Insuring the Construction Project March 29 th, 2007 ORIMS Professional Development Day

Insuring the Construction Project

March 29th, 2007

ORIMS Professional Development Day

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Contents

Construction Process

Typical Project Delivery Methods

Risk Management

Who is at Risk and What are the Risks

Construction Insurance Coverage

Insurance Program Options

What is an OCIP

Why Choose an OCIP

Claims

Conclusion

The Construction Process


1

2 2

3

2

4

5

6

7

8

Quality Control

Value Engineering

Construction SchedulingDesign Scheduling

Design Cost ControlEstablishBudget

Addenda Change Orders

ConstructionPunch

ListBid

WorkingDrawings

DesignDevelop-

ment

SchematicDesign

Archi-tecturalProgram

Budget CompatibleBudget CompatibleWith ProgramWith Program

AdvertisementAdvertisementfor Bidfor Bid

Pre-Bid ConferencePre-Bid Conference

Notice of AwardNotice of Award

Letter of IntentLetter of Intent

Sign ContractSign Contract

Notice to ProceedNotice to Proceed SubstantialSubstantialCompletionCompletion

FinalFinalCompletionCompletion

WarrantyWarranty

The Construction Process




Design - Bid - Build

Construction Manager

– At risk

– Not at risk

Design Build


Project Delivery Methods

General ContractGeneral Contract

OwnerOwner

GeneralGeneralContractorContractor

Sub-Sub-ContractorContractor

Architect/Architect/EngineerEngineer






Construction ManagementConstruction ManagementManager not at RiskManager not at Risk

OwnerOwner

ConstructionConstructionManagerManager

TradeTradeContractorContractor







Construction ManagementConstruction ManagementManager at RiskManager at Risk

OwnerOwner

ConstructionConstructionManagerManager








Design - BuildDesign - Build

OwnerOwner

Design - BuildDesign - BuildTeamTeam



* Joint* JointVentureVenture



SubcontractorsSubcontractorsSubconsultantsSubconsultants

Design - Build Team Options:

Risk Management


Risk Management

Risk Identification

Contractors Employees

Public

Damage to Project

Damage to Adjacent Property

Damage to Contractors Equipment

Losses caused by excusable delay

Losses caused by inexcusable delay

Faulty Workmanship

Hazardous Materials


Risk Management

Factors Affecting Risk Likelihood

Project type & site

Participants -“The Ark was built by Amateurs and the Titanic was built by Professionals” - unknown.

Budget and Financing

Scheduling

Project Delivery Method

Legal Issues

Political Issues


Risk Management

Environmental Exposures

Soil - Construction Waste/Toxic Waste/Buried Materials

Air - Incineration, Dust, Metal Recovery

Surface Water - Storm Water runoff

Ground Water Contamination - Boring/Drilling


Risk Management

Risk Allocation & Transfer is:

Determining how risks should be shared across the Owner, Contractors, Architect/Engineer to avoid:

– Bid Contingencies

– Admin/Legal Costs for disputes

– Property damage and Bodily Injury

– Loss of Revenue & Increased Expense from delays


Risk Management

How to Transfer Risk

1. Transfer Risk to other parties

2. Allocation of risks to party best able to control risks

Risk Transfer Mechanisms

Shifting financial obligation of certain risks to other project participants through -

Non Insurance transfers(Hold Harmless & Indemnity)

Commercial Insurance

Bonds


Risk Management

Contractual Risk Allocation

Contracts - Standard/Custom

CCDC 2 - 1994 - Stipulated Price Contact

CCDC 14 - Design-Build Contract Etc;

Choice Depends on Suitability of Standard to Owners Risk Transfer Desires


Risk Management

IndemnificationIndemnification

Limited - Contractor assumes liability to extent own fault

Intermediate - Contractor assume all-except owner sole negligence

Broad - Contractor assumes all liability

Address consequential loss


Risk Management

Construction Insurance is:

Recovery fund for damages caused by negligence - Architect/Engineer or Contractor

Insure (some) risks assumed in indemnity provision

Financial Viability


Risk Management

Limits Should Consider Loss Scenarios

Construction cost

Complexity

Consequential Loss Exposure

Renovation vs New

Environmental

Limits Typically purchased by Contractors

Other (Geography, Climate, Legal Environment, etc.)

Who is at Risk and What are the Risks


Who is at Risk

Owner

Architect

Contractor


What are the Risks

Owners Risks

– Damage to the project

– Delay in start up

– 3rd party Bodily Injury / Property Damage

– Force Majeure

– Error in design - change orders

– Environmental


What are the Risks

Architects Risks

– Error in design

– 3rd Party Bodily Injury / Property Damage


What are the Risks

Contractors Risks

– Damage to project

– 3rd party Bodily Injury / Property Damage

– Delay by performance

– Environmental

Construction Insurance Coverage


Common Construction Insurance Coverage

Builders’ RiskBuilders’ Risk

General LiabilityGeneral Liability

Business AutomobileBusiness Automobile

Workers’ CompensationWorkers’ Compensation

Equipment FloaterEquipment Floater

Professional LiabilityProfessional Liability

Basic Coverage Basic Coverage Architect/Engineer Architect/Engineer ContractorContractor


Common Construction Insurance Coverage

Umbrella/Excess LiabilityUmbrella/Excess Liability

Pollution Professional LiabilityPollution Professional Liability

Valuable Papers CoverageValuable Papers Coverage

Contractors’ Pollution LiabilityContractors’ Pollution Liability

Professional LiabilityProfessional Liability (CONST. MGT/Design - Build)(CONST. MGT/Design - Build)

Surety BondsSurety Bonds

Additional Coverage Additional Coverage Architect/Engineer Architect/Engineer ContractorContractor


Builder’s Risk

1st Party Coverage for damage to project works

Can include coverage for delay in start up

Covers all parties involved in construction

All risks coverage:

– Fire– Lightning– Wind, Hail– Flood– Vandalism

Testing and Commissioning


Builder’s Risk (cont’d)

Subject to exclusions:

– War– Nuclear– Faulty workmanship– Error in design

Exclusions vary widely - beware of frost / freezing exclusion, mechanical / electrical breakdown, faulty workmanship / error in design

Insures for full replacement cost

Needs to include transit coverage, off-site storage

Should be non-cancelable - important


General Liability

3rd Party Coverage

Provided by all parties to the construction project

Covers bodily injury and property damage

Owner should be added as additional insured to contractors / subs policies

Subject to exclusions:

– Intentional acts– Automobile– Workers comp.– Gradual Pollution

Includes coverage for damage to project


General Liability (cont’d)

Limits shared amongst all contractors’ projects

No dedicated completed operations

Renewable annually


Wrap-up Liability

3rd Party Coverage Covers all parties in the construction project

Owner-Contractor-Sub-Contractor-Consultants(excluding suppliers and security guards)

Coverage for bodily injury and property damage Same exclusions as general liability policy Excludes damage to project Dedicated Limits Dedicated Completed Operations Covers entire term of project Should be non-cancelable - important


General Liability vs Wrap-Up Liability


General Liability Vs. Wrap-up Liability

Question: Which is better?

The simple answer: Neither, as it depends on your point of view!

Let’s look at the issues.


General Liability Vs. Wrap-up Liability

General liability

Either owner’s or contractor’s operational policy

Renews annually

Insures a single entity and its related firms

Single limit (per occ./agg. as applicable) covering all the Insured’s operations

Wrap-up liability

Project-specific

A specialized general liability policy

Covers multiple, unrelated Insureds but limited to a certain purpose i.e. the Project

“One Time” policy with a definitive start and finish that spans the project term plus a fixed “Completed Operations” period


A Comparison

Contractors arrange coverage resulting in inconsistent coverage, sub-limits and gaps

Individual coverage is often more restrictive

Claims handling is complicated with several insurance carriers involved

Insurance costs hidden in price of Contractors’ Bid and, though most individual policies are smaller, in total they may be more costly

Individual Contractor’s Liability Policy Wrap-Up Liability Policy

Consistent coverage for Owner and all Contractors on one policy. (If arranged by Contractor, terms of coverage are outside Owner’s control)

Project Owner can often arrange broader coverage

Claims handling tends to be smoother as only one insurer is involved

Lower insurance cost, especially on very large projects, due to “one-off” nature of Policy


A Comparison

Preferred by some Contractors due to established relationships with their own insurers and brokers

Contractor provides evidence of insurance to Owner including interest of the latter. However, such evidence is of questionable value to Owner and does not guarantee the actual existence of coverage

Annual aggregate limit applies to all Contractor’s operations


Preferred by Owners due to retaining control, knowledge and quality of coverage and cost

Dedicated policy is security for Owner, Contractors and Sub-Contractors

Aggregate is dedicated to the Project and can only be exhausted during Completed Operations period (usually 24 months)


A Comparison

Owner has to administer and review the existence of the many insurance policies over the potentially many years of the Project, and thereafter

Small Contractors usually carry low limits of liability

Potential dispute between various insurers over which policy(ies) responds

Under this Policy, Owner has to rely on “Additional Insured” status which does not confer privity of contract


Administration kept to minimum

Limit of Liability can be as high as Owner desires - not restricted

Minimizes disputes - due to single insurer responding

Full privity of contract given as Owner is a Named Insured


A Comparison

Typically lower deductibles more in keeping with Contractors ability to absorb risk

Policy excludes damage to Contractor’s own work after completion unless work was done by a Sub-Contractor (allows insurer to subrogate against Sub-Contractor)


Owner often prefers larger deductibles (to minimize cost) which may cause conflict with Contractors and/or increase costs as Contractors may ‘pad’ the Bid to cover incremental risk

Policy excludes damage to Contractor’s work during construction but not during Completed Operations Period


A Comparison

Broad based coverage for damage to the Project limited only by Broad Form Property Damage (BFPD) provisions

Completed Operations trigger for each Contractor as each completes its own work

Coverage is for all operations of the Insured


Excludes damage to the Project in its entirety until the Completed Operations phase

Completed Operations triggered only on completion of the entire Project. N.B. Ensure that policy addresses this!!

Coverage is for all operations of the Insureds on the Project site(N.B. If any works are to be performed off-site, try and cover within the Wrap-up.)


Automobile

Covers physical damage to vehicle as well as 3rd party bodily injury / property damage

Should cover all vehicles owned, leased or licensed

Should be provided by all parties to the construction project

Should be endorsed to give the owner notice of cancellation


Umbrella / Excess Liability

Excess of general liability - wrap-up orautomobile policy

Increases limits of primary policies

Follows form of underlying coverage


Contractors Equipment Floater

Covers all equipment owned / leased by contractor (or subs)

All risk coverage:– Fire– Windstorm– Flood– Earthquake– Theft– Vandalism

Should include rental coverage Replacement cost or actual cash value Large contractors may self insure


Marine Insurance

1st party coverage for property in the course of ocean transit

All risks coverage

Can include delay in start up


Professional Liability ( E & O )

3rd Party Coverage

Insures against negligent act, error or omission

Provides coverage for financial loss, as well as bodily injury / property damage

Usually provided by consultants to the project (Architect, Engineer, etc)

Can be provided by contractor

No dedicated limits - covers all professionals work

Renewable annually

Owner cannot be added as an additional insured


Single Project Errors and Omissions

3rd Party Coverage

Insures against negligent act, error or omission

Provides coverage for financial loss, as well as bodily injury / property damage

Covers all consultants on the project

Dedicated limit

Non-cancelable

Dedicated reporting period

Owner can be added as an additional insured (usually only for defence costs)


Owners Protective Insurance

1st party policy for the owner only

Excess of the consultants E & O policy

Pays on judgement against consultant

Much cheaper than single project policy

Dedicated limits

Can also cover more than one project

Remove limitation of liability in contract


Pollution Liability

Can be 1st party clean upor

3rd party coverage for acts, errors and omissions arising from:

– Professional Services (A & E)

– Contracting Services (Contractor)

Can be single project or practice policy


Liquidated Damages

1st party coverage

Usually taken out by contractor

Very expensive

High deductible

Small insurance capacity


Insurance Program Options

Owner can require contractor and subcontractors to provide necessary insurance coverage

Owner can require contractor to provide aSingle Project Insurance Program (CCIP)

Owner can Provide Insurance Program (OCIP)

Combination of the above.

Documents

Insuring the Construction Project March 29 th, 2007 ORIMS Professional Development Day