Completing the Project and Maximizing Recovery

Weather events are changing the construction landscape, giving new vigor to the force majeure clause and requiring new approaches to project completion. Most recently, Hurricanes Harvey, Irma and Maria—and the wildfires in California and Montana—have highlighted the need to focus on best practices for responding to such events. Contractors and subcontractors can take steps to minimize out-of-pocket costs related to damage and recovery efforts and maximize their ability to transfer to others risks of force majeure events.

An effective response to a severe weather or other force majeure event begins well before the first meteorological warnings. The force majeure provision in the project contract may dictate a contractor’s or subcontractor’s rights to recovery.

Broadly speaking, force majeure excuses a party from performing a contract in the face of an unforeseeable event beyond the control of either party. A significant hurricane or wildfire likely will meet that definition, but other significant events—such as severe rain, snow or wind—may cause uncertainty, as what was once considered “severe” or “unusual” becomes more common. Careful contracting at the outset can relieve some of the uncertainty. For example, defining “unusually severe” weather or “unexpected delay” may help prevent disputes about what constitutes a force majeure event.

After the storm, review those project contracts carefully to determine a contractor’s or subcontractor’s rights and responsibilities. Pay particular attention to what type of recovery the clause provides (e.g., schedule relief only versus schedule and monetary relief) and any notice requirements. Contractual notice requirements for force majeure events are frequently short, so do not delay, even if only a basic notice is provided. 

Aside from the project contracts, a firm’s insurance portfolio will be an asset when responding to a natural disaster. The most likely sources for insurance coverage for construction projects damaged by natural disasters or other force
majeure events will be builder’s risk insurance, property insurance and marine cargo insurance. Other potential sources of insurance coverage (depending on the circumstances) include professional errors and omissions, commercial general liability and subcontractor default policies. 

Review these policies at the outset of a project, paying particular attention to any exclusion or limitation on coverage that might affect a firm’s ability to recover damages arising from a natural disaster or other force majeure event. For example, consider whether any policy (and in particular the builder’s risk policy) provides coverage for a delay in completion or “soft” costs.  If not, consider:
  • whether this type of coverage is available, and whether it is cost effective, or where the company will get the funds to keep the project going through completion; and 
  • how it will recover added costs due to the delay that natural disasters often cause (especially if the force majeure clause does not authorize monetary relief).
Once again, after the storm, get those insurance policies out and review the terms of each to maximize potential recovery. To effectively and efficiently use the insurance, it is necessary to comply with notice requirements and to keep the insurers informed throughout the recovery process. 

Once the storm is over, documentation is key for both force majeure and insurance recovery.  Good documentation maximizes claim recovery, and minimizes costly after-the-fact reconstruction of costs. Consider creating disaster-specific cost codes, including cost codes that correlate to any sublimited categories of insurance recovery. Note: Creating the codes but then failing to use them correctly—or not at all—may do more harm than good. 

Finally, but perhaps most importantly, a firm must choose its words carefully. Remember that what is said now, in the heat of getting recovery work done with perhaps not enough information, matters. Project participants and other interested parties (insurers, owners, subcontractors, sureties, etc.) are listening to what has been damaged, how it was damaged, how much it will cost to get back up and running, and how long work will be delayed. What the company says now will set expectations at all levels of the project, and those expectations might be difficult to overcome if estimates prove low later on.

Particularly regarding insurance recovery, how an issue or a specific cost is framed can affect whether there is full, partial or no coverage. Consider identifying specific individuals or consultants who are subject experts to serve as the company’s voice for a particular subject (e.g., select one person to be the sole point of contact for claims adjusters). Communication is key, but accurate, timely and consistent communication will be most effective in recovery and damage mitigation efforts.

The immediate aftermath of a natural disaster or other force majeure event will be decisive for successful project completion, for claims made or avoided and for the availability of insurance coverage.  Effective project planning, coordination with experts, and quick action will help complete the project and maximize recovery.

Jocelyn Knoll, Eric Ruzicka and Alex Hontos are partners in the Minneapolis office of Dorsey & Whitney LLP. Katie Pfeifer is counsel at the firm. For more information, visit dorsey.com.