Insuring the Construction Project

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

2. 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

3. The Construction Process

4. The Construction Process Pre-Bid Conference 4 Warranty Notice of Award 5 Letter of Intent 6 FinalCompletion Budget CompatibleWith Program Advertisementfor Bid Sign Contract 7 SubstantialCompletion 1 3 8 Notice to Proceed 2 2 2 Archi-tecturalProgram DesignDevelop-ment SchematicDesign WorkingDrawings PunchList Bid Construction Addenda Change Orders EstablishBudget Design Cost Control Design Scheduling Construction Scheduling Value Engineering Quality Control

5. Typical Project Delivery Methods

6. Typical Project Delivery Methods • Design - Bid - Build • Construction Manager • At risk • Not at risk • Design Build

7. Project Delivery Methods General Contract Owner Architect/Engineer GeneralContractor Sub-Contractor Sub-Contractor Sub-Contractor Sub-Contractor

8. Project Delivery Methods Construction ManagementManager not at Risk Owner ConstructionManager Architect/Engineer TradeContractor TradeContractor TradeContractor TradeContractor

9. Project Delivery Methods Construction ManagementManager at Risk Owner Architect/Engineer ConstructionManager TradeContractor TradeContractor TradeContractor TradeContractor

10. Project Delivery Methods Design - Build Owner Design - BuildTeam Design - Build Team Options: GeneralContractor Architect/Engineer * JointVenture Architect/Engineer GeneralContractor SubcontractorsSubconsultants

11. Risk Management

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Risk Management Indemnification • Limited - Contractor assumes liability to extent own fault • Intermediate - Contractor assume all-except owner sole negligence • Broad - Contractor assumes all liability • Address consequential loss

19. 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

20. 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.)

21. Who is at Risk and What are the Risks

22. Who is at Risk • Owner • Architect • Contractor

23. 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

24. What are the Risks • Architects Risks • Error in design • 3rd Party Bodily Injury / Property Damage

25. What are the Risks • Contractors Risks • Damage to project • 3rd party Bodily Injury / Property Damage • Delay by performance • Environmental

26. Construction Insurance Coverage

27. Common Construction Insurance Coverage Basic Coverage Architect/Engineer Contractor Builders’ Risk  General Liability   Business Automobile   Workers’ Compensation   Equipment Floater  Professional Liability 

28. Common Construction Insurance Coverage Additional Coverage Architect/Engineer Contractor Umbrella/Excess Liability   Pollution Professional Liability  Valuable Papers Coverage  Contractors’ Pollution Liability  Professional Liability (CONST. MGT/Design - Build) Surety Bonds 

29. 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

30. 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

31. 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

32. General Liability (cont’d) • Limits shared amongst all contractors’ projects • No dedicated completed operations • Renewable annually

33. Wrap-up Liability • 3rd Party Coverage • Covers all parties in the construction projectOwner-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

34. General Liability vs Wrap-Up Liability

35. 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.

36. 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

37. 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

38. 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 Individual Contractor’s Liability Policy Wrap-Up Liability Policy • 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)

39. 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 Individual Contractor’s Liability Policy Wrap-Up Liability Policy • 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

40. 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) Individual Contractor’s Liability Policy Wrap-Up Liability Policy • 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

41. 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 Individual Contractor’s Liability Policy Wrap-Up Liability Policy • 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.)

42. 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

43. Umbrella / Excess Liability • Excess of general liability - wrap-up orautomobile policy • Increases limits of primary policies • Follows form of underlying coverage

44. 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

45. Marine Insurance • 1st party coverage for property in the course of ocean transit • All risks coverage • Can include delay in start up

46. 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

47. 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)

48. 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

49. 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

50. Liquidated Damages • 1st party coverage • Usually taken out by contractor • Very expensive • High deductible • Small insurance capacity