ACIG SafetyClaims Management Workshop

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ACIG Safety/ClaimsManagement Workshop

• Risk Transfer - Contract Administration
• Upstream Downstream Contracts

Max LewelsRMS Account ExecutiveACIG Insurance
CompanyDallas, TXApril 12, 2007
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Introduction

• Construction projects bring various entities
  together to create a final product.
• Construction contracts are tools for defining the
  rights, responsibilities and liabilities of each
  party.
• The most important aspect of contract negotiation
  from an insurance standpoint is risk allocation.
• Identify the responsible party for a loss
• Determine how a loss is to be funded

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Types of Contracts

• Upstream Contracts - Contracts entered into with
  Owners, Developers, Public Entities, General
  Contractors and Construction managers for whom
  work is to be performed.
• Downstream Contracts - Contracts entered into
  with subcontractors, service providers, trucking
  owner/operators, etc., and any other entity who
  will perform work on your behalf.

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Contract Administration Process

• Contractual Risk Transfer
• 1. Is a technique for allocating risks
  associated with construction between the
  contracting parties.
• 2. Takes place in many types of contracts,
  including owner agreements, subcontract
  agreements, purchase orders, equipment
  rental agreements, etc.
• 3. Can take place in any section of a contract,
  but typically takes place in
• Indemnity agreements
• Insurance requirements

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Key Issues in Upstream Contracts

• Builders Risk
• Contractors Liability Insurance Obligations
• Additional Insured Parties and Forms
• Indemnity Agreements

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Builders Risk

• Covers loss or damage to the work and building
  materials used in the construction of a structure
  during the course of construction.
• Many things may not be covered
• High deductibles - which party is responsible for
  the deductible and is that deductible
  reimbursable to the contractor?
• Earthquake and land movement
• Flood
• Windstorm
• Delay
• Existing structures

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Builders Risk (cont.)

• There is no standard Builders Risk form.
• Will the Owner reimburse the contractor for a DIC
  (Difference in Conditions) Builders Risk if the
  Builders Risk for the project is inadequate?

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Contractors Liability Obligations

• Is there an A.M. Best Rating indicated in the
  specs for the Contractors insurance carrier?
• Are the limits of liability required within the
  Contractors program in place, both underlying
  and excess?

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Contractors Liability Obligations (cont.)

• Are all coverages required in place, or is there
  a need to secure additional coverage?
  (Pollution, Professional, etc.)
• Does the Owner request the right to select
  counsel for the Contractor should there be a
  claim?

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Contractors Liability Obligations (cont.)

• What is the length of coverage required for
  completed operations?
• Is there a problem if the Contractors policy
  contains a large deductible or SIR?
• What type of requirements are passed onto the
  Contractors subs?

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Additional Insured Requirement

• An additional insured endorsement shall be
  provided to the Owner naming the Owner and all
  other parties required by the prime contract,
  using ISO additional insured endorsement (CG
  2010), edition date 11/85, or an equivalent
  (e.g., CG 2010, a later edition, plus CG 2037).
  Said insurance shall be written on an occurrence
  basis, and shall be primary and non-contributing.

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Additional Insured Endorsements

• Certificate does not confer coverage to an Owner!
• 1. CG2010 (11/85 edition)
• a. Covers additional insured for liability
  arising out your work.
• b. Additional insured is covered during course
  of construction and for completed operations.
• c. Increasingly difficult to obtain from
  insurers.

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Additional Insured Endorsements

• 2. CG2010 (various editions 1993-2001)
• a. Covers additional insured for liability
  arising out of your ongoing operations.
• b. No coverage for completed operations.
• c. Completed operations coverage for the
  additional insured can be obtained by adding
  CG2037 endorsement.

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Additional Insured Endorsements

• 3. CG2010 (07/04 edition)
• a. No coverage for additional insureds sole
  negligence.
• b. Applies only to ongoing operations.
• c. Completed operations can be covered by adding
  CG2037 endorsement (which now excludes sole
  negligence).
• 4. Manuscript Endorsements
• a. Increasingly prevalent in insurance
  marketplace.
• b. Some provide coverage similar to various
  editions of CG2010, but some provide even less
  coverage for additional insured.
• Interpretations of AI Status changing constantly.
• (EXHIBIT A)

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Indemnity Agreements

• Limited Form Indemnity
• The Contractor is responsible for defending and
  paying a claim only to the extent of their
  negligence.
• Intermediate Form Indemnity
• If the Contractor is at fault to any degree, they
  are responsible for defending and paying the
  entire loss.
• Broad Form Indemnity
• The Contractor assumes an unqualified obligation
  to hold the Owner harmless for all liabilities
  even if the injury or damage is due to the sole
  negligence of the Owner.

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Contract Administration Recommendations

• Upstream Contract Checklist
• Have a properly executed contract in the file.
• Qualify, within reason, those insurance
  requirements that are found to be onerous.
• Transfer or minimize liability whenever and
  wherever possible.
• Limit the contractual indemnification in the
  contract to a specific dollar amount, if possible.

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Contract Administration Recommendations (cont.)

• Upstream Contract Checklist
• Have a Builders Risk certificate in file,
  protecting the Contractor and all tiers of
  subcontractors. Secure a copy of the policy as
  soon as possible.
• Have a copy of the Contractors certificate of
  insurance furnished to the Owner in file in order
  to verify the limits and coverages originally
  required by the Owner.
• Have a monitoring system in place to review any
  contract changes.

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Conclusion

• Contractors should minimize the economic risks
  that are in the path of a profitable project.
• An equitable allocation of risks should be the
  contractors prime goal.

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Conclusion (cont.)

• A contractor who understands risk allocation can
  do a lot to maximize their ability to manage
  risks in contracts while preserving their right
  to recover losses.

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Owner/Contractor Risk Matrix

• An Upstream Contract Matrix is included in the
  workbook as Exhibit B for reference of
  Preferred and Fall Back positions in Upstream
  Contract negotiations relative to insurance
  coverages.

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Types of Downstream Contracts

• Standard subcontract agreement
• Short-form agreement
• Limited to dollar threshold
• Purchase orders
• Same insurance requirements
• Same indemnity provisions
• Equipment lease/rental
• Trucking/hauling agreements
• Service provider agreements

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Primary Goal of Subcontractors Contracts and
Insurance

• Protect upstream party (Contractor).
• Subcontractors insurance first dollar coverage.
  (Exhibit C)
• Defense coverage.
• Provisions for any variances to the contracts.

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Subcontract Requirements

• Signed, executed by subcontractor prior to
  mobilization.
• Indemnity provisions deemed non-negotiable.
• Who can sign subcontractor agreements?
• President
• VP/Division Managers/PMs
• Equipment Manager
• Others?
• Who approves any changes to the indemnity
  provisions and/or insurance requirements?

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Subcontractor Risk Transfer Challenges

• Unsigned Subcontract Agreement
• Subcontract Terms Amended
• Subcontractor Insolvency
• Aggressive Subcontractor lobby on Indemnity
  Limitations
• Subcontractor Insurance Carrier
• Insolvency
• Exclusions to their policy
• Providing the correct additional insured
  endorsement (See Exhibit A)

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Subcontractor Insurance Challenges

• Quality of subcontractor coverages/exclusions
• EIFS/Mold
• Subsidence
• Residential
• Subcontractors resisting broad risk transfers
• Subs to accept sole negligence.
• Sub must anticipate to defend and settle GC claim
  not connected to their work.

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Solutions/Recommendations

• Aggressive Subcontract Prequalification/Selection
• Include insurance requirements, financials
• QA/QC programs
• Tight Document Control(Exhibit D)
• No subcontractor mobilization without a signed
  subcontract and insurance certificate and
  additional insured endorsement
• Use of letter of intent (signed) incorporating
  indemnity provisions and insurance requirements
  (Exhibit E)

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Solutions/Recommendations (cont.)

• Tight Document Control (cont.)
• No subcontract insurance modifications without
  risk management approval
• Document storage and retention through the
  statute of repose
• Strong/Consistent Enforcement of Insurance and
  Additional Insured Requirements
• Dont set pattern of compromise
• Regularly audit processes

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Solutions/Recommendations (cont.)

• Educate PMs, division managers, etc. on the
  importance of contract administration and
  consistency.
• Expend your effort at the front-end of the
  project to clearly define all requirements of the
  contract.