Contracts Gone Wild? Avoiding Gaps in your Insurance Coverage when the Construction Team

1. Contracts Gone Wild? Avoiding Gaps in your Insurance Coverage when the Construction Team Has Gone Wild! Presented By: Norma Carabajal Essary, VP Risk Management DFW International Airport Board Lori Robinett, VP National Construction Practice Willis Cynthia Pertile Tarle, Founder and Managing Director Tarle Law, P.C. 18th Annual Willis Construction Risk Management Conference September 19-21, 2012, San Antonio, Texas

2. HAVE A PLAN!Determine the Insurance Program • Understand your options regarding how the insurance program can be structured for the project. • Conventional Insurance: • Each trade procures their own individual insurance coverage. • Project Specific: • Procurement of coverage on a Project Specific basis, for the purpose of providing coverage to all eligible and enrolled contractors under one policy, as opposed to relying only on a contractor’s individual conventional policy of insurance.

3. HAVE A PLAN!Determine the Insurance Program • Consider coverage which can be procured on either a Project Specific or Conventional market basis: • General Liability • Excess Liability • Workers’ Compensation • E&O – Professional Liability [OPPI or PSPL] • Rail Road Protective [RRP] • Environmental [Contractor’s Pollution Liability and Premises Pollution Liability] • Builder’s Risk • Don’t forget to consider coverages not available under a Project Specific program, but which could be added as ancillary coverage: • Aviation / Marine • Contractor’s Equipment • Auto Liability

4. HAVE A PLAN!Determine the Insurance Program • Consider the perspective of each of the stake holders when determining the type of insurance program the project will operate under. • Controlled Insurance Program [CIP]: • Single policy/program, procured by either the Owner [OCIP] or the General Contractor [CCIP], that would include WC/GL/Excess or on a monoline basis. • Does the Prime or General Contractor influence the insurance program? • Consider insurance options the GC is offering under both a CIP and conventional program. • Consider experience level of GC with a CIP. • Does GC engage CCIPs? • Owner should advise GC early in negotiations if it is looking to pursue an OCIP. • Consider safety program of General Contractor. • Safety program can significantly impact how smoothly the project runs and how the claims process is handled.

5. HAVE A PLAN!Determine the Insurance Program • Does the type of insurance program chosen ultimately affect the bid process? • Project Specific / CIP: • Financial component tied to this approach. Structure can vary depending on how the contractor bids the project. • Net Bid (Alternate Add) - Contractor’s bid excludes the cost of insurance related to coveragesincluded under the program. • Gross Bid – Contractor’s bid first includes the cost of insurance provided for under the CIP and then said costs are removed via a deductive change order. • Conventional: • Maximum deductible or self-insured retention limit may be imposed on the insurance policy procured by the individual trade. • Low maximums could pose a procurement problem for national policies or large contractors. • Risks and exposure may be a bigger consideration. • Higher coverage limits may be requested which may increase bid cost.

6. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • When should the Construction Team ideally start communicating with the Insurance Team regarding what type of insurance program the project will be operating under? • Bid stage? • After contract negotiations have already commenced? • When the subcontractors start arriving on-site? • The sooner both teams start communicating the insurance and risk management needs of the project, the more benefits the project will reap.

7. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • The “Construction Negotiation Team” - Who should be involved in negotiating the contract? • Should the Risk Manager be included in contract negotiations – or do they “just get in the way with all that insurance talk!?!” • Who are these Brokers anyway? • And what in the world is a Coverage Attorney? • Correctly identifying the Insurance Team before contract negotiations commence will typically result in smoother, faster, and more productive negotiations between the parties. • Involvement of the Insurance Team throughout negotiations will increase the ability to have and maintain seamless coverage for the project.

8. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • Should a RFP be issued if a Project Specific/CIP is being considered? • Consider issuing RFP to Brokers, particularly if project has special circumstances. • Some Brokers may be more effective in certain markets. • What should RFP generally include? • Project description and length and scope of the work. • Identification of appropriate resources inherent in the project for all the parties. • Lines of insurance required, including discussion of any ancillary coverage needs. • Scope of Administrative services needed and expectations as to reporting. • Consider identifying professional and external resources being utilized. • Establish criteria for the evaluation process.

9. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • Additional factors to evaluate in determining the best insurance program for your specific project? • What is the budget for the project? • Larger budget projects are more likely to benefit financially from a Project Specific Program / CIP. • The number of direct contracts involved in the project. • The complexity and flow of the indemnity and risk of loss provisions may lend the project to benefit more from one program over the other.

10. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • What are some of the benefits to the project when insurance is discussed early in contract negotiations? • The project may reap the benefits of lower premiums. • Leverage is increased when negotiating with the Underwriter regarding specific language in the policy and endorsements. • The project will typically run smoother, which should lead to fewer claims, translating into higher overall profit margins. • Insurance coverage will likely be more adequate and contractually compliant, reducing the potential for gaps in coverage, or even a complete denial of insurance benefits.

11. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • “THE DEVIL IS IN THE DETAILS….” • The modification of individual words in your contract language and insurance requirements CAN make a major difference in whether your project has coverage when a claim arises! • When it comes to insurance, minutiae IS everything!

12. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • Considerations when assessing potential impact of the selected insurance program: • Aggregate limits and catastrophic loss • Deductibles and Self-Insured Retentions • Scope of coverage: • Completed operations coverage under a conventional policy vs. a CIP • Waivers • Exclusions, including the following: • Project Specific/CIP. Examples include: • Workers’ Compensation coverage for out-of-state workers can be excluded. • Definition of “Eligible Contractors” can determine whether there will be a lack of coverage for certain trades. • Conventional policy exclusions equally concerning. Examples include: • “Your Work” • Mold and environmental exclusions • Wrap-Up exclusions • Additional insured coverage – AI Form CG 2010 11/85 extremely difficult to obtain in the conventional market. Are the proper AI requirements in place?

13. CONTRACT NEGOTIATIONSBuilding Your Insurance Requirements • Talk to your Broker • Make sure that the insurance coverage being demanded or requested, including any specific endorsement language, is available in the marketplace and economically realistic.  • Tie what is in the contract to what is available in the marketplace: • Named Insureds definition • Scope of coverage • Excluded classes • Definition of project site

14. CONTRACT NEGOTIATIONSConnecting the Dots…. • Once you determine your insurance requirements, obtain an understanding of what issues may be on your “Hill To Die On” during negotiations. • Scope of Insurance Coverage • Endorsements • Exclusions • Waivers • Risk of Loss • Indemnity • Jurisdiction

15. CONTRACT NEGOTIATIONSConnecting the Dots….Risk of Loss • Impact of contractual risk of loss on insurance and the claims process. • Understand who is carrying the risk of loss related to certain issues and marry how and when risk is transferred with the contractual coverage requirements. • Is risk of loss transferred for the cost to repair and replace damage upon a certain trigger, i.e. delivery to site? • Are risk of loss/indemnity limits tied to insurance proceeds? • Know the deductible under the policies of insurance to be triggered and cross-reference with assumption of risk of loss limits. • Consider both per occurrence and in the aggregate limits. • Are exceptions built-in to attempt to address policy exclusions? • Does the contract address different risk of loss limits for non-conforming or defective work vs. damage to “Your Work”?

16. CONTRACT NEGOTIATIONSConnecting the Dots….Risk of Loss • Contract values + scope of work do NOT always = exposure. • Evaluation of what should be the appropriate insurable risk of loss is not tied exclusively to contract values or scope of work alone. • History has shown that some of the smallest contractors have been the source of some of the largest claims on a project. • The subcontract is only $5,000, and the subcontractor advises that they don’t have the general liability insurance specifically called for under the contract – “Can’t we just give them a pass?” • The subcontractor is only going to be on the job for one day – “We don’t need a certificate of insurance – or do we?” “What was their scope of work again??” • The subcontractor says its additional insured endorsement language is “equivalent” to the 2010 11/ 85 required in the contract, but the endorsement says something about only covering “ongoing operations.” When we pushed back, the subcontractor swears that the endorsement provided is the “only language available to them in the marketplace.” What do we do?

17. CONTRACT NEGOTIATIONSConnecting the Dots….Indemnity • Be sure that the scope of defense, indemnity and hold harmless language in the contract matches up with the scope of insurance coverage required? • Indemnity language of contract calls for defense and indemnity under completed operations scenario, yet the insurance requirements only demand CG 2010 10 93 AI Endorsement. What can happen? • Upstream can be faced with a denial of additional insured coverage as a result of disjointed indemnity and insurance language in the contract. • Don’t forget to be cautious as to how the contract defines the scope of certain other significant terms. • Consider differences in contract interpretation and potential impact of coverage analysis regarding language such as: • “due to, arising out of or resulting from” vs. “to the extent of” when defining “losses arising from”

18. CONTRACT NEGOTIATIONSConnecting the Dots…….Jurisdiction • Why does court jurisdiction matter with regard to insurance coverage and litigation? • Understand what types of coverages the project has both up and downstream and how it will likely be triggered in your jurisdiction. • Watch out for possible unsuspecting pitfalls: • Jurisdiction is identified in the contract as the State where corporate headquarters reside, not where the project is being built. Court decisions from the corporate headquarters’ jurisdiction have been overwhelmingly favorable to insurers not insureds.

19. CONSTRUCTION AND LOSSThe Unexpected Almost Always Occurs! No matter how perfect the project, the unexpected almost always occurs! • The Loss! • We Have a Claim! • The Litigation Begins!

20. CONSTRUCTION AND LOSSThe Loss! • Who do we contact? • Risk Manager • CIP Administrator • Insurance Carrier • Do we really need to notify our insurance carrier? • Won’t this just go away? • It is all the other guys fault anyway! • Involvement of carrier when the claim arises can assist in triggering early investigations and intervention in order to mitigate exposure. • Tender early, tender often! • How much time do we have? • Typically policies require notice of a claim within 30 days. • Important to advise a carrier as early as possible, as States vary in their requirements as to what constitutes as “Notice.”

21. CONSTRUCTION AND LOSSWe Have a Claim! • Ongoing versus Completed Operations….What’s the Diff? • Don’t we only care about losses that occur during the building of the project? • Isn’t it someone else’s problem if the loss occurs after the construction is completed? • How long do we have to worry about potential losses after the construction is completed? • States vary in their statute of limitations and repose. For construction defect, many have a 10 year tail, and even up to 12 years if certain criteria are met. • What in the world is a “tail”? …Doesn’t that belong to a dog? • Understand the trigger of coverage in your State. • In a construction defect action, for example, triggers vary by State law: • Exposure Rule • Manifestation • Continuous and Progressive • Injury-In-Fact

22. CONSTRUCTION AND LOSSWe Have a Claim! • What’s our deductible? Or, do we have a Self-Insured Retention? Understand the different impact each has upon a claim. • Deductible carries with it “dollar one” coverage by the insurer. • Whether an insurer has “dollar one” coverage can impact and direct how a matter is investigated and defended early on in the claims handling process. • SIR requires satisfaction by insured before obligation of carrier is triggered. • Insured’s ability to satisfy its SIR can affect the timing and level of carrier involvement when a claim arises. • However, be sure to read the policy language, as how satisfaction of the insured’s SIR can occur varies from policy to policy. • Do we need to tender this to anyone other our carrier? • Read the indemnity provisions in both the upstream and downstream contracts. • Tender early, tender often! • Determine contractual requirements for dispute resolution and assess mandatory versus voluntary.

23. CONSTRUCTION AND LOSSThe Litigation Begins! • Can’t we all just get along? When talking about it just doesn’t work, the lawyers get involved. • Isn’t this claim going to move faster toward resolution now that it is in the courthouse? • Why is this so expensive to pursue/defend? After all, we didn’t do anything wrong! • Is this depleting our policy limit? Did the Insurance Team procure a policy with defense fees inside of limits? Why do you care? • Project Specific/CIP versus Conventional • Finding out about exclusions after the fact can prove to be extremely detrimental the project. • Cross-Suits exclusions under a Project Specific/CIP • Owner exposed to additional defense fees in excess of the deductible.

24. IN THE END…. • Poor planning of the insurance program can be financially devastating to a project. • What may seem unimportant to the Construction Team today, can destroy profit margins tomorrow. • Select your insurance program wisely!

25. IN THE END…. • Build a Partnership • The Insurance Team and the Construction Team should partner together to ensure that the proper scope of coverages are sought under the contract and that those obligations are contractually required to flow up and downstream where applicable. • If you let them , the Insurance Team can be the Construction’s Team’s “Best Friend” during negotiations.

26. IN THE END…. Paying Attention to the Details DOES Matter!

27. Any Questions? Please Contact: Norma Carabajal Essary, VP Risk Management DFW International Airport Board nessary@dfwairport.com Telephone: 972.973.5655 Lori Robinett, VP National Construction Practice Willis robinett_lo@willis.com Telephone: 972.715.6249 Cynthia Pertile Tarle, Founder &Managing Director Tarle Law, P.C. cptarle@TarleLaw.com Telephone: 512.879.3678 (TX) or 760.683.8030 (CA)