Construction Insurance 101 or: What You Dont Know Can Hurt You

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Construction Insurance 101 orWhat You Dont
Know Can Hurt You

• Illinois Association of School Business Officials
  
• 57th Annual Conference
• May 15, 2008

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Agenda

• The Goals of Risk Management
• Three Options for Managing Risk
• The Transfer of Risk
• Insurance
• Bonds
• Other Ways to Transfer Risk

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Defining Risk Management
Planning for the negative consequences of any
decision process or action by using whatever
means feasible to control the chance of financial
loss. Public Sector Risk Management Manual
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Basically, RM Involves

• Trying to stop losses from happening
• (through avoidance, risk control,
• loss control or loss prevention)
• Paying for the losses that do occur
• (through reduction, insurance or
• risk transfer)

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(No Transcript)
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Risk Management Toolkit
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Insurance

• A contractual relationship that exists when one
  party (the insurer) for a consideration (premium)
  agrees to reimburse another party (the insured)
  for loss to a specified subject (the risk) caused
  by designated contingencies (hazards or perils).

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• Why would we do that??

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What Will the Policy Pay?

• Attachment point When will the policy begin to
  pay?
• Policy limits the maximum amount the policy
  will pay (per occurrence or in the aggregate)
• What are the terms of payment? (When, to whom,
  conditions)
• Pay attention to proper notice (notification of
  potential claim)

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A FewImportant Insurance Terms

• Indemnification
• To indemnify to make whole
• Waiver of Subrogation
• Waive (release) all rights
• Subrogation to recover from a third party
  (e.g., auto salvage)

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Subrogation

• A common law principle inherent in insurance and
  other indemnification transactions
• It is the right of an insurer to assume the
  rights of the insured to seek remedy against a
  responsible party
• Most insurance contracts require the insureds
  full cooperation in this endeavor

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Lines of Coverage

• Builders Risk
• Bonds

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Builders Risk

• A Property insurance policy that provides direct
  damage coverage on buildings or structures while
  they are under construction.
• Also covers
• Foundations
• Fixtures
• Machinery Equipment
• Materials Supplies

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Builders Risk

• Coverage may be written on the following forms
• Complete Value (100 Coinsurance)-RECOMMENDED
• Reporting Form (Values Reported as Completed)

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Builders Risk

• Completed value should include all permanent
  fixtures and decorations that will be a permanent
  part of the building
• CONTRACT PRICE DOES NOT NECESSARILY EQUAL THE
  FULL VALUE AT COMPLETION

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Now That Insurance Is Perfectly Clear
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Bonds

• A form of insurance, but there are three parties
• Not an aleatory contract
• Insurance premium protects against defined
  risks
• Bond premium guarantees a performance,
  completion or protection
• The surety does not expect losses

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Definition of (not James) Bond

• A written instrument guaranteeing the
  performance, compliance, integrity and honesty of
  the principal by the surety for the benefit of
  the obligee. The instrument binds itself to the
  terms of an underlying contract or obligation
  consisting of a formal agreement, a fiduciary
  relationship or an official duty

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Key Definitions

• Obligee The entity protected against loss and
  guaranteed adequate completion of the underlying
  obligation
• Surety The one promising to answer for the
  debt, default or miscarriage of another
• Principal The person whose debt or obligation
  is secured or guaranteed by the bond

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Bonds

• A surety bond is a written contract like
  insurance
• Suretyship means one party answers for the
  faults of another
• Surety guarantees to an obligee on behalf of a
  principal
• Unlike insurance it guarantees in the event of a
  failure to perform

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Other Types of Bonds

• Bid Bond Difference in Bid Amounts
• Performance Bond Failure to do the work
• Payment Bond Guarantee all bills get paid
• Maintenance Bond Warranty
• Supply Contract Bond Difference in Cost

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Other Ways to Transfer Risk

• Contracts
• Additional Insured Named Insured

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Contractual Risk Transfer is NOT Rocket Science
but it is important to understand the moving
parts
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A Valid Contract

• Offer
• Acceptance
• Consideration

• Legal Intent
• Agreeable Form

A promise recognized by the law as amounting to
a duty, the breach of which may trigger a legal
remedy
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Insurance Provisions

• Define Insurance Requirements
• Coverage types, terms, formats
• Timeframes for maintaining coverage
• Limits, per occurrence and aggregate
• Deductibles and SIRs
• Financial stability of insurer
• Additional insured status, endorsements and
  certificates
• Put Requirements in the RFP

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Recommended Insurance Requirements

• For purposes of establishing insurance
  requirements, hazard levels are broken down into
  three categories
• LOW HAZARD
• MEDIUM HAZARD
• HIGH HAZARD

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Low Hazard

• Low Hazard-Artisan type contractors such as
  carpenters, plumbers (no digging or trenching),
  painters, small repair type contractors
• Minimum recommended insurance limits of
  1,000,000 occ/agg for GL, AL, WC/EL

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Medium Hazard

• Medium Hazard-Roofers, plumbing with minor
  digging, cement contractors, grading of land,
  landscapers, cleaning contractors, brick layers
• Minimum recommended insurance limits of
  1,000,000 occ/2,000,000 agg for GL, AL, WC/EL,
  Prof. Liab.

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High Hazard

• High Hazard-Excavation, underground
  contractors, road contractors, erection, welding
  projects, and all major building construction and
  renovation
• Minimum recommended insurance limits of
  1,000,000 occ/3,000,000 agg for GL, AL, WC/EL,
  Prof. Liab.

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Using Certificates of Insurance

• Shows evidence that coverage exists (proof of
  workers compensation, professional liability
  coverage, etc.)
• Verifies coverage details
• It does not guarantee coverage for you the
  endorsement does that

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Certificates Endorsements

• How do I review the certificate?
• Check limits, company, date, name
• The A.M. Best Rating Guide
• Hard copy is available from A.M. Best
• Computer website www.Ambest.com
• Grades A D denotes the financial performance of
  the insurer
• Size category I XV denotes the financial size
  of the insurer

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Reading an ACORD Form

Endorsement Example
Back of Certificate
Certificate of Liability Insurance ACORD Form
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The Big Picture
Additional Insured
Policy may be modified or cancelled mid-term
Policy may not be obtained
Insurer not acceptable
Limits not adequate
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Additional Insured

• Its when Who is an Insured? (in an insurance
  policy) is amended to include
• The School as an insured party on a contractors
  or vendors insurance policy when the School and
  the contractor or vendor have entered into a
  written contract or agreement for the performance
  or operation of some service or task. This is
  done through an endorsement to the policy.

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Why be an Additional Insured?

• Reinforces risk transfer accomplished via
  contract
• Effectively waives insurers ability to subrogate
  against you
• Provides direct right of action against insurer

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Caution
Additional insured status does not automatically
extend to your employees, officers, directors,
etc.
This is accomplished only via contract language
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Drafting Contract Insurance Requirements

• Keep both contracting parties in mind make it
  realistic and fair
• Boilerplate language is a guide, not a rule
  exceptions will be necessary
• Specify minimum financial rating standards
• Make your expectations clear up front

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Best Practices Contractual Risk Transfer

• Put insurance requirements in bids
• Request review certificates be specific and
  exact
• Require proof before work begins
• Know when to ask for help!

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Conclusion

• MOST COMMOM MISTAKES MADE SCHOOLS
• Not notifying insurance agent/broker of project
• Not insuring to completed value
• Not obtaining certificate of insurance from
  architect, construction manager, and contractors
• Not being named as an additional insured by the
  above
• Not forwarding above certificate to agent/broker
  for review
• SIGNING A WAIVER OF SUBROGATION UNDER STANDARD
  AIA CONTRACT

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Speaker Information

• Ryan Isaacs-Area Vice President
• Public Entity Scholastic Division
• Arthur J. Gallagher Risk Mgmt Services
• [phone]
• Ryan_Isaacs_at_ajg.com