Construction Insurance,
Contracts, Mitigating Risk &
Related Issues - Workshop
Capital Planning, Design and Construction
November 4, 2008
Introduction and Agenda
• Panelists
• What is Construction Risk Management
• Key Components
– Contract Relationships
– Property Preservation
– Insurance
• Information Sources
• Questions / Open Discussion
Panelists
• Jim Castle, President, Driver Commercial Group, Alliant
Insurance Services
• Girard Fisher, Esq., (of Counsel) Pollack, Vida & Fisher
• Robert E. Powers, ARM, Vice President – Liability,
Gregory B. Bragg & Associates
• Joseph C. Risser, CPCU, ARM-P, California
Polytechnic State University
• Craig Schweikhard, ARM, Liability Claims Manager,
Gregory B. Bragg & Associates
• Raymond Szczucki, P.E., ARM, ACE USA Global
Property & Specialty Lines
Jim Castle
• President
• Driver Commercial Group
• National Construction Practice Group
Leader
• Surety and Insurance Services to
Construction Industry
• Contractor Practice Policies
• Controlled Insurance Programs
Girard Fisher, Esq.
• Pollak, Vida & Fisher
• Member of California Bar
– California U.S. District Courts
– U.S. Court of Appeals, Ninth District & Supreme Court
• 45 jury trials, 40 appeals
– exposures in 7 figures, published opinions
• Author and Speaker
– Government, public entity liability
– Design Immunity, Tort Claims, Negligence
Robert Powers, ARM
• Vice President – Liability
• Gregory B. Bragg & Associates, Inc.
– Carl Warren & Company
• Public Entity and Nationwide Multi
Jurisdiction Claims Administration
• Licensed Independent Adjuster
• Presenter:
– Public Agency Risk Management Association
– Risk & Insurance management Society
Craig Schweikhard, ARM
• Ventura Liability Claims Manager
• Gregory B. Bragg & Associates, Inc.
– Carl Warren & Company
• Critical Public Entity Account Manager
• Public Entity Liability and Administration
• Presenter:
– Public Agency Risk Management Association
Raymond Szczucki, P.E. ARM
• Account Engineer, Inland Marine
• ACE Global Underwriting Group
– Design Engineer – public & private projects
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Engineering Evaluation
Construction Risk Management Services
National and Local Professional Engineering
International Bridge, Tunnel & Turnpike
American Society of Civil Engineers
Joe Risser, CPCU, ARM-P
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•
Risk Manager
California Polytechnic State University
University’s Insurance Programs - CSURMA
Construction Contract Insurance Compliance
– Facilities Planning & Facility Services
– Contracts, Procurement & Risk Management
• Presenter:
– Public Risk Management Association
– University Risk Management & Insurance Association
– Public Agency Risk Management Association
What is Risk Management
• Technical Component
– Identify, Analyze, Address Risk
• Practical
– Prevention & Response
– Contractual Transfer
– Purchase Insurance
What is Insurance?
• Insurance is CASH!!!
• CASH for:
– Replacing / repairing your property
– Replacing / repairing others property
– Medical Costs / Lost wages
– Defending you from others
Traditional Project Structure
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Multiple Parties
Multiple Contract Types
Various Skill Levels
Gaps
Hope
WC
GL
BR
GL
WC
WC
WC
WC
WC
GL
GL
GL
GL
BR
BR
BR
BR
Key Components
• Pre-Construction
• Construction Duration
• Post Construction
Pre Construction
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Project Evaluation
The Contract
Insurance
Project Safety Requirements
Project Claim Procedures
Project Evaluation
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Who is the Project Owner / Team
What are they Building
When are they Building
Where are they in the Process
Why are they Building
How???
The Contract
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Most Important Construction Document
Scope & Timeline
Responsibilities
Indemnification Language
Insurance Requirements
Project Safety Requirements
Administration Requirements
Risk Management of Construction
Projects and Managing Insurance
Relationships
• Robert Powers – Bragg & Associates
• Craig Schweikhard - Bragg & Associates
• Girard Fisher – Pollak, Vida and Fisher
The Need for a Clear Picture
• Large Scale Projects
are Very Complex
• They are “Generally”
outside the Area of
Expertise of
Education Officials
• Contractor know how
to manipulate the
process to squeeze
more money out of
the State
The
Model
by Jim Wiederschall
Two Phases of Project
• Design Phase
– Architect is primary
contractor
– Numerous sub-contractors
• Construction Phase
– Main Contractor
– Numerous sub-contractors
• Other Contracts
– Construction Manager
– Inspectors
– Consultants
Design Phase
• Contract Provisions
with your Architect
– Contractual Indemnity
– Additional Insured on
GL Coverage
– Certificate of
Insurance for all
coverage
– E&O Insurance
Certificate
Subcontractors in Design Phase
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Engineers
Mechanical Engineers
Soil Engineers
Structural Engineers
Subcontractor
Engineers
– Usually no contractual
or insurance
relationship with these
contractors
Remedies v. Architect
• Breach of Contract
• Contractual Indemnity
• Claim on GL as additional
Insured
– Early Notice to carrier is
essential.
– Defense costs are only
reimbursed as of tender
• E&O
– Timely notice is essential
Construction Phase
• Primary Contractor will
retain numerous
Subcontractors.
• Subcontractors may have
subcontractors
• Contractual Relationship
between primary and
subcontractors that may
require indemnity to P.E.
• Entity may or may not
have a contractual
relationship with subs and
their insurance
Contract Provisions
• Contractual Indemnity
• Additional Insured on
GL Coverage
• Certificate of
Insurance for all
Coverage
• Bonds
– Performance
– Payment Bonds
Remedies v. Contractors
• Breach of Contracts
• Claim of Performance
Bonds
• Claims on insurance
coverage
• Contractual Indemnity
Contractor’s Remedy Against You
• Contractor’s thrown
off of projects sue for
constitutional taking.
• Conversion
– Coverage???
• Contract Payment
Claims
Claims Filing Requirements
Public Contracts Code Section 20104.2
• Contractual Payments Due
– Breach of Contracts do require claims
• Claim must be in writing before final payment
• Public Entity has 45 or 60 days to respond
– Additional info requested within 30 days
• If contractor disagrees with finding a meet and
confer will be scheduled within 30 days
• Claim statute is tolled from the time the written
claim is filed until the meet and confer process is
completed.
Other Contractors
• Same contract
provisions as Design
Phase
• Same Remedies as
Design Phase
• Need for Close
Supervision of these
functions.
Bonds
• Not Insurance but
standing on their own
• Performance Bonds
– Guarantee the specific
performance of the contract
or completion of the
contract
• Payment Bonds
– Guarantees the payment of
subcontractors on the
project.
Performance Bonds
• For use when the project
is not completed as
contracted.
• Bonds are not insurance
and Bond holders will go
after contractor for nonperformance
• Goals of the Bond Holder
may be Different than
Yours
– Step in and defend
• Do not release bond too
early
Payment Bonds and Stop Notices
• No mechanics liens
on public projects
• Stop notices
– Must hold payments to
cover stop notice until
dispute is resolved
• Use “Stop Notice”
Bonds to release
payments
Leverage
• Unfair Claims
Practices act
• First Party “Bad Faith”
• Bonding Capacity
Insurance
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Insurer Requirements
Coverage Requirements
Limit Requirements
Premium / Deductible Responsibilities
Documentation Requirements
Traditional Project Insurance
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Duplication of Cost
Stack Markups
Cross Litigation
Gaps in Coverage
Inadequate Limits
Uninsured
Contractors
WC
GL
BR
GL
WC
WC
WC
WC
WC
GL
GL
GL
GL
BR
BR
BR
BR
The OCIP Alternative
• One Program
• Control
• Consistent
Coverage
• Dedicated Limits
• No Cross Litigation
• Consistent
Services
• Decreased Markups
•
Available Coverage
• Builders Risk
• Workers’
Compensation
• General Liability
• Excess Liability
• Auto Liability
• Design Professionals
Errors & Omissions
• Pollution Liability
• Surety / Subguard
OCIP Key Components
• Program Design
• Documents / Manuals
/ Forms
• Insurance Placement
• Enrollment Process
• Claim Management
Pending Legislation
• California SB 195 - Calderon
• OCIP Disclosure Requirements
– Coverage Terms / Exclusions
– Exposure Basis of Policy
– Contractor Participation
– Deductible Application
– Design Professional Limitation of Liability
– Insurance Deductive Change
• Allows Contractor to Void Contract
Insurance Summary
• Commercial General Liability
– Bodily Injury, Property Damage
– Ongoing and Completed Operations & Products
• Business Automobile Liability
– Bodily Injury, Property Damage
• Workers’ Compensation and Employer’s Liability
– Bodily Injury and Illness of employees, work related
• Professional Liability (Architects, engineers, construction managers, etc.)
– Injury or Damages due to errors & omissions
• Builder’s Risk (Property)
– Damages or Losses to Property under construction
Insurance Placement
• Property / Inland Marine
– Pays for damage to your “stuff”
– Building & Contents at Main Office
– Builders Risk Coverage
– Tools & Equipment
• Scheduled Equipment
• Miscellaneous Tools
• Leased and Rented Equipment
CSU Construction Project
Coverage Program
• “All Risk” Builder’s Risk Insurance
– Property Damage
– Materials in Transit
– Off site storage
• Direct physical loss to Insured Project(s)
– Construction
– Reconstruction
– Renovation
The Building Construction
Process and Property Loss
Exposures
Raymond Szczucki
ACE USA Inland Marine
Disclaimer
Any information or discussion arising from this presentation shall
not prejudice, waive or otherwise forestall any legal right of
ACE USA Inland Marine, ACE USA or any of The ACE Group
of Companies concerning the terms, conditions, exclusions or
provisions contained in an issued policy of insurance. The
information or materials provided herein shall not amend or
alter in any way the terms, conditions, exclusions and
limitations of any policy delivered. Please consult the policy
for exact terms and conditions. The materials and information
contained herein are not intended to offer or provide any legal
advice concerning the topics covered.
Topics of Discussion
– Building Construction Process
– Property Loss Exposures
– Project Management Issues
– Project Constraints
– Property Preservation Management &
Planning
– Property Preservation Assessments
– Construction Dynamics
– Economics
Building Construction Process
– Construction management demands have
increased in past 20 years; major shift in last
10 years
– “Techno-time” vs. “steel and concrete time”
– Dynamic environment of construction
– Economic vs. exposure-based scheduling
Property Loss Exposures
– Water is a Primary Cause of Loss $$
• Flooding from surface water
• Water penetration through incomplete building
envelope or temporary openings
• Condensation/moisture
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Wind
Rigging & Lifting
Collapse
Equipment Damage
Fire
Project Management
– Project management team that is proactive in
management of subcontracts and property
preservation. (Values the process.)
– Pre-construction planning to “eliminate” property loss
exposures. (Schedule project to avoid loss
exposures.)
– Implement plan to “control” property loss exposures
during construction. (Mitigation of exposures that
cannot be eliminated.)
Project Constraints
– Maintenance of schedule is a priority
– CP activities control schedule (“criticality” )
– Time is more valuable than money
– Changes in schedule/scope of work create
changes in property loss exposures
– Increasing complexity of construction
– Wide range of project stakeholders
Project Constraints
Project Constraints
Property Preservation
Management & Planning
1. Discuss property preservation (new and existing) at all
project scheduling and coordination meetings. (Make it
a formal part of the agenda.)
2. Require field supervisory personnel to evaluate property
related exposures and monitor protection requirements.
3. Involve all parties (design, construction, operations) in
planning process.
Property Preservation
Management & Planning
4. Confirm subcontractor management controls and require
pre-installation reviews for critical equipment/materials.
5. Implement severe weather monitoring program and
formal notification procedures with emergency response
plans.
Property Preservation
Management & Planning
6. Identify weather sensitive equipment, materials and
finishes during pre-construction planning and progress
meetings with contractors. Monitor compliance with
vendor/manufacturer required storage/warranty
requirements.
7. Develop and implement contingency plans for delays in
material delivery or schedule changes that impact
contractor work completion and expose work in
progress to damage.
Property Preservation
Management & Planning
8.
Evaluate security and access controls to project sites.
Fire Protection and Emergency Response Plans.
9. Focus on ‘elimination’ of property loss exposures. If not
practical to eliminate exposures, implement and
document ‘control’ of exposures.
Property Preservation
Management & Planning
10. Conduct periodic property preservation assessments
(similar to safety assessments) of project site. Monitor
property preservation controls at subcontract interfaces,
project boundaries & temporary facilities/structures.
Property Preservation
Assessments
Construction & Erection
Associated Hazards – Evaluate exposures
and controls in assessment categories.
Include future exposures that are
anticipated as project progresses through
completion.
Property Preservation
Assessments
1. Transit - Evaluate transit exposure and
controls that are in place or required.
2. Storage - Review storage of materials
associated with the project on and off the site.
Exposure and controls to be implemented.
3. Security - Evaluate site access controls and
theft and vandalism potential.
Property Preservation
Assessments
4. Fire Protection - Review adequacy of fire protection that
is provided on the site.
5. Rigging and Lifting / Equipment Exposures - Evaluate
rigging and lifting exposures and other equipment related
exposures that exist on the project and controls to be
implemented.
6. Collapse - Monitor collapse exposures that may exist on
the site and adequacy of controls; e.g.: support of
excavation, formwork/shoring, temporary bracing of
structural members.
Property Preservation
Assessments
7. Adjacent Hazards – Evaluate adjacent exposures and
required controls.
8. Water Hazards – Evaluate water damage exposures that
may exist on the site. Work in progress or materials
exposed to damage from water.
Property Preservation
Assessments
9. Flood - Review flood exposure to the project site and
adequacy of control of surface runoff or underground
utilities. Action plans to minimize damage and control
flooding.
10. Severe Weather Exposures - Review controls to protect
stored materials and work in progress from elements.
Project Housekeeping
–Daily Clean-Up
–Dumpster Placement
–Segregation of Materials
–Debris Removal from Building
First-Aid & Fire Protection
–Fire Extinguishers > Types & Use
–Other First-Aid
–Placement
–Training
–Maintenance & Inspection
Fire Department &
Emergency Services
–Notification
–Scope of project
–Plans/Site Access
–Communication/Advise of Progress
Control Sources of Ignition
–Temporary Electrical
–Smoking Controls
–Hotwork > Firewatches
–Temporary Heat
Flammable Liquids & Gases
–Types & Uses
–Storage
–Dispensing
–Disposal
Permanent Fire Protection
–Alarm Systems
–Sprinkler Systems
–Standpipes
–Hydrants
Flooding Exposures
–Flood Zones
–Site Grading, Drainage, Diversion
Berms
–Retention Basins
–Consideration of Project Stage
Project Scheduling
–Charging of Water Lines
–Protection from Freezing
–Weather Sensitive Systems
–Making Buildings Weather Tight
–Contract Coordination
Project Scheduling
–Daily Weather Reports
• Manage schedule of high exposure
activities
–Materials for Weather Protection
–Severe Weather Plan
–Emergency Response Plans
Site Security Considerations
–Concentration of Values
–Target Property
–Job Stage & Size
–Neighborhood
–Labor or local area issues
Site Security Controls
– Limit Points of Vehicle Access
– Project Trailer Security
– Site Storage Inside Secured Structures
– Police/Guard Service & Communication
– Fencing
– Lighting
– Alarm Systems
Construction Dynamics
• Schedule compression & exposure accretion
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Closely monitor concurrent work activities
Construction sequencing for optimum
productivity
Building envelope delays and increases in
interior exposures
Weather-dependent work activities
CPM logic change vs. decrease time for critical
items
Construction Dynamics
Building envelope exposures
–Water, water everywhere….
–Lack of construction industry
awareness
–Potential problems for completed
facility
Construction Dynamics
Design & construction complexity
–Architectural/structural details
–Atrium space planning
–Shop drawings & fabrication delays
–New building materials/methods
Construction Dynamics
Building systems exposures
– Building systems technology
improvements
– Sensitive systems (dust, moisture,
vibration, heat)
– Start-up testing and coordination
– Multiple contractor involvement in
complex systems
– LEED or “Green Buildings”
Construction Dynamics
Craftsmanship & quality assurance
–Craft shortages
–Craft expertise
–Work-force development takes time
–Formal QA programs
–Project management oversight
Construction Dynamics
Construction coordination & project
interfaces
– Project boundaries and contract
interfaces
– Overlapping responsibility
– Coordination of all stakeholders
– Maintain sequencing and account for
variances
Construction Dynamics
Project delivery systems
–Traditional, design-build, fast track,
turn-key
–Opportunities & challenges
–Incorporate property preservation
planning into project design
development and project schedule
Economics
Economic effects of losses
– Direct & Indirect Loss Costs
– Productivity & quality issues
– Employee and public injury exposures
– Schedule delays
– Loss cost reduction benefits with PPP
Property Preservation Management
& Planning
SUMMARY
 Pursue elimination of exposures; if not
possible, implement controls to mitigate
exposures.
 Evaluate the construction efforts at the
project site from a macro perspective.
 Maintain controls across project boundaries
and disciplines.
Property Preservation Management
& Planning
• SUMMARY
 Evaluate changes in loss exposure as
project progresses.
 Monitor contract interfaces, work
coordination and construction sequencing.
 Review subcontractor management controls
and impact of schedule/scope changes.
Property Preservation
• Property preservation planning should be
an ongoing component of construction
project management.
• Include “property preservation” when
estimating, planning and scheduling the
project work.
Builder’s Risk Application
• Project Enrollment Form
• Builder’s Risk Application
• General Building Supplement
Insurance Documentation
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Certificates
Endorsements
Declaration Sheets
Claims Reporting requirements
Entire Policy
NOTICE OF CANCELLATION - 30/10
Insurance Limits
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Occurrence and Claims Made
Annual Aggregate
Policy vs. Project limits
Deductible vs. Self Insured Retention(SIR)
What Limits?
– Why $1, 2, 5, 10 Million?
• What Deductible?
– 1%, 2%, 5%, 10%.....
Insurance Placement
• Business Auto Coverage
– Auto Liability Limit $1,000,000
• Include Owned, Hired & Non-Owned vehicles
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Uninsured & Under Insured Motorists - $1,000,000
Medical Payments - $5,000
Auto Physical Damage Coverage
Endorsements
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Additional Insured
Waivers of Subrogation
Primary Wording
Non Contribution
Insurance Placement
• General Liability
– Limits:
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•
•
•
$1,000,000 Per Occurrence
$2,000,000 General Aggregate
$2,000,000 Products / Completed Operations Agg
$1,000,000 Personal & Advertising Injury
– Provides certain project requirements
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Additional Insured
Waivers of Subrogation
Primary Wording
Non Contribution
Insurance Placement
• General Liability – Major Exclusions
– Pollution Liability
– Mold (Fungus)
– Subsidence
– Asbestos
– Professional Products and Services Liability
– Employment – Related Practices
– Operations covered by a Wrap-Up
– Environmental Enforcement Action - FINES
Insurance Placement
• Workers’ Compensation
– Provides medical and disability payments to an
injured employee
– Limits:
• Part A:
• Part B:
Statutory
$1,000,000 (Employers Liability)
– Rate Basis:
• Payrolls
• Insurer Rates
• Experience Modification Factor
– Waiver of subrogation endorsement
Insurance Placement
• Excess / Umbrella Liability
– Provides extra protection ($$$) in the event of
a severe claim.
– Provides Limits Above
• Business Auto Liability
• General Liability
• Workers’ Compensation – Part B
– Declaration Sheet
Insurance Placement
• Professional Liability
– Addresses the Design Liability assumed by
Prime Architect either directly or through the
use of Sub-Consultants.
– Declaration Sheet
• Retro Date
• Reporting Period
– Claims reporting procedure
Insurance Placement
• Pollution Liability
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•
Additional Insured
Waivers of Subrogation
Primary Wording
Non Contribution
– Significant Increased Limits
– Transportation
• Auto liability coverage – MCS-90
• Sudden and Accidental Pollution
– Disposal Sites
Project Safety Requirements
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Contractual
Responsibility for Design
Application of Requirements
Inspection
Adjustments
Environmental Requirements
• Owner or Contractor responsible
• Owner or Contractor statutory liable
–Air Pollution
–Water Pollution
–Hazardous Materials
• Not Covered by Insurance
Construction Duration
• Contract Administration
• Insurance Documentation Process
• Safety Program Administration /
Adjustments
• Claim Administration
Introduction
• What is Insurance
• Why Request Insurance Documentation
• When Subcontractor Insurance is
Inadequate
• How to Prevent Inadequacies
– Communication
– Compliance Methods
– Subcontractor Pre-qualification
Owner Responsibilities
• Understand Contract Requirements
– Indemnification Clause
– Insurance Requirements
• Communicate Insurance Requirements
– Transfer of Owner Requirements
– Accuracy in Set-up of Document
– Minimal Acceptable Contractor Insurance
• Compliance
Contractor Responsibilities
• Understand Contract Requirements
• Properly Price Insurance Requirements
• Provide Appropriate Documentation
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Certificate of Insurance
Additional Insured Endorsement
Primary / Non-Contributory Language
Waiver of Subrogation Endorsements
Other Coverage
• Language in Policy
• Blanket Endorsements
Certificates of Insurance
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What is a Certificate of Insurance
Reviewing a Certificate of Insurance
Standard Limits
Attachment A - Compliance
Cancellation Clause
Additional Insured Endorsements
• What is an Additional Insured
• Why Attach the Endorsement
• Types of Endorsements
– Your Work
– Ongoing Operations
• Contractor Cost for the Endorsement
– Range $0 to $1,000
– Typically $0 to $250
Primary Language
• What is this Endorsement
• Why Attach the Endorsement
• Contractor Cost for the Endorsement
– Same as Additional Insured Endorsement
Waiver of Subrogation
• What is this Endorsement
• Why Attach the Endorsement
• Contractor Cost for the Endorsement
– GL:
Same as Additional Insured Endorsement
– WC:
Flat Charge or Percentage of Project
Premium
• WC Cost Example:
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–
Subcontractor Project Payroll:
$100,000
Subcontractor WC Rate:
$10 per $100
Project Premium:
$10,000
Waiver Charge (3-10%)
$300 - $1000
Other Insurance Items
• Owner Operators & Workers’
Compensation
• No Owned Vehicles
• Professional Liability Coverage
• Environmental Coverage
• Others
Compliance Methods
• Sample Contractor Insurance Packet
• Standard Operating Procedures
– Contract Standardization
– Checklist / Deficiency Letters
– Non- Compliance Situations
• What to Expect from the Contractors
• What to Expect from their Brokers
Post Construction
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Project Close Out
Transfer of Risk / Insurance
Claim Management
Documentation Storage
Results / Lessons Learned
Additional Information Sources
• Contact your Risk Manager or Agent
• Insurance Risk Management Institute
– Construction Risk Management Reference
– Courses / Designations Available
– Annual Convention
– www.irmi.com
• Alliant Construction Team
– Jim Castle (619) 849-3807
Resources
• “Insurance Requirements In Contracts Manual” –
Alliant Insurance
•
http://www.alliantinsurance.com/Services/Specialty/Public/PropertyCasualty/default.aspx
• “Construction Risk Management”, “Design-Build
Insurance”, “The Wrap-Up Guide” - International
Risk Management Institute – IRMI
•
http://www.irmi.com/Products/Marketing/Construction.aspx
• Materials and Presentations on Surety Bonds The Surety and Fidelity Association of America
•
http://www.surety.org/content.cfm?lid=13&catid=3
Downloads
• Presentation Power Point
• Handouts
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The Model – Contract Relationships
CSU Builder’s Risk Coverage Summary
CSU Builder’s Risk Project Enrollment Form
CSU Builder’s Risk Application & General Building
Supplement
– ACE Property Protection Recommendations for
Subcontractors
– ACE Property Preservation Assessment Checklist
Downloads
– ACE Builder’s Loss Control & Prevention
Series
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Fire
Hot Work
Indirect Controls
Temporary Heating
Theft & Vandalism
Water
Wind
Crane Outrigger Pads
Questions?