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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


5 Major Construction Trends

In order to stay competitive and set your construction firm up for success, the following are five major construction trends to follow this year:

  1. Technology advancements—The construction industry is notoriously slow at adopting new technologies. However, firms may soon have no choice but to pivot their business practices, as 3D printing, cloud applications and drone usage will likely boom.
  2. Modular and prefabrication construction—In 2017, modular and prefabrication construction grew in popularity due to its cost effectiveness and efficiency. This trend will likely continue, especially when you consider that material prices aren’t expected to fall.
  3. An increased focus on safety—The construction industry is consistently ranked as one of the most dangerous. Following higher levels of scrutiny, expect a continued focus on crafting better safety procedures and utilizing more safety technology.
  4. Continued labour shortages—Labour shortages in the construction industry are nothing new and will likely continue to plague firms across the country. With a small pool of qualified candidates, firms may struggle to find enough skilled craft workers to meet growing demands.
  5. Sustainability—Over the last few years, firms may have noticed a greater emphasis on green products and construction practices. Sustainability will be important throughout 2018, and companies that fail to consider their environmental impact may lose out on new projects.

Organizations can’t always predict what factors will have the greatest impact on future business. However, with the above trends in mind, companies can avoid major risks and ensure they remain competitive.

© Zywave, Inc. All rights reserved


The Importance of Disaster Preparedness in Construction

Natural disasters and other emergencies can strike without warning, potentially leading to major losses for construction firms that aren’t prepared. In fact, in the absence of a recovery plan, contractors and construction firms risk exposing their business to liability and serious reputational damages.

Although you can’t prevent disasters, you can prepare for them. The following are four important steps all construction firms should take before disaster strikes:

  1. Clearly define the terms used in your contracts. While hurricanes and wildfires will likely excuse you from fulfilling a contract, vague definitions—such as severe rain—may cause confusion. Define such events ahead of time to relieve uncertainty.
  2. Prepare an emergency plan that assigns actions to designated individuals.
  3. Provide disaster preparedness training to employees. Include evacuation processes and proper use of emergency equipment.
  4. Protect project records. Contracts, permits and other physical files can be easily destroyed in the event of a disaster. Cloud-based storage can protect valuable data and ensure you have access to it from any location.

It may also be a good idea to develop an emergency response plan. This plan should account for hazard identification, communication methodology, plan administration and emergency response procedures. In addition, review your insurance policies before beginning big projects.

© Zywave, Inc. All rights reserved


Avoiding Construction Defect Claims

Construction defect claims are a common risk architects, engineers and contractors face with every project they take on. A construction defect claim occurs when a building system or component fails and is often the result of improper installation, design or material selection.

Not only are these claims incredibly costly to correct and defend, they can also damage your reputation and negatively impact future opportunities. To protect your firm from a construction defect claim and manage your overall risk, consider doing the following:

  • Keep up with current building codes and standards.
  • Follow manufacturer guidelines for every product you use. Be sure to examine warranties and understand the limitations of the materials you use in construction projects.
  • Pre-qualify the subcontractors you hire. Above all, ensure that the individuals and organizations you choose to partner with have the proper credentials, experience and skills to deliver a quality finished product.
  • Seek legal counsel to ensure that all of your contracts are airtight and protect you against errors committed by outside parties.
  • Document the construction process. This will ensure that you have a solid record of materials and practices used during a project, which will come in handy in the event of a claim.
  • Implement a quality assurance/quality control program (QA/QC). QA/QC programs provide a set of standards that ensure a project is built correctly or performs as designed.

In general, the best way to avoid a construction defect claim is through quality construction. Be sure to work only with architects, engineers and contractors who have good reputations and track records. In addition, plan and perform work in the correct sequence and with proper supervision.

Keeping in mind the above tips will ensure that your projects run smoothly and are completed to a high standard of quality.

© Zywave, Inc. All rights reserved


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