract. The situations in which termination is allowed will vary from contract to contract. Some contracts will allow the right to terminate in cases of dissatisfaction; others will allow it with a specific notice, for no cause. It is important that you consider in what cases you would want the right to terminate the contract. There should also be language defining the term of the contract. Does it have a finite term? Does it automatically renew each period?

Right to Cure – Related to termination, some contracts will contain a right to cure clause. This would give the defaulting party notice of a breach and a finite period of time in which to remedy such breach.

Standard Form Contracts

Contracts produced by professional and trade associations for architects, engineers and commercial contractors can serve as important references and benchmarks when drafting a new construction contract. They are a good source of industry best practices, and using them can greatly reduce drafting and review time, meaning lower overall transaction costs for your company.

For all of their advantages, there are several things that you should be cautious about when using standard form contracts. Note the following cautions about standard forms before using them.

Standard forms, which are written broadly to encompass many different contexts, require transaction-specific and jurisdiction-specific modifications. For example, certain provinces may require that indemnities be written in a certain way.
Changes made to one part of the document, such as definitions of words or terms, may affect other parts that make reference to it.
Custom-drafted and industry-drafted forms are often incompatible. Even industry-drafted forms from different publishers can be incompatible.
Standard forms always contain the bias of the drafter. Use this bias; know when to use various standard forms published by different industry organizations.

General Understanding

Reviewing general terms and features of a construction contract will help you grasp the consequences of its terms and conditions for your business. In any case, to ensure its completeness and accuracy, it is necessary to submit each contract you must sign to legal review.

Category Archives: Construction Insurance

Cyber Risks in the Construction Industry

Does Your Builders Risk Policy Cover Soft Costs?

Preventing Construction Job Site Theft

5 Common Types of Construction Fraud

Understanding Construction Contracts

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