Snakes in the Grass Understanding Contractors Risk Management and Insurance

1. Snakes in the GrassUnderstanding Contractors Risk Management and Insurance Michael J. O’Neill, CPCU, ARM James M. Shay, ARM, CRIS American Contractors Insurance Group, Inc.

2. Snakes in the Grass Introduction • In today’s presentation I am going to explore some of the hidden risks for contractors. • Provide details of an effective Risk Management and Insurance Program.

3. Snakes in the Grass • Contractual Risk • Construction Delivery Methods • Risk Transfer • General Liability Risks • Owner Controlled Insurance Programs • Joint Ventures • Umbrella Liability • Professional Liability • Pollution Liability

4. Contractual Risk • Contractor and Surety’s perspective • Contract provisions, clauses and conditions be reasonable and bondable. • Owner attempts to expand liabilities to include “Killer Provisions”. • This is true of insurance risks as well, whether specified in the Prime Contract or inherent in the Contractor’s program design.

5. Risk Management and Insurance • Most important goals of risk management are to: • Protect the assets, and • Financial viability of the company • Minimize the cost of risk • Retain only those risks the contractor can reasonably control or finance • Know when to say “No”

6. Risk Management and Insurance • Construction industry recognizes the relationship between risk management and sustained profits. • Risk management requires “beyond the edge” thinking. • Managing risk has evolved from a one-time a year insurance bidding process into a serious profit initiative. • Managing risk will boost profits, reduce costs and change the way contractors compete.

7. Risk Management and Insurance • Every project faces a full spectrum of risk. • The level, depth and scope of those risks vary by the context and content of the project.

8. Risk Management and Insurance RISK MANAGEMENT versus INSURANCE MANAGEMENT

9. Breadth of Risk Management RISKS

10. Risk Management and InsuranceRisk Matrix

11. Construction Delivery Systems I. Traditional General Contracting

12. Construction Delivery Systems I. Traditional General Contracting Characteristics 1. Single source of construction responsibility 2. Presumed checks and balances between A/E and contractor 3. Less construction risk for owner 4. Simple and objective selection process 5. Less administration required by owner 6. Owner and contractor's interests are not aligned 7. Lack of contractor input in design phase of project 8. Loss of fast-track ability, which increases cost 9. Design risk for owner is more 10. Risk of "unknown subcontractors"

13. Pure “Agency” CMwith Single General Contractor

14. Construction Delivery Systems II. Construction Management Characteristics 1. As defined 2. Various forms: a. Agency CM b. "At Risk" CM 3. Team relationship 4. Construction input during design phase 5. Early construction start, reduce schedule

15. Construction Delivery Systems II. Construction Management Characteristics 6. Savings to owner 7. Pure agency CM 8. Fast tracking 9. Eliminates duplication of Construction Manager/GC's services or costs 10. Potential conflict of interest between CM's role as owner's advisor

16. Pure “Agency” CMwith Multiple Prime Contractors

17. Pure “Agency” CM The process by which a qualified General Contracting Firm is retained as Construction Manager by an Owner to furnish services in connection with the administration of the contract throughout the planning, design and construction phases of a project. The Construction Manager is generally authorized by the Owner to: 1. Act on behalf of that Owner with respect to contract matters, including overview of the design and construction phases of the project 2. Transact business on behalf of that Owner 3. Render an account of its activities The actual construction work is performed by others under direct contract to the Owner. The Construction Manager is typically not responsible for construction means and methods nor does he guarantee construction cost, time or quality aspects of the project.

18. “At Risk” CM with Trade Contractors

19. “At Risk” CM The process by which a qualified general contracting firm is retained as Construction Manager by an owner to provide advice and construction leadership on a project during the planning and design phases and to provide construction leadership, contract management, direction, supervision, coordination, and control of the work during the construction phase. The actual construction work is performed by trade contractors under contract to the Construction Manager. The Construction Manager is responsible for construction means and methods and delivery of the completed work within the Owner's objective of cost, time and quality.

20. Construction Delivery Systems III. Design-Build

21. Construction Delivery Systems III. Design-Build Characteristics 1. A single source of responsibility for design and construction 2. Providing all services necessary to design and construct a facility or structure 3. Guaranteed max price 4. Valuable input by A/E and contractor from beginning to end 5. Reduced time to complete 6. Potential savings back to owner

22. Construction Delivery Systems III. Design-Build Characteristics 7. Reduced claims - by 30% or more for professional liability 8. Loss of checks and balances 9. Difficult and costly selection process 10. Limited flexibility 11. Competitive bid advantages can be retained 12. Owner loses control over project and becomes sole watchdog

23. Risk Transfer Illustration

24. Risk Financing Illustration

25. CG 20 10 11 85 - “Liability Arising out of Your Work” • One hurdle - “Your Work” • No trigger of negligence • Includes completed operations • Broadest form around – was widely used and is still quoted as a requirement

26. CG 20 10 10 93 – “Liability Arising out of Your Ongoing Operations” • One hurdle - “Your Ongoing Operations” • No trigger of negligence • No completed operations • Widely provided

27. CG 20 10 10 01 / CG 20 37 10 01 • Forms often used together • Provides ongoing operations on 20 10 • Provides completed operations on the 20 37

28. CG 20 10 07 04 / CG 20 37 07 04 • Similar to 10 01 forms above for grant of coverage • Provides ongoing operations on 20 10 • Provides completed operations on the 20 37 • Requires showing that liability was “caused” by the subcontractor

29. Risk Transfer 4. Additional Insured Goals for General Contractors • Primary risk transfer mechanism • Quick resolution of defense/indemnity obligations

30. The CGL Policy • CGL policy provides the insured with protection against legal liability imposed by violations in tort. • May include violations of the: • Insured • Insureds employees • Others

31. Tort Liability • Tort - civil wrong, other than a breach of contract, for which the law provides monetary damages as a possible remedy. • In order for a tort to occur, there must be an unjustified breach of a legal duty causing direct damage. • Intentional and unintentional tort. • Assault and Battery • Slip and Fall

32. Policy Limits • CGL policy will pay on behalf of the insured for: • damages up to the policy limits • defense and investigate cost in addition to the policy limits; and • certain supplementary payments.

33. CGL - Coverage Requirements • Insured must be legally liable to pay damages to a third party. • Occurrence of injuries or damage for which the insured is legally liable. • Compliance of the insured with various provisions of the policy, e.g., payment of premium, reports events that may lead to claims. • Triggering event must take place.

34. CGL - Policy is Design to Cover • Tort Liability • Contractual Liability • Independent Contractor Liability • On-going Operations • Completed Operations

35. CGL - Policy 1. Damage to Property Exclusions A. Found in policy as Coverage A, Exclusion J (see handout). B. Major issues for contractors.

36. CGL - Policy 1. Damage to Property Exclusions A. Alienated premises. B. Loaned property. C. Care, custody or control. D. That particular part. E. Faulty workmanship.

37. CGL - Policy 2. Damage to Your Work - Found in the policy as Coverage A, Exclusion L. “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

38. CGL - Policy 2. Damage to Your Work • This exclusion precludes coverage for property damage to the named insured’s work after it has been completed, arising out of the work or any part of it. • By specific exception, the exclusion does not apply if the work that is damaged or that causes the damage was done on behalf of the named insured by a subcontractor.

39. CGL - Policy 2. Damage to Your Work By virtue of the subcontractor exception, the insured has coverage, despite Exclusion I., with respect to the following exposures. • Property damage to work performed by the insured when the damage results from the work of the insured’s subcontractor. • Property damage to work performed by the insured’s subcontractor when the damage results from that subcontractor’s work.

40. CGL - Policy 2. Damage to Your Work • Property damage to work performed by the insured’s subcontractor when the damage results from work performed by the insured. • Property damage to work performed by the insured’s subcontractor when the damage results from the work of another contractor or subcontractor.

41. CGL - Policy Damage to Work • Look out for a CG 22 94 (10-01) exclusion that removes the subcontractor exception.

42. CGL - Policy 3. Common Exclusions for Contractors • Mold, fungi or bacteria exclusion - CG 2167 (12 04) (see handout). • Dramatic increase in the number of claims. • Likely to be added to general contractors policies.

43. CGL - Policy 3. Common Exclusions for Contractors B. Silica or Silica Related Dust Exclusion • Silicon dioxide, tiny, airborne crystals, occur naturally in soil and has an ingredient in construction material including: • Bricks • Concrete • Asphalt

44. CGL - Policy 3. Common Exclusions for Contractors 2. Insurance industry wary of the exposure. 3. Silica or Silica Related Dust Exclusion CG 2196 (03 05).

45. CGL - Policy 3. Common Exclusions for Contractors C. Subsidence or Earth Movement • Marked increase in the use of subsidence exclusion for: • General Contractor • Excavation Contractors • Grading Contractor • California is a target state, but many underwriters apply nationwide. • No Standard Form Exclusion. • Sample Exclusion.

46. CGL - Policy Subsidence Exclusion • In consideration of the premium charged, it is hereby understood and agreed that liability for bodily injury or property damage caused by, resulting from, attributable to or contributed to, or aggravated by the subsidence of land as a result of landslide, mudflow, earth sinking or shifting, resulting from operations of the Named Insured or any other subcontractor of the Named Insured is excluded.

47. CGL - Policy 3. Common Exclusions for Contractors D. Residential Exclusions • Some insurers are unwilling to cover any form of residential construction. • Carve out the residential coverage via an exclusion. • No coverage under the GC’s policy. • No coverage under the subs policy if it contains a residential exclusion.

48. CGL - Policy Residential Operations Definition • Underwriter’s definition of residential - “all single or multi family housing properties including apartments, custom single family homes, tract housing, condominiums, town houses, military housing, school dormitories, retirement communities and nursing homes.”

49. CGL - Policy Residential Operations Definition • Sample Definition (more favorable/narrow) • The term “residential construction” shall mean the construction or renovation of any “for-sale” unit, including single or multi-family homes, condominiums, row-houses or town-homes. It does not include apartment buildings, assist living facilities (unless units are made available for sale to individuals), hotel construction, dormitory housing, military housing or other habitational dwellings that are not made available for sale to individuals.

50. CGL - Policy 3. Common Exclusions for Contractors E. Exterior Insulation and Finish Systems (EIFS) • EIFS gained attention due to moisture intrusion. • Faulty installation allowed water to penetrate the walls. • Trapped moisture produced wood rot and mold. • Insurance industry migrated to the ISO EIFS Exclusion CG 21 86. • Many manuscript EIFS exclusions are used by underwriters.