Sample Presentation Headline

Project Risk

Management

Presented by

Harold Dorbin, Marsh Risk Consulting

Co-sponsored by

Project Risk Management

Agenda

1. Owner and Contractor Risk Perspective

2. Project Risk Governance and Systems

 Owner Considerations & Structure

 Contractor/Vendor Considerations & Structure

 Observations/Recommendations

3. What is a Project Risk?

 Project Specific Risk Identification


4. Managing Project Risk Through the Project Life Cycle

 Considerations for a Workable Plan


5. Wrap-up & Questions

1

Section 1

OWNER AND CONTRACTOR RISK

PERSPECTIVE

2

Owner and Contractor Risk Perspective

Owner’s Project Perspective

 Owner’s make money from the completed project.

 Project objectives are longer term.

 On-Stream reliability.

 Usable life.

 Cost of use/operation.

 Schedule and cost may or may not be critical.

 Project is “the asset.”

 Funding structure/equity exit.

 Industry/business needs.

 Success for the project defined by both:

 Corporate objectives.

 Business justification for project.

3

Owner and Contractor Risk Perspective

Contractor’s Project Perspective

 Contractor’s make money by completing the project:

 Project objectives are usually shorter term.

 Defined by contract compliance.

 Longer term objectives are real.

 Execution reputation.

 Technology supplied/experience.

 Success for the project defined by both:

 Contract compliance.


4

Section 2

PROJECT RISK MANAGEMENT AS A

RISK GOVERNANCE SYSTEM

5

Project Risk Governance and Systems

Project Risk Governance Objectives

 “Capacity of a management organization to positively influence the project toward a successful outcome.”

Information – engage and make decisions.

Accuracy - acceptable to make decisions.

On-Time – late decision or assumptions.

6



 This is easy ….

 What decisions do I need to make?

 When do I need to make them?

 What information do I need to make them?

 How accurate does the information need to be?

7



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 Systematic (“Stage Gate”) identification of the what and when of decision making:

 Define stages in planning/bidding when key decisions need to be made.

 Identify the Information needed to make the decision.

 Define the level of accuracy

 Timeline set around what is required.

.

9


Owner Considerations & Structure

 First Question:

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 Stage Gate I – Concept:

 Decision: fund feasibility study.

 Information:

 Risk assessment.

 OOM estimate of project.

 Scope and feasibility estimate.

 Market and ROI assessment.

 Regulatory overview (high level).

 Class 4 project schedule.

 Schedule to accumulate sets the timeline.

11



 Stage Gate II – Feasibility:

 Decision: fund preliminary engineering.

 Information:

 Risk assessment/gaps closed.

 +/- 50% estimate of project.

 Major equipment resourced.

 Resource availability.

 Scope and pre-engineering estimate.

 Refined market and ROI analysis.

 Regulatory analysis (mid level).


 Insurance/finance/currency.


12



 Stage Gate III – Preliminary Engineering:

 Decision: fully funded/committed project.

 Information:

 Risk assessment/gaps closed.

 +/- 20% estimate of project.

 Major equipment committed quote.

 Resources confirmed.

 Scope, work breakdown structure.

 Confirm market and ROI analysis.

 Regulatory analysis/permits.




13


Contractor/Vendor Considerations & Structure

 Contractors have a “bid cycle” to respond within so they do better if they understand.

14



 Stage Gate I – Bid/No Bid:

 Decision: fund the bid/respond to RFB.

 Information:

 Proposal schedule.

 Preliminary risk assessment.

 Go/get vs. proposal budget.

 Resource/technology availability.

 +/- 30% execution estimate.

 Scope statement/contract plan.

 Regulatory analysis/permits.



15



 Stage Gate II – Schedule/Budget/Scope/Risk Update:

 Decision: continue with proposal.

 Information:

 Proposal schedule update.

 Risk assessment update.

 Proposal budget update.

 Resource/technology confirmed.

 +/- 20% execution estimate.

 Scope/contract plan defined.

 Regulatory/permits defined.

 Class 1 project schedule w gaps.


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 Stage Gate III – Bid Close Out:

 Decision: submit bid.

 Information:


 Proposal budget update.

 Resource/technology availability.

 +/- 10 % execution estimate.

 Scope statement/contract plan.

 Regulatory/permits confirmed.



17



 Stage Gate IV – Contract Signing/Execution:

 Decision: contact signing.

 Information:


 Contract exceptions/acceptance.

 Terms impact on execution.


18


Observations/Recommendations

 In order for management to have project governance and manage project risk effectively; project procedures and how they are implemented must be:

 Industry Best Practice.

 Consistent – remove approach/application variation.

 Accountable – know who is to do what.

 Transparent – allows management intervention.

19



Industry

Best

Practice

Processes

Consistent

Accountable

Transparent

Processes

Develop Required

Information for

Timely Decisions

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 Each Stage Gate is defined by all the decisions that must be made before the next stage can proceed.

 Contractors must consider bid cycle and information delivery schedule – early in the bid process.

 Bid exception?

 Best Procedures define requirements broadly.

 For smaller/less complex projects, it states “not applicable.”

 Keep submissions at each Stage Gate for audit.

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 Track exceptions to procedure and close out as a priority.

 Generally an exception cannot go through two Stage Gates without being resolved.

 All assumptions – treated as a risk in risk register.

22

Section 3

WHAT IS A PROJECT RISK?

23

What is Project Risk?

Definition

 “A Project outcome of a probability less than ‘1’ that results in something other than Plan.”

 Risks can yield positive or negative variation from plan.

24

Sources of Project Specific Risks

Success for the Project

Owner Sources

 Business justification for the project.


Contractor Sources

 Contract compliance.


25

Sources of Project Specific Risks

Risk to Project Specific Goals

Risk is something that prevents the goal from occurring:

Example: Owner Concern

 Maintain the relationship with the aboriginal communities in zone.

 Corporate objective driven.

Example: Contractor Concern

 Meet Performance Test Criteria within 60 days of turnover.

 Contract compliance driven.

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Sources of Project Specific Risk

Risk to Project Specific Goals

 Manage risk to project specific goals:

 Yields more key goal focused risk assessment than “checklist.”

 Provides alignment of stakeholders needs (JV partners, lenders, regulators, governments).

 Provides a framework to make future key project decisions.

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Risk Sources/Management

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Definitions

 Scope relationships:

 Risk that evolves from how the project contracts are organized (project delivery method).

 Risk that evolves through non-contractual parties (government agencies, special interest groups, etc.).

 Contracts:

 Mechanism used to influence the performance of another party.

 Environment:

 Site specific, resource availability, financial condition, etc.

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Observations/Recommendations

Project Scope & Relationship Diagram

Principal

Test and Inspection

Employer

Employers and

Contractors

Contractor

Subcontracts

Structural Steel

Electrical I&C

Mechanical

Civil

Others

Material Supplies

Regulators, Agency and

Local, Governmental

Principal

Turbine

Boilers

Others

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Risk Management Fundamentals

 Project risk management should embrace all of the key corporate and business/contract goals for each undertaking – not just cost and schedule.

 Risk management processes that are focused on the project goals allow for early development of project strategy “best risk fit” decisions.

 Simple tools – PCSRD, contract overview, etc., provide a consistent baseline for those participating in identifying project risk.

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Section 4

MANAGING PROJECT RISK THROUGH THE

PROJECT LIFE CYCLE

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Managing Project Risk Through the Project Life Cycle

Considerations for a Workable Plan

 “Snap shot project risk management.”

 Project risk management systems must be updated.

 Frequency depends on what stage the project is in.

 “Quantitative models vs. qualitative assessments.”

 The need for numbers vs. strategy.

 Do not put all of the obligations on the project manager, the proposal manager or executive team.

 Executive management must “captain the ship” not “row the boat.”

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Considerations for a Workable Plan

Risk Committee

 Reports to executive management only.

 Make-up:

 Project manager.

 Counsel.

 Project controls expert.

 Other experts part time.

 Set up risk screening tests at each stage gate.

 If a “high risk” condition exists:

 System engages risk committee.

 Defined interaction between project and risk committee.

 Risk committee makes recommendations to project and executive management – at each stage.

34

Example

Proposal

Decision

Flow Chart

PM includes pre approved Liability Limits etc.

Commitment made to providing proposal

PM completes

Pre RA Form

LEVEL 3

Preliminary decision made on Proposal

Level 1, 2, 3

LEVEL 1 AND 2

PM completes Pre RA

Form and submits for comment/approval

REJECT

Pre RA approve/reject and comments via procedure

123

ACCEPT

END

Bid/No Bid

Assessment

LEVEL

3

BID

Proposal Level

Confirmed via procedure

123

1 or 2

Notify Risk Review

Group based on Pre RA

Responses

YES

GATE ONE

~ ~

NO

Notify Risk Review

Group immediately after bid decision

Risk Review Group provided the Pre RA &

Proposal Documents

~

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Example

Proposal

Decision

Flow Chart

GATE THREE

~

Proposal Management

Plan Updated

Gate 3 Risk Checklist Forms completed, All documents required via Procedure 123 completed

Do Gate 3

Risk Checklist Forms or updates to the Procedure 123 Risk Documents require

RRG engagement

YES

NO

PM provides Gate 3 Risk

Checklist Forms and all documents per procedure

123.

Project Risk Analysis completed and contingencies defined by procedure 234

PM submits Project Risk

Analysis and other bid data

Continued

~

Proposal Management

Plan updated and sent to

RRG

Gate 3 Risk Checklist Forms completed, All documents required via Procedure 123 completed

Risk Review Group provides remarks to PM for consideration

Project Risk Analysis completed and contingencies determined per procedure

234, then provided to RRG.

Risk Review Group provides recommendations on specific Risk Action

Plans and RA

PM determines which

RRG recommendations to include

PM supplies revised Project

Risk Analysis and contingencies to RRG

RRG accepts revised

Project Risk Analysis

NO

Risk Review Group recommends No Proposal

YES

PM submits contingencies,

PRA and other data

36

Considerations for a Workable Plan

Lessons Learned

 Spending more on resources does not guarantee better results.

 Simple lessons learned system aids with risk identification.

 Sort able risk data for easy identification of project specific risks.

 Project risk management will tell you what worked and what did not.

 Link project risk management with project controls.

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System Usage

 Considerations when deciding how often the project risk management system should be updated:

 How often risk assessment output is needed?

 How much risk is changing?

 During execution – as often as project controls is updated/at least monthly.

 Let managers manage and let the experts apply their expertise.

 Engage risk committee only when well defined screening processes indicate the project is high risk – this includes execution.

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System Usage

 Retain all screening tools filled out by planning/proposal team and by project execution teams.

 These are subject to audit and should be reviewed for learning purposes if a project goes wrong.

 Focus executive time on the projects that present the largest risk.

 Not always the largest projects.

 Will help ensure project risk governance over the entire operation.

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Section 5

WRAP-UP

40

Wrap-up

Conclusion

 Owners and contractors have different perspectives on projects.

 Why rely on a contractor to manage your project risk management system with his concerns?

 Project risk management, in order to be project specific, should be:

 Project goal oriented.

 Use simple tools focusing on:

 Scope relationships.

 Contracts.

 Project environment.

 Well-structured project risk governance processes:

 “Stress test” each project.

 Focus executive time toward the critical few.

 Provide risk committees that apply independent expert analysis through procedures.

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Contact Information

Harold Dorbin

Senior Vice President

Marsh Risk Consulting

Houston, TX

+1 713 276 8505

Email: harold.dorbin@marsh.com

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DISCLAIMER

K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and South America and represents leading global corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com

.

K&L Gates has offices in: Anchorage, Austin, Beijing, Berlin, Boston, Brisbane, Brussels, Charleston, Charlotte, Chicago, Dallas, Doha, Dubai, Fort Worth, Frankfurt, Harrisburg, Hong Kong, Houston,

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Francisco, São Paulo, Seattle, Seoul, Shanghai, Singapore, Spokane, Sydney, Taipei, Tokyo, Warsaw, Washington, D.C. and Wilmington.

This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

©2013 K&L Gates LLP. All Rights Reserved.

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.

The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.

Copyright 2013 Marsh Inc.

All rights reserved.

43

Best Practices in Construction Claims and

Disputes Management

Presented by:

Frederic J. Giordano, Partner, K&L Gates LLP

Donald W. Kiel, Partner, K&L Gates LLP

Co-sponsored by

Overview

 Types of Policies

 Property

 Business Interruption

 Rebuild and Restoration

 Claims Preparation and Submission

 Disputes Prevention and Resolution

 Conclusion and Questions

45

General Aspects of Property Policies

 First party.

 Insures the policyholder’s losses rather than the losses of others.

 Some do contain duty to defend for claims arising out of losses.

 Insures property.

 Buildings, fixtures, equipment, inventory.

 Whether “land” is insured property is a litigated issue.

 Insures against perils causing loss of or damage to property.

46

Types of Property Policies

 All Risks or Difference-in-Condition.

 Covers all of the policyholder’s property, unless specifically excluded (may be called

“blanket” coverage).

 Covers all risks of loss (perils), unless specifically excluded.

 Named perils:

 Fire insurance policy.

 Theft/Fidelity.

 Schedule of insured property or locations.

 Other specialty policies.

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Property – Insured Property

 “Real and personal property” owned, used, or intended for the policyholder’s use.

 Improvements and betterments to buildings.

 Equipment and machinery.

 Contents/inventory/stock.

 Interest of the policyholder in the property of others in the policyholder’s care, custody, and control (leasehold).

 Personal property of employees on premises.

 Property in transit that policyholder insures.

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Extent of Coverage

 The extent of coverage is determined by policy language as interpreted by applicable case law.

 Policy language:

 Coverage grant.

 Exclusions.

 Conditions.

 Applicable case law: Under common choice-of-law principles, law of the location of the damaged or destroyed property or the location of the policyholder’s insurance department/headquarters may govern.

49

Coverage Grants

 The scope of the insurer’s coverage grant and obligation is usually found in the insuring agreement.

 Coverage grants can be broad (e.g., all risks/blanket) or narrow (e.g., named perils/scheduled).

 Need to review entire policy to have a full picture of coverage grant.

50

Broad Coverage Grants

 All risk property example:

 “This policy covers all risks of physical loss of or damage to property described herein including general average, salvage, and all other charges on shipments covered hereunder, except as hereinafter excluded.”

51

Narrower Coverage Grants

 Named perils/scheduled locations:

 “The insurer will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any

Covered Cause of Loss.”

 “Covered Property” is defined to include only certain categories of property.

 Premises – list of locations.

 “Covered Cause of Loss” is defined to include only certain perils.

52

Exclusions – Property

 Commonly excluded property in current policies:

 Money.

 Land.

 Property insured under other policies (e.g., aircraft, watercraft, automobile, and marine insurance).

 Animals.

 Business interruption without direct physical damage to property.

 Contraband.

 Infrastructure: retaining walls, roads and bridges, pipes.

53

Exclusions – Perils

 Carve outs from coverage grant.

 Commonly excluded perils (cause of loss) in general policies:

 Ordinary wear and tear.

 Perils covered by other policies.

 Vacant buildings – may not cover against certain perils (e.g., theft, vandalism, sprinkler damage) and may reduce amount of payment from other causes of loss.

 Contamination (currently).

 Asbestos.

 Correction of faulty workmanship, construction, design.

 Nuclear materials.

 War-like actions.

 Fortuity issue.

54

General Property Policy Coverages

 Examples of specific additional/supplemental coverages:

 May be separate provisions from insuring agreement providing for payment of policyholder’s costs associated with a loss.

 Sue and Labor – Under certain conditions, insurer will contribute to cost of safeguarding property from loss or mitigating loss.

 Rental equipment (e.g., vehicles) for temporary replacement of damaged or destroyed property.

 Property Damage/Physical Loss or Damage.

 Debris removal of insured property.

 Business interruption.

55

Business Interruption Insurance

 Business Interruption (BI) coverage is typically included as part of first party commercial property insurance covering assets of the insured entity.

 Limits of commercial property insurance – provides coverage for loss or damage to real and personal property of business or “hard” costs associated with repairing or replacing property.

 Catastrophic events, however, often result in consequential economic losses that extend far beyond the “hard” costs.

56

The Relationship Between BI Coverage and Property

Damage

 BI insurance covers necessary business interruptions caused by damage to covered property.

 After establishing that a covered peril has caused property damage, the insured may need to establish that the property damage caused the interruption.

 Some policies may expressly exclude coverage for losses attributed to worsened business or market conditions.

57

Period of Restoration

 A defined term in policies.

 Sometimes understood to be the theoretical (or hypothetical) reasonable amount of time that it should take the insured to repair the damage or otherwise resume operations.

 Permanent Replacement Issue/Failure to Rebuild.

 If failure to rebuild, then theoretical debate ensues.

 Carriers will downplay severity and estimate time of repair under ideal circumstances.

 Policyholders will argue for estimates based on conditions as they exist and account for events such as insurers’ refusal to advance funds in a timely manner.

58

Interruption or Suspension of Operations

 Complete Cessation vs. Partial Shutdown.

 Partial loss of business income.

 Slow down does not count unless specified.

 Suspension means:

 The slowdown or cessation of your business activities, or

 That a part of all of the described premises is rendered untenantable if coverage for business income including rental value applies.

59

Scope of Coverage – Overview

 Basic form of BI coverage.

 Additional BI coverage provisions:

 Extended.

 Contingent.

 Civil/Military Authority.

 Ingress/Egress.

 Extra Expenses.

 Claims Preparation Costs.

 Delay in Opening/Soft Costs.

60

Necessary Interruption

 Most policies today require that the suspension of operations be deemed “necessary.”

 “Necessary” is generally not defined in most policies.

 General standard: Unreasonable for insured to continue business operations.

 Insured need not take extraordinary efforts to avoid Necessary

Interruption.

 Discretionary business decisions may not qualify as necessary.

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Typical Exclusions

 Excluded Perils.

 Idle Periods.

 Interference.

 Loss of Contracts.

 Consequential Losses.

 Utility Service Interruption.

 Finished Stock.

 Wear and Tear Exclusion.

 Loss Due to Unfavorable

Business Conditions.

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Proving Lost Income

 Burden of proof on plaintiff.

 Must show that except for the suspension of operation, the business would have earned income.

 Insured must prove how much would have been earned.

 TIP: Insured should retain assistance of forensic accountant/expert.

 Policies will typically provide standard for loss determination for business income and extra expenses.

 Insured may have option to negotiate in advance with insurer on a Business

Income Agreed Value.

63

Duty to Mitigate

 Most policies require an insured to reduce the loss by complete or partial resumption of the business or by making use of the merchandise or other property at the location.

 An insured must take steps to shorten indemnity period where possible, but it is not necessary to take any and all measures.

 Reasonable actions with intention to reduce the recovery.

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Range of Possibilities

Scope

Variations

Cost

Rebuild

Schedule

Pace of restoration and reconstruction

High

Low

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Rebuild and Restoration

 Prudency and transparency of decisions.

 Minimize rework – do it right the first time!

 Must be able to segregate costs.

 Cash-flow – early and continuous.

 Documentation – anticipate a form of negotiation/ADR/litigation.

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Claims Preparation and Submission

 Condition Assessment.

 Interactions and Interface.

 Track Costs from Day 1.

 Monitoring/Control.

 Material Inventory/Management.

 Effective Project Controls.

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Condition Assessment

 Perform the assessment as soon as possible to facilitate defining the scope.

 Maintain detailed records of all assessments performed.

 Utilize competent and knowledgeable technical people.

68

Interactions and Interface

 Facilitate access to recovery work to adjusters and insurers as needed.

 Be transparent with all claimed work.

 Dedicate point person to interface.

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Track Costs From Day 1

 Equipment, material, and labor.

 Inventory and material management.

 Dedicated on-site project teams.

 Technical support/engineering/project controls.

 Operations, procurement (material management, store room/inventory), etc.

 Financial, contractor oversight, etc.

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Monitoring/Control

 Maintain strict controls, oversight, and daily reporting of labor resources dedicated to the recovery work.

 Do not intermingle operational/maintenance work and recovery work. Separate performance records and billing.

 Continue stressing safety; do not relax safety standards in any manner.

 Accelerated and potentially crowded site conditions require an even greater emphasis and reminders on safety.

 Consider engaging additional resources dedicated to site safety, if needed.

 Immediately determine and implement procedures to maintain site-wide support; dedicate a contractor or resources to site support and general conditions.

 Control fueling of all site equipment.

 Manage scaffolding.

 Facilitate power and compressed air to all contractors.

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Material/Inventory Management

 Place strict controls on the ordering, receiving, storage, and distribution of all materials and equipment intended for recovery.

 Return unused materials.

 Separate recovery materials in storeroom area from regular storeroom items.

 Maintain damaged materials removed from service or replaced in separate area if needed for inspection by adjusters or insurers.

 Maintain strict site security and access and inspect loads, as needed.

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Effective Project Controls

 Implement and facilitate project controls.

 Maintain and update a realistic schedule forecast, including accurate as-built data.

 Maintain and update cost forecasts.

 As new scope emerges, include in all forecasts.

 Expect unforeseen scope.

 Monitor and maintain allowances and contingencies.

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Claim Submission Conditions

 Notice.

 Look to Notice Provision for recipient (e.g., insurer, broker, law firm).

 If notice is provided orally, follow up in writing.

 Timely notice – standards vary based on policy language, facts, and law.

 Policy may require certain information – read the notice provisions.

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 Sworn proof of loss.

 Place, time, and cause of loss.

 Property lost or damaged.

 Value of property.

 Amount of loss.

 Oftentimes there is a time limit.

 If not submitted, insurer may have to show prejudice to deny coverage.

 Coverage litigation may supersede.

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 Examination under oath.

 Usually after proof of loss filed.

 Deposition of policyholder.

 Produce documents.

 Exhibit damaged property to insurer.

 Coverage litigation may supersede.

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 Suit limitation provision.

 May limit the time in which an action can be brought to a time period after the loss or discovery of the occurrence giving rise to the claim.

 In context of progressive losses (e.g., asbestos-related property damage), there may be disputes as to when a loss happened or occurred.

 Some versions of provision provide “unless a longer period is provided by applicable statute.”

77


 Suit limitation provision (continued).

 Should not rely on insurer’s ongoing investigation of claim to toll running of suit limitation period (varies by state).

 Consider tolling agreement if claim resolution may be ongoing for a considerable time.

 Small minority of jurisdictions requires insurer to show prejudice from policyholder’s failure to comply with provision.

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Sources of Disputes

 Disputes arise from unresolved problems that stem from:

 Contracts and agreements.

 People and their perspective.

 Unknowns.

 Ensure all decisions are aligned with the overall rebuild objectives.

 Early identification and alignment of objectives is the key to preventing disputes.

 Proof of claims, especially ability to allocate costs to the appropriate policy, is key in streamlining resolution of any conflicts.

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How to Select a Dispute Resolution Method

 How fast do you need the issues resolved?

 How sensitive are you to the cost of pursuing a decision?

 Do you want it to be a flexible or formal setting?

 Nature of the issues: are they legal, questions of applicable law or equity, and fairness driven?

 Level of control over the outcome – is it self-manageable or being left to a third-party decision maker?

 Importance of longer-term relationship with the opposing side.

 Enforceability of outcome – do you want it to be binding?

 Privacy of the process: public domain or private and confidential?

80

Conclusion

 Property policies can cover losses to policyholder’s property arising from a wide variety of perils – obtain all potentially applicable policies.

 If involved in a claim, be aware of policy conditions.

 Applicable state laws may make a difference to interpretation of policy in a coverage dispute.

 Valuation is often the key issue to address.

 Maintain accurate and complete records of all damages and rebuild costs.

81


Frederic J. Giordano

Partner

K&L Gates LLP

Newark, NJ

+ 1 973 848 4035 frederic.giordano@klgates.com

Donald W. Kiel

Partner

K&L Gates LLP

Newark, NJ

+ 1 973 848 4064 donald.kiel@klgates.com

Reza Nikain, CFCC

Managing Director


Princeton, NJ

+ 1 609 497 2266 reza.nikain@marsh.com

82

DISCLAIMER


.











83

Handling Subcontractor

Default Claims

Presented by

Christopher Barbarisi, Partner, K&L Gates LLP

James Bly, Managing Director, Marsh USA, Inc.

Presented by

Anthony La Rocco, Administrative Partner, K&L Gates LLP

Co-sponsored by

SUBGUARD CLAIM PREPARATION

85

Subguard Claim Preparation

Pre-Claim Considerations

 Contract type and contract administration.

 Project governance.

 Scope.

 General conditions.

 Schedule.

 Documentation.

 Claims team.

86


A Default Occurs – Initial Focus (Continued)

 Identify pitfalls affecting overall completion, issues with the owner, entitlement and proof around default, etc.

 Stay ahead of the default impacts.

 Develop a claim strategy to maximize recovery and expedite processing.

 Align project controls with claim prep.

 Be proactive — engage all relevant parties.

 Timing of payments typically becomes a frictional area with complex claims.

87


The Proof of Loss - Overview

 Simple calculation: difficultly tends to be more on establishing a reasonable level of documentation.

 Draws a line in the sand at default.

 Reconciles the amount of the subcontract dollars available.

 Applies those dollars to completion costs.

 Overrun is the claim.

88


The Proof of Loss – Example Calculation

P R O O F O F L O S S S U M M A R Y

P R E - D E F A U L T

CATEGORY

Original Subcontract Amount

Changes to Scope/Change Orders

Revised Subcontract Value

Amount Paid to Sub

Subcontract Balance

AMOUNT

$ 15,000,000

$ 1,000,000

$ 16,000,000

$ 13,000,000

$ 3,000,000

ADDITIONAL COMPLETION COSTS

P O S T - D E F A U L T

CATEGORY AMOUNT

Labor Costs

Material Costs

Equipment and/or Tool Costs

Subcontractor's Costs

Legal/Consulting

Unpaid Vendors

Indirects

Total Costs Incurred

$ 1,000,000

$ 1,500,000

$ 500,000

$ 4,500,000

$ 500,000

$ 300,000

$ 1,500,000

$ 9,800,000

TOTAL CLAIM AMOUNT $ 6,800,000

89


“Contemporaneous” Claim Documentation

 Contract/subcontract.

 Job cost reports.

 Change order log.

 Original budget/estimates.

 Drawings/submittals.

 Vendor invoices.

 Time cards.

 Payroll reports.

 Daily reports.

 Baseline and all update schedules.

 Project photographs.

 Correspondence/emails.

90


Managing the Claim Process

 Multiple submissions — put some thought into cut-off dates and Proof of

Loss amounts.

 Consider time to review and process for responding.

 Requests for Information (RFIs).

 What to expect and how to manage them.

 Qualitative tracking of the process.

 Contractor should keep a record of information provided and the number of times a question is asked.

 Engage the insurer’s consultants to expedite.

 Dedicate resources.

91

PRODUCTS TO MITIGATE SUBCONTRACTOR

DEFAULT RISK

92

Products to Mitigate Subcontractor Default Risk

Subcontractor Default Insurance

 Surety bond vs. Subcontractor Default Insurance (SDI):

 Tri-party relationship between surety, bond principal, and bond obligee.

 Surety’s right of indemnification from bond principal.

 Surety stands in the shoes of subcontractor.

 Potential for multiple lawsuits.

 Negotiate subcontractor bond language — dispute resolution, surety’s time to respond recoverable damages, attorney’s fees.

 Performance bond claims — may require subcontract termination to trigger surety’s performance unless surety chooses to finance defaulted subcontractor.

 Termination — drastic measure that increases risk for all parties.

93


Subguard® = The First SDI Policy Written by Zurich in 1996

What is Subguard®?

 Definition

 Subguard® is a first-party insurance policy that indemnifies the insured for costs incurred as a result of a default of performance by one of its subcontractors.

GC/CM

(Obligee)

GC/CM

Subcontractor

(Principal)

Surety

Subcontractor

94


Default Protection and Risk Transfer

 Subguard®:

 Insurance product that protects contractor from subcontractor’s default:

 Insurance company pays for “paid project losses.”

 Losses must be first paid by the GC — Subguard® will not front the loss.

 Proof of loss — covered costs, procedure, and timing.

 Direct and indirect losses/costs:

 Delay, impact, attorney/consultant fees.

 Separate limits of coverage.

 Exclusions.

 Deductible.

 Subrogation recovery against subcontractor.

 Subguard® and contractor vs. defaulted subcontractor.

 Subguard®/Insurer — right of recovery against contractor for Subguard® payments in event of wrongful default.

95


A Second Market — Arch

 Contractor Default Insurance (CDI).

 Similar coverage to Subguard® with a few differences:

 CDI has no minimum premium requirements.

 $20 million per loss and $30 million aggregate vs. $50 million/$150 million with

Subguard®.

 Indirect expense is 5 – 25% of direct loss incurred vs. $5 million per claim limit with

Subguard®.

 Co-pay is eliminated if loss is reported within five days.

 Lower deductible levels offered.

96


A Third Market — XL

 $50 million per claim/$150 million aggregate.

 Indirect cost sublimit — $5 million or percentage of claim.

 Copay may be waived if reported in five days.

 CapAssure product:

 Coverage A: Prime to owner coverage — up to $25 million/claim and $50 million aggregate.

 Coverage B: SDI.

97


Why Subguard® or SDI?

Control

 Gives the named insured (GC or CM depending upon contract delivery method) control over default resolution process, keeping the project on time and within budget.

 Insured manages claims in most efficient manner without surety approval.

 Insured decides what subcontractors are enrolled in the program through a prequalification process.

 Successful prequalification may include comprehensive financial analysis that includes balance sheet, cash flow, job profit, and historical and future earnings projections.

 Marsh’s SubSecure prequalification tool is a best-in-class process as recognized by all three SDI markets.

 Owner can be added to the policy through a Financial Interest

Endorsement, and dedicated limits can also be provided to the owner.

98


Other Products/Solutions

 Joint checks.

 Funds administration services.

 QA/QC.

 Increased retention.

 Personal guarantees/parental guarantees.

 Letters of credit.

 Labor-only subcontracts.

99


Filing Claims Under a Subcontract Bond

 Default under a subcontract bond:

 Generally moves control of account out of underwriting into claim, unless jobspecific, no financing, adequate capital.

 Surety’s options in default:

 Pay third party to assume liability (surety negotiates constraints).

 Take over job.

 Finance/workout existing contractor — the surety decides the course of action.

 Owner rebid.

 Surety rebid.

 Deny.

 Surety defenses:

 Material change to contract.

 Forgery of bond.

 Obligee failure to pay, perform.

100


Filing Claims Under A Subcontract Bond

(Continued)

 Surety’s options are limited by bond form language, including:

 Forfeiture language.

 Limited response time — AIA312 Payment Bond.

 Limitation of options — owner takeover mandate, etc.

 Public vs. private owner.

 Factors considered when making financing decision:

 Receivable/payable/contract balance/CTC.

 Historic margins vs. CTC.

 Bank support — collateral — covenants — violations — forbearance.

 Ability to cross job funds.

 Bid spreads.

 Nature of work — ability to find replacement contractor.

 Performance problems not normally financed.

101


Filing Claims Under A Subguard® Policy

 Default under a Subguard®/SDI policy:

 First-party coverage, insured (GC) files claim with its carrier, reducing possibility of need for legal action.

 Gives control of claims process to insured (GC), keeping project on time and within budget.

 GC makes decision to finance defaulting sub or hire a new sub to complete work.

 Notify insurer immediately with description of situation and anticipated cost of claim.

 Provide proof of loss, including:

 Written description of circumstances.

 Notice of default to subcontractor.

 Complete cost reconciliation of claim.

 Copy of subcontract.

 Labor costs for self-performed work.

 Material costs.

 Equipment costs.

 Sub costs to complete work.

 Legal costs.

 Proof of payments to unpaid vendors.

 Documentation of indirect costs incurred.

102


Filing Claims Under A Subguard® Policy

(Continued)

 Insurer actions in event of default:

 Upon receipt and review of acceptable proof of loss, insurer will make payments for qualifying loss within 30 days.

 Interim payments are available for losses occurring over period greater than 30 days.

 Advanced payments made for qualifying losses that cannot be fully quantified at time of claim submission.

 Insurer may elect to subrogate against defaulting subcontractor.

 Wrongful termination of subcontractor:

 Defense cost included in default claim.

 Coverage eliminated and payments refunded if sub wins wrongful termination lawsuit.

103

SUBCONTRACTOR DEFAULT INSURANCE

What to Expect When Pursuing a SDI Claim

104

What is SDI Insurance intended to “Cover”?

 Costs to complete subcontractor’s contractual obligations;

 Costs to remedy defective (nonconforming work);

 Indirect costs associated with the default:

 acceleration costs;

 extended overhead;

 liquidated damages;

 Usually subject to a separate sublimit;

105

What Costs Are Typically not “Covered”?

 Misrepresentations;

 Fraud;

 Defaults pre-policy period;

 Contracts acquired by other entities;

 Nuclear reaction/radiation;

 Professional services provided by the insured;

 Costs covered by ‘other insurance’;

106

Gauging Insurer’s Claim Response: Preliminary Questions

 How large is your claim?

 If significant, dig in for the long haul;

 If relatively small, expect reasonable response;

 Are you viewed as repeat business?

 If not, dig in for the long haul;

 If so, expect more reasonable response;

107

Timing of Claim Process

108

Timing of Claim Process: Marketing

 SDI specifically marketed as:

 an efficient alternative to bonds;

 insurance that “empowers the contractor to evaluate and manage subcontractor default situations, bypassing potentially

contentious and lengthy claims process that can result when using thirdparty guarantees.”

 “Default need not mean delay – The . . . claims process requires the general contractor inform the insurer about the default and the steps they are taking to remedy the problem. This gives the general contractor the control to make decisions that keep work moving forward while supporting the cash flow needs of your project.”

109

Timing of Claim Process: In Practice

 Expect a reservation of rights (or declination letter);

 ROR accompanied by extensive/voluminous Requests for

Information (“RFI’) to rectify ‘defects’ in submitted Proof of Loss;

 Anticipate lengthy RFI process;

 Each claim is factually unique;

 Anticipate preparing detailed response narratives accompanied with all documents associated with the circumstances of the default & costs to complete/claim value;

 Case Example – 24 months, 4 rounds of extensive RFI’s, produced over 67,000 pages of material (carrier still processing proofs);

• *Be prepared to keep project financed during this process

110

Timing of Claim Process: In Practice (cont.)

 RFI Responses - practical considerations

 Build strong narratives in RFI responses (will follow you throughout the process);

 Create positive positions , i.e., highlight consistent positions taken by insurer in other cases;

 Be flexible to expedite claim .

 Don’t hesitate to give up weak/undocumented items to expedite process;

111

Common Claim Defenses

112

“Proof of Loss” = Payment: Marketing

 “Default need not mean delay – The . . . claims process requires the general contractor inform the insurer about the default and the steps they are taking to remedy the problem.”

 Common CDI policies promise to indemnify policyholder for a loss

“within thirty (30) days after [it] receives the Proof of Loss” ;

 Policies define “Proof of Loss” to be: “a written description and any other supporting evidence [including the subcontract & default notice] . . . that document the claim . . .and quantify the amount. . . .”

113

“Proof of Loss”: In Practice

 Is the Proof of Loss “Satisfactory”?

 Insurer may focus on undefined policy language requiring “satisfactory” proof of loss to delay 30 day payment clock.

 Wholly undefined/subjective term;

 Insurer’s judgment may lead to delayed payment ; (Ex: ACH transfers with corresponding lien waivers not proof of payment)

 Insurer must apply the term in a “commercially reasonable” manner;

 If needed - can be basis for ‘bad faith’ claim —especially in light of the marketing materials;

114

The “Default”: Marketing

 “[t]he biggest advantage is that the ability to determine default rests with the

general contractor, thereby allowing the general contractor to make a quick decision and remedy the situation without outside intervention. This avoids waiting for a third party to make a determination of responsibility and to select

the remedy as may be the case with a subcontractor surety bond.”

 prompt payment upon the contractor’s determination of default.

 Policy defines “default of performance” as - “failure of Subcontractor to fullfill the terms of the [c]overed [s]ubcontract . . . As determined by you or a legally binding authority.”

 provides for payment subject to disgorgement if subsequently determined that default was not valid – burden is on carrier to disprove the default.

115

The “Default”: In Practice

 Insurer may challenge default – Sound like a surety bond?

 ROR letter may actually say: “Lack of default of performance by

___[subcontractor]__” (from actual ROR letter).

 Insurer may posture that it has no obligation until it “makes a determination of

responsibility” (from actual ROR letter)

 Insurer may use as additional basis to withhold/delay payment. (Carrier will link it

to “proof of loss” documenting “Loss” (caused by a default – circular position).

 Insurer will contact defaulted subcontractor to gather evidence to disprove default (bad faith?);

 *Before defaulting subcontractor – be sure to gather proofs and be prepared to defend/support the default

116

A Note on Subrogation:

 Most SDI policies provide subrogation rights to insurer against defaulted subcontractor;

 Insurer who pays a SDI claim will sue subcontractor in name of insured;

 If suit is unsuccessful, could lead to disgorgement of paid policy proceeds (improper default);

 Practical – Insured should seek modifications of SDI policy to avoid this, e.g., perhaps carve out exceptions to disgorgement or allow insured to control/participate in subrogation suit;

117

Interim Payment of Claim Items: Policy Language

 “[i]f an amount would constitute a Loss except that the amount of the Loss has not been finally determined,

[Steadfast] will indemnify [the policyholder] for the Interim

Percentage . . . of the Loss payment which would have been payable as calculated above . . . .”

 Interim percentage subject to negotiation – can be as high as

95% of an item;

118

Interim Payment of Claim Items: In Practice

 Insurer may be reluctant to make interim payment until insured has completely documented the loss item;

 Not “satisfactory” under the policy until 100% proven;

 Position is inconsistent with: i.

the Marketing Materials; and ii.

the Policy.

iii.

N.Y. Law requiring partial payments for substantiated portions of claims.

*Clearly delineate claim items (avoid overlap) to maximize partial payment on items

119

Beware of “Other Insurance” clause

 SDI policies may state that it is “excess . . . Over other valid and collectible insurance available to you.”

 Subcontractor default could trigger multiple overlapping policies.

 Insurer should not have to pursue other insurance first.

 * Practical Note – Insurers should seek removal/modification of “other insurance” clause.

120

Last Resort: Arbitration or Litigation?

 Insurer – strong preference for Arbitration;

 not public – preserves marketing;

 Insured – press for court litigation;

 public forum;

 pressure point;

 capitalize on ambiguous arbitration provision;

 assert non-arbitrable claims

 seeking punitive damages, e.g., good faith; N.Y Gen Bus. Law Sect.

349 (deceptive business practices) & Sect. 350 (false advertising)

121

Conclusion

Practical Points to

Streamline the Claim Process

122

Conclusion

Practical Points to Streamline Claim

 Up front (depending on your buying power)

 Attempt to negotiate SDI policy language for:

 definition of “satisfactory”;

 Negotiate policy language re: interim payment on unsatisfied items;

 Negotiate modifications to subrogation and “other insurance” clauses;

 Negotiate away arbitration provision (not likely);

123

Conclusion

Practical Points to Streamline Claim (cont’d.)

 Claim preparation/submission

 Manage expectations, i.e., be financially prepared for extended claim process;

 Invest time to prepare a well documented claim;

 Clearly delineate claim items (avoid overlap) to maximize payments; partial

 Avoid RFI delays by giving on small/undocumented items;

 If needed, assert lawsuit to include non-arbitrable claims – public pressure point;

124


Colin Daigle

Managing Director


Washington, DC

+1 202 263 7892 colin.a.diagle@marsh.com

James Bly

Managing Director

Marsh USA, Inc.

Pittsburgh, PA

+1 412 552 5028 james.bly@marsh.com

Christopher Barbarisi

Partner

K&L Gates LLP

Newark, NJ

+1 973 848 4010 christopher.barbarisi@klgates.com

Anthony La Rocco

Administrative Partner

K&L Gates LLP

Newark, NJ

+1 973 848 4014 anthony.larocco@klgates.com

125

DISCLAIMER


.











126

127

LESSONS LEARNED

FROM SUPERSTORM

SANDY AND WTC

Presented by

Ray Hutnik, Marsh Risk Consulting

John Scordo, K&L Gates LLP

John Cunningham, Marsh Risk Consulting

Co-sponsored by

Lessons Learned From Superstorm Sandy and WTC

Our Proposed Agenda

 Our Perspective – Accounting/Forensic, Engineering & Legal.

 Superstorm Sandy and WTC.

 Market response/issues.

 Causation issues.

 Coverage issues.

 Claims management.

 Recovery from various policies.

 Measurement issues.

 Overview of the Property Claims Process.

 Pre-loss preparedness.

 Post-loss activities.

 Buckets of coverage.

129

Lessons Learned From Superstorm Sandy and WTC

What Perspectives Do We Represent?

 Coverage expertise.

 Negotiation and interaction with insurers.

 Quantum.

 Claims preparation.

 Interacting with insurers’ experts.

 Liaison to Risk Management Department.

 Claims project management.

 Litigation/Arbitration preparation and prosecution.

130

Recent Catastrophic Losses

A Sign of Things to Come?

2012 was a quiet year…until

Superstorm Sandy

Q4 2012

131


Market Response

 More named storm deductibles likely to become a percentage deductible regardless of geographic location.

 Capacity to staff enough adjusters to respond being tested.

 Quantum and complexity of losses resulting in widespread usage of outside experts.

132


Threshold Issues

 Direct loss vs. financial loss.

 Time element.

 Service Interruption issues: Power outages in New York caused by storm damage vs. planned shutdown. Overhead transmission and distribution issues elsewhere.

 Contingent Business Interruption (CBI) issues: Drove need to carefully document specific reasons customers/suppliers may have been interrupted: damage, civil authority, ingress egress, service interruption, etc.

133


Damage to Insured Property

 Repair or replace the damaged property and:

 Business Interruption.

 Extended Business Interruption.

 Extra Expense.

 Interdependency Extra Expense.

 Claims preparation costs.

134


Damage to Third-Party Property

 Prove that there is damage to a third-party’s property and:

 Business Interruption and Extended Business Interruption.

 Service Interruption.

 Civil/Military Authority.

 Ingress/Egress.

 Contingent Extra Expense.

135


Causation Issues

 Insurance policies have varied terms and conditions. When discussions on coverage occur with insurers, they must have reference to specific terms and conditions of your policy.

 Losses may be tied to any number of causes:

 Direct action of wind.

 Storm surge.

 Service interruption.

 Flying debris.

 Ingress/egress.

 Surface water.

 Overflow of rivers and waterways.

 Civil authority.

136


Flood Issues

 Much debate over storm surge vs. flood vs. wind in

2005, post-Katrina.

 Policy definitions of storm surge as flood or windstorm vary. Careful analysis is necessary. Can affect cover, limits, and deductibles.

137


Flood Issues (cont.)

 Sandy claims are in active debate over storm surge vs. flood vs. wind as opposed to Irene in 2011, which was more of a rain flooding event.

 Each policy will have its unique issues.

 For example, the peril of flood is more often sublimited on a policy than is the peril of wind.

 Insureds may have traded pricing or other coverage for how the peril of storm surge will be defined.

138


Additional Flood Issues

 Some insureds do not realize they have a general flood sublimit and then a smaller sublimit for the problem areas.

 As defined by FEMA’s flood maps: The 100-year-flood zones, also know as zones “A” and “V” or Special Flood

Hazard Areas.

 Not uncommon on a commercial risk to see a flood limit of

“X” along with a further sublimit of one-fifth of “X” for zones “A” and “V.”

139


Additional Flood Issues (cont.)

 Important for insureds to know their sublimits and which locations are in problem zones.

 FEMA redraws these maps occasionally.

 A location that was not in an SFHA zone at renewal might now be in one.

140


Named Storm Deductibles

 Most commercial insurance policies refer to “named storm” or “named windstorm.”

 Can be complicated. Definition of named storm: “Storm or weather condition declared by NWS as a hurricane or tropical storm.”

 Typically, named storm deductible is a percentage of the replacement cost of the location damaged, typically 2% to

5% depending on the location.

 There may also be a maximum or a minimum on the dollar value of the percentage amount.

141


Named Storm Deductibles (cont.)

 Typically applied to locations in counties referred to as “Tier One Counties.”

 Percentage deductibles also apply to business interruption.

142


Business Interruption

 Business interruption (BI).

 A subset of time element.

 Many unique extensions of coverage.

 Large portion of the expected losses may arise from BI: service interruption, leader property, civil authority, ingress/egress.

143


Business Interruption (cont.)

 Lessons from the 2011 Japanese earthquake and tsunami and Thai floods.

 Some clients have since calculated their expected BI and

CBI exposure.

 Other companies have put together business continuity plans based on identified weak spots and/or critical processes.

144


Coverage and Legal Considerations

 In the definition of flood in the policy, what is the scope of the coverage?

 Are there distance limitations and requirements of property damage for ingress and civil authority coverage?

 For service interruption, are there distance limitations?

Are there qualifying periods, such as 24, 48, or 72 hours?

 When you look at employee availability, how will it impact indemnity periods?

 How does pre-loss evacuation impact an insurer’s position on business interruption coverage?

145


Coverage and Legal Issues

 Cause of loss: wind or flood?

 Concurrent causation – is there an anti-concurrent causation clause?

 Business interruption or contingent business interruption.

 Suppliers and customers – direct or indirect?

 Suspension or reduction of operations.

 Calculating business interruption losses.

146

Financial Recovery Considerations

Additional Cost of Operations

 Extra Expense.

 Third-party costs.

 Embedded internal costs.

 Expense to avert BI.

 Increased cost of work (ICOW).

 Additional ICOW.

 Increased cost of construction (builders risk).

 “Pure” extra expense.

 Expediting expense.

147


Reconstruction

 Rebuild considerations.

 Resource availability (labor, materials, equipment).

 Cash flow requirements and considerations.

 Rebuild contracting strategy.

148


Reconstruction (cont.)

 Insurance policy considerations.

 Limits and sublimits.

 Replacement cost value vs. actual cash value policies.

 “Period of restoration.”

 Like kind and quality.

 Code requirements.

 Time limits.

 Builders risk loss scenarios.

149


Rebuild Considerations

 Demolition, increased cost of construction.

 DICC or Code Coverage.

 “Capital expenditure” options.

 Not planned as of date of loss.

 Usual to the insured’s operations.

 At an insured location.

 Completed in two years.

150

Replacement Cost vs. Actual Cash Value

 ACV is an option for cash payment.

 ACV = Replacement Cost – Depreciation.

 Depreciation is NEITHER book NOR tax depreciation.

 Effective age.

 Typical life expectancy.

 Standard tables.

151

Repair vs. Replace

WTC Disaster

 BI coverage for a “direct physical loss or damage” to the property.

 Nature of “damage” – may not be easily visible or in dispute (e.g., noxious particles in interior of buildings following 9/11).

152

Claims Process

Is There an Imbalance?

Insured

Risk Manager

Insurer

Loss Adjuster

Engineer

Accountant

Lawyer

153

How to Even the “Balance of Scales”

Insured

Risk Manager

Marsh Risk

Consulting

K&L Gates

Insurer

Loss Adjuster

Engineer

Accountant

Lawyer

154

Role of Insured’s Risk Manager

 Coaches and quarterbacks.

 Directs and controls all communication and exchange of information.

 Identifies internal key contacts and delegates to team.

 Takes ownership.

155

Managing the People

 Agree to loss management and communication protocols early, ideally before loss occurs.

 Define roles, responsibilities, and deliverables with specific time frames.

156


(cont.)

 Plan for empowered personnel from all parties of interest:

 Adjusters.

 Forensic accountants.

 Building and engineering consultants.

 Restoration contractors.

 Insured’s engineering community.

 Human resources.

 Risk management.

 Financial community.

 Public relations.

 Legal.

157


(cont.)

 Meet insurer decision makers as soon as possible post loss.

 Help the insurer understand the policyholder's financial and operational goals.

 Get the insurer to agree on a “funding" protocol early in the claims process.

158

Your Duties as the Insured

 Prepare the claim.

 Demonstrate conditions found.

 Link damages back to the event (show causation).

 Show work done and why it was like kind and quality.

 Justify replacements (vs. repair).

 Make good business decisions, regardless of coverage.

 Involve the adjuster.

159

Claims Management

WTC Disaster

 Record keeping.

 Privilege.

 Chain of custody.

 Documentation.

 Bidding and work processes.

160

Expedited Payments

 Fundamentals.

 Adjuster must become comfortable with scope and estimate of loss.

 This is not a requirement.

 Some carriers are more forthcoming than others.

 Best ways to achieve:

 Develop a good rapport with adjusters by actively helping them.

 Give adjusters easy but escorted access to the loss sites. Have a member of your claim/recovery team escort them.

 Prepare a preliminary estimate of the loss and present it to the adjuster.

 Provide quotes, invoices, and purchase orders.

161

Expedited Payments

 Expect questions about the preliminary loss estimate.

 Answer all questions.

 Help your adjuster better understand the claim.

 Expect no advance payment against estimated business interruption claims.

 Concentrate efforts on losses related to fixed assets, clean up/restoration costs, and inventory.

 Making a formal request for an advance will force the insurers to respond.

162

Managing Sublimits

 Examples of sublimits:

 Expediting.

 Temporary services.

 Demolition, increased cost of construction.

 Claim preparation.

 Adjuster is trained and motivated to shift as much of your loss as possible into categories with sublimits.

 Expect your experts to be likewise trained and motivated to maximize your total recovery.

163

Professional Fees Coverage

(AKA “Claim Preparation”)

 Typically included as a specific sublimit.

 Claim preparation consultants.

 Reasonable and necessary.

 Put your architect, engineering, and outside estimator’s expenses into the cost of recovery, NOT in claim preparation.

164

Preparing for the Unpredictable

Ensuring That Losses Are Fully Recovered: Step One

 Work with your broker, claim advocate, and attorney and confirm that policy coverages and limits for your property and potential loss of income are sufficient.

 How accurate are your reported values for property and business interruption?

 Test your business income limits, and calculate your anticipated maximum business interruption loss (AMBIL) amount for key locations.

 Are deductibles too high (flood, EQ, wind)?

 Are limits and sublimits sufficiently high (property, BI, service interruption)?

 Are Contingent Business Interruption coverages in place for both direct CBI and indirect CBI events.

 Exclusions, waiting periods, valuation considerations.

165

Preparing for the Unpredictable

Ensuring That Losses Are Fully Recovered: Step Two

 Have your team in place.

 In-house team:

 Risk manager.

 Claims manager.

 Safety manager.

 Corporate counsel.

 Operations, finance, IT.

 Outside experts:







Claims advocacy.

Forensic accounting.

Claims engineering.

 Legal.

166

Post-Loss Activities

Initial Steps for Obtaining Financial Recovery

 Perform initial damage assessments.

 Inspect loss site.

 Photograph and video extensively to capture extent of damages.

 Inventory damaged items.

 Obtain quotes of replacement cost or repair costs.

 Your experts can often spot hidden damage and are alert to code issues.

 Create overall estimate of loss, claim books.

 Present estimate to adjuster, walk them through it.

 Adjuster sets reserves.

 Adjuster processes advance payment.

167

Communicate, Communicate, Communicate

 Communication cannot be overemphasized.

 Establish communication guidelines with the entire claims management team.

 All insurer/insurer rep site visits should be monitored.

168


(cont.)

 Communication with insurers is critical.

 Engage them early regarding projected cash need.

 A claim is a very dynamic process – unanticipated issues inevitably arise.

 Effective communication can prevent a small issue becoming a significant problem.

 Immediate notice of loss.

169


(cont.)

 Communication with insurers is critical (cont.).

 Provide as much information as possible regarding:

 Extent of damage.

 Impact on the business.

 Immediate steps being taken to manage the loss.

 Many decisions are made early in the process – need to be communicated and made jointly.

170

Measurement of the Loss

Maximize Recovery by Allocating to the Right Buckets

 Physical damage:

 Buildings, equipment, inventory.

 Sublimits: debris removal, expediting.

 Exclusions: nuclear, environmental.

 Time element losses:

 Business Interruption/mitigating costs.

 Inefficiencies and additional costs to operate = extra expenses.

 Time element extensions:

 Extended period of indemnity.

 Contingent time element/contingent business interruption (CBI).

 Service interruption.

 Ingress/egress, possibly civil and military authority.

171

Loss Measurement and Documentation

You Will Be Asked for More Documents Than You Can Ever Imagine!

 Detailed budgets and proposals.

 As-was repairs vs. betterments.

 Hypothetical as-was repair timelines.

 Detailed invoices.

 Receipts and expense reports for out-of-pocket expenditures.

 GL accounting detail and POs.

 Production, sales, inventory data.

 Operating statements (forecast and actual).

DOCUMENTATION IS KEY!

172


BI - “3-Step Method”

 Calculate lost sales.

 Reduce lost sales to lost gross earnings.

 Deduct non-continuing operating expenses.

173

Gross Earnings Less Non-Continuing vs. Net

Income + Continuing Loss Calculations

Projected Actual Loss

Revenue

Cost of Sales

Gross Earnings

Operating Expenses

$10,000,000

($7,000,000)

$3,000,000

Variable

Fixed

$1,000,000

$1,500,000

$0

$1,500,000

Total Operating Expense $2,500,000 $1,500,000

Net Income $500,000 ($1,500,000)

Gross Earnings ($3,000,000) less N/C Exp ($1,000,000) = $2,000,000

NI + Continuing $500,000 plus $1,500,000 = $2,000,000

$0

$0

$0

$10,000,000

($7,000,000)

$3,000,000

$1,000,000

$0

$1,000,000

$2,000,000

174

Coverage for Work Done Before the Adjuster

Arrives

 Adjusters expect to approve to work before you start.

 Challenges when you do the work first.

 Harder to prove as-found conditions as site has been altered.

 Expect that work you did and work that is covered may be different.

 Must prove that replacements made were cheaper than repairs.

 Must justify upgrades (code changes, obsolescence, etc.).

175


Coverage Puzzle

Excess

Insurance

Policy

Insurance

Policy

NFIP

Flood Insurance

FEMA

176


National Flood Insurance Plan (NFIP)

 The National Flood Insurance Plan (NFIP)

 Government-run insurance program administered by FEMA.

 The zones in which people typically buy NFIP are “A” and “V”:

Considered 100-year flood plains.

 Special Flood Hazard Areas (SFHA’s).

 Limits are:

 $500,000 of building repair and cleanup.

 $500,000 for damaged contents.





$1,000 for sue and labor.

$10,000 for pollution.

 Not covered: Indirect loss, spoilage, or loss of income.

177


National Flood Insurance Plan (NFIP) (cont.)

 Commercial risks typically buy NFIP on a per-location basis to:

 Provide additional coverage for flood exposed locations.

 Buy down the flood deductible.

 Marsh has a dedicated Flood Service Center in

Austin, Texas.

 Important to know what flood zones your locations are in.

178


Federal Emergency Management Agency (FEMA)

 FEMA provides federal aid and relief to communities that are impacted by disaster events.

 Once a disaster declaration is made, eligible applicants may seek FEMA assistance to cover their uninsured losses.

 There are two types of FEMA assistance:

 Individual assistance (residential aid).

 Public assistance (support for public entities).

179


Federal Emergency Management Agency (FEMA) (cont.)

 Shared core principles, but drastic policy differences between the two.

 Eligible FEMA applicants:

 States and state agencies.

 Local governments.

 Indian tribes.

 Private nonprofit organizations.

 For profit companies are not eligible. (No business interruption cover)

180


FEMA Coverage

 FEMA is a means of last resort.

 Expects applicants to pursue and exhaust all available insurance coverage.

 Eligible uninsured exposures should be pursued with

FEMA, for example:

 Insurance policy deductibles.

 Certain policy exclusions (such as asbestos abatement).

 Limit losses (excess damage above debris coverage limits or excess losses above total policy limits).

181


FEMA Time Limits

 Request for public assistance.

 Due 30 days after disaster designation.

 Applicant’s identification of preliminary damages.

 Due 60 days after kickoff meeting.

 Appeals.

 Applicant may appeal FEMA’s decision within 60 days of being notified of that decision.

 Completing work.

 Time limits for all projects begin the date of the disaster declaration

(extensions can be granted).

 Emergency work (Categories A and B): 6 months.

 Permanent work (Categories C-G): 18 months.

182


FEMA Insurance Purchase Requirements

Insurance

FEMA

State

Applicant

 As a condition for receiving public assistance, applicant is required to

“obtain and maintain” insurance coverage (for the hazard that caused the damage).

 Coverage commitment will be based on the total eligible costs associated with permanent work only.

 Insurance commitments are based on the peril – recent NY disasters:

 DR# 4085 – Hurricane Sandy (October 2012) – wind and flood.

 DR# 4031 – Tropical Storm Lee (September 2011) – flood.

 DR # 4020 – Hurricane Irene (August 2011) – wind and flood.

 DR #1957 – Winter Storm (December 2010).

183

THANK YOU!

Raymond S. Hutnik,

CPA, CFE, CFF, FCPA

Managing Director


Forensic Accounting and Claims Services

Philadelphia, PA

+1 215 246 1456

Raymond.S.Hutnik@marsh.com

John P. Scordo

Partner

K&L Gates, LLP

Newark, NJ

+1 973 848 4136

John.Scordo@klgates.com

John R. Cunningham, PMP, CFCC

Senior Vice President


Construction Consulting Practice

Houston, TX

+1 713 276 8681

John.R.Cunningham@marsh.com

184

DISCLAIMER


.











185

Sample Presentation Headline

Project Risk

Management

OWNER AND CONTRACTOR RISK

PERSPECTIVE

PROJECT RISK MANAGEMENT AS A

RISK GOVERNANCE SYSTEM

WHAT IS A PROJECT RISK?

MANAGING PROJECT RISK THROUGH THE

PROJECT LIFE CYCLE

WRAP-UP

Handling Subcontractor

Default Claims

SUBGUARD CLAIM PREPARATION

PRODUCTS TO MITIGATE SUBCONTRACTOR

DEFAULT RISK

SUBCONTRACTOR DEFAULT INSURANCE

Timing of Claim Process

Common Claim Defenses

Conclusion

LESSONS LEARNED

FROM SUPERSTORM

SANDY AND WTC

Related documents

Products

Support

Sample Presentation Headline

Project Risk

Management

OWNER AND CONTRACTOR RISK

PERSPECTIVE

PROJECT RISK MANAGEMENT AS A

RISK GOVERNANCE SYSTEM

WHAT IS A PROJECT RISK?

MANAGING PROJECT RISK THROUGH THE

PROJECT LIFE CYCLE

WRAP-UP

Handling Subcontractor

Default Claims

SUBGUARD CLAIM PREPARATION

PRODUCTS TO MITIGATE SUBCONTRACTOR

DEFAULT RISK

SUBCONTRACTOR DEFAULT INSURANCE

Timing of Claim Process

Common Claim Defenses

Conclusion

LESSONS LEARNED

FROM SUPERSTORM

SANDY AND WTC

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