“Insurance procurement and management has become increasingly complicated,” observes Henry Lombardi, President and COO of Allied Group Holding, LLC. “At the same time, it has become more frequent that a project’s profitability depends on recovery of insurance dollars.” With this in mind, you’ll want to examine the fine print in your policy more closely after reading what these industry experts in insurance, bonding and construction law have to say.
Henry W. Nozko, Jr.
President
ACSTAR Insurance Company
First, make sure you actually have insurance to cover construction defects. Some insurers may have exclusions in their policies for construction defects or a time limit, for example, of five years that a defect claim must be reported in order to be covered under the policy. Otherwise, coverage might be declined.
Second, a contractor should rigorously resist adding additional insureds to its general liability policy. Your policy has a limit that you paid for, which is for your protection. By adding additional insureds to your policy, a claim against the additional insured not necessarily arising out of your negligence could consume a portion of your policy that would no longer be available for you.
Third, be on the alert for onerous terms that may tie you to loosy-goosy warranty provisions, such as unlimited periods for construction defect manifestation and discovery.
Fourth, this is a very complex area of coverage and sometimes, a ‘too good to be true’ premium quotation may come with coverage limitations, which might be okay as long as you have evaluated and handicapped the risk. Generally, you will be purchasing broader coverage if you limit yourself to purchasing a policy from an admitted insurer vs. an excess and surplus lines insurer.
Henry C. Lombardi
President and Chief Operating Officer
Allied Group Holdings, LLC
One of the primary goals of every contractor who purchases liability insurance should be to maximize the coverage available when property damage or bodily injury results from defective construction. This involves:
- making sure the necessary coverage is in place before the loss; and
- ensuring that the coverage will pay the loss by presenting the claim properly and complying with policy conditions.
The first step is to procure the right types of coverage, with sufficient limits, and according to proper terms. This involves knowledge of the potential trouble spots and skillful negotiation. The goal is to obtain a clear policy in which the coverage is predictable and does not change depending on where a loss occurs. One of the biggest issues facing contractors today is the disagreement in states’ laws over whether or not defective construction is a covered event under a commercial general liability policy when the result is property damage as opposed to bodily injury. There may be opportunities to address this and other similar issues when a policy is first negotiated.
Any contractor who plans to have work performed by subcontractors must give equal attention to contract insurance procurement language. The best coverage is the kind that comes from someone else. Careful drafting of the indemnity and insurance procurement provisions can make all the difference. Among other things, contract insurance procurement provisions must address how broad the additional insured coverage will be, how it applies with other insurance and what happens if it is cancelled.
When a loss occurs, the most important step is the timely recognition of the loss as a potentially covered event. Whenever defective construction causes bodily injury, property damage or results in project delay (which may result in an owner’s loss-of-use claim), timely notice must be given to potential insurers to preserve coverage. “Late notice” is one of the most common bases insurers use to deny coverage. The insured’s notice obligation typically applies both to the incident itself as well as to any later demands or suits based on the incident. One of the most common mistakes is the decision to handle defect-related property damage/delay as a business dispute to be worked out as part of the contract/project resolution, rather than as something for which insurance funds may be available. To solidify the claim for coverage there must be a demand for payment, timely notice and an opportunity for the insurer to investigate and participate in the resolution of the dispute.
Insurance procurement and management has become increasingly complicated. At the same time, it has become more frequent that a project’s profitability depends on recovery of insurance dollars. In this climate, there is no substitute for the involvement of your insurance professionals at every critical stage.
Michael P. Foster
Executive Vice President
Merchants Bonding Company (Mutual)
A qualified surety agent should have a goal of helping contractor customers achieve their goals. The agent should be part of a team of professionals that includes your banker, attorney, underwriter and accountant. In order to do this, the agent and surety partner must understand your goals. Your agent should act as a consultant, adding value to the overall relationship. It is essential that your agent coordinate open and regular communication between your construction business and the surety company.
Addressing critical issues such as review of contract documents, insurance requirements and bond forms is another valuable service your agent should be able to provide or facilitate with your surety partner. We are seeing more onerous requirements in contract documents. Your agent should be able to guide you through these potentially disastrous clauses.
Your agent and surety should also be involved in tax planning and ownership perpetuation. An experienced agent and your surety partner should be available for consulting through the year.
Don Filson
Senior Vice President, Surety Manager
Thomas Rutherfoord Inc.
Your broker should be one of your closest and trusted business advisors. He understands your industry and your company’s culture and operational style. He possesses the technical expertise and standing within the surety and insurance marketplace to achieve appropriate credit and coverages at reasonable prices with responsible insurers.
A good broker will help you understand the total cost of the risks your company faces, and will work with to you reduce those costs through safety programs, proper contract review and negotiations, and in many other ways that will improve your bottom line.
Your broker should be your financial advisor on satisfying bonding companies and remaining financially healthy for the long term. Experienced agents have a vast amount of knowledge about the marketplace and can provide frequent feedback on changing market conditions, including the financial health of your insurance and bonding companies. He should also have the connections and market knowledge to recommend contractors and owners you should be working with, as well as those you should avoid.
Your agent should offer strategies and approaches to handling difficult or new situations, based upon his vast exposure to the operations, financials and circumstances of his other clients. A knowledgeable broker has access to legal and accounting experts in the construction field who can provide quick and valuable advice that will make your projects more successful.
Ultimately, a good surety broker will add value by maximizing your bonding capacity, giving you the opportunity to increase sales and your bottom line.
Mark C. Vonnahme
Executive Vice President
Arch Insurance Group
Some of the most important relationships contractors develop over time are those with the insurance and bonding professionals who help them analyze and manage risk. These relationships evolve as the contracting organization grows and require ongoing adjustment to meet the growing needs of the business and its customers.
One of those changes may be the contractor’s relationship with a broker or agent knowledgeable about the business of surety. Surety bonds are required on public works projects. As a contractor develops business plans related to this segment, establishing a strong relationship with a surety company is essential. Many agents and brokers specialize in the surety segment of the insurance industry just as others do in the contractor insurance business. Finding an agent or broker who understands the business of surety, has deep expertise in working with construction clients and a strong relationship with leading insurance and surety companies is the first step. A knowledgeable surety broker can help you navigate the information requirements of various underwriting companies and find the right match for your business needs.
Working on this long-term relationship with your broker and your surety is more important today than ever before. Experienced agents and sureties know construction businesses are being negatively impacted by the economic transition caused in part by the credit crisis. By communicating bad news quickly with a plan for improvement in operations, the experienced agent can help the contractor maintain a strong relationship with the surety. Communication in an open and honest manner is vital in laying groundwork for future growth when an expanding contracting operation eventually requires increased bonding capacity to bid on larger projects. In the difficult times we all face, an experience and effective agent will help a contractor strengthen its partnership with the surety through straightforward, honest and timely communication.
Joel E. Brown
Partner
Bradley Arant Boult Cummings LLP
Just like the necessity of construction financing, the project will not go forward without insurance and bonding. The contractor’s insurance and bonding agent obviously plays a pivotal role in the life of any project. How can the agent add value? Know the insured’s business, know the project, and be proactive if and when a claim arises.
The agent should know his insured’s business. What type of projects does the contractor typically build? Is the work mostly public or private? Hard bid or negotiated? Are standard form contracts typically used by the contractor? If so, has the agent reviewed them, particularly for insurance and bonding provisions? Does the agent regularly perform or participate in a risk audit of its contractor clients?
The agent should also know the specific projects on which its insured contractor clients are working. What are the most likely risks for the type of work being performed? Has the contractor performed any work like this before? What coverage and bonding requirements have been imposed by the owner and has the contractor successfully “passed down” those obligations to its subcontractors and suppliers?
When a claim does arise, has the agent performed a detailed investigation? Has the agent been to the site? Has the agent read the applicable contracts, policies and key correspondence?
If the agent can answer the foregoing questions affirmatively, then the agent is taking the appropriate proactive approach and will have the knowledge to provide advice regarding appropriate coverages and policy and bonding limits for the particular project. Both the insured contractors and the owners for whom they work will realize and appreciate the approach. Best of all, the loss experience for the insured and insurer will likely be reduced as well.
Paul Ramm
Surety Manager
CBIZ
An agent should go far beyond the traditional role of simply being a “middleman” or “broker.” Good agents bring value to their clients by being active business consultants.
Agents should get to know their clients and play an active role in various aspects of their business, especially on the bonding side. We often assist our clients in finding a “contractor oriented” CPA, banker and legal counsel. Construction is a specialized business and the professionals that service this industry are specialized too.
Since bonding capacity is heavily determined by the working capital and net worth of a construction company, the financial statement presentation is critical. The CPA firm needs vast experience in construction accounting for the bonding underwriters to give their statements credibility and due consideration. If the underwriter knows and trusts the CPA, they are most likely to extend favorable bonding terms to the contractor.
An experienced bonding agent works with contractor clients and their CPA to ensure the best overall financial presentation. A quality agent should help contractors forge a strong relationship with their bonding underwriters, helping to create familiarity, build trust and hopefully receive favorable bonding terms.
An agent also serves an important role on the insurance side by consulting with clients early and often to make sure they are buying the proper limits of insurance at competitive pricing from stable insurance markets. Agents add the most value for their contractor clients by understanding their business needs and remaining active and present throughout the year.
David Shillingford
President
The National Equipment Register, an ISO Company
Unfortunately equipment theft is all too common. As much as $1 billion of equipment is stolen each year in the US, primarily from worksites, due to poor physical security and the ease with which stolen equipment can be sold.
The good news is that contractors can do many things to improve security and increase the chances of recovery.
Worksite security such as fences, lighting and mobile CCTV systems all go a long way to deterring thieves. Remember that fences will delay thieves but barriers will stop them from removing equipment. Always look for your weakest link (it may well be the padlock). It is critical to take steps to secure the equipment itself such as disabling or immobilizing machines not in use with ignition security systems or custom made locks.
To increase the chances of recovery, action must be taken before a theft occurs. Make a record of the full serial number of every machine. Take this to the next level by registering serial numbers on a national database used by law enforcement to identify the owner of a machine found in suspicious circumstances. This provides the chance to identify and recover a machine even before the theft is discovered and allows a warning decal to be placed on the machine to deter theft. GPS systems also significantly enhance recovery chances.
Check used equipment carefully before a purchase. Insist that used equipment vendors run a thorough check using a service like IRONcheck.com. This makes life riskier and less rewarding for thieves and aids in equipment recovery.
In recent years, the insurance industry has taken important steps to combat equipment theft. Most support the National Equipment Register. Many offer incentives to owners who pre-register machines through the HELPtech service. Some insurers offer incentives for equipment owners with additional security or electronic tracking systems.
Martin X. Horsman
Assistant Vice President, Construction
CNA
It is common for a contractor to be required by contract to add another person or entity as an additional insured under the contractor’s CGL policy. It is equally common for a contractor to require by contract to be added as an additional insured to another person’s or entity’s CGL policy. While there are numerous endorsements available to accomplish this, wording is not standard and coverage offered is not equal.
My advice to any contractor is to carefully review the contract documents which often specify the coverage that must be provided or that is being sought through the additional insured endorsement. It is critical that the contractor being asked to provide additional insured status to another (or requesting additional insured status from another) review the endorsement to be certain contractual obligations are being met. While ISO and company forms do differ, considerations in any review include the form and edition date being requested, completed operations coverage and any primary and noncontributory wording. The most recent ISO updates for contractors were 7/04, 10/01 and 11/85. Most contracts call for the most current version but some call for specific ISO endorsements including earlier edition dates. The contractor should review the additional insured endorsement to determine if the requested or equivalent form is being provided.
Contract documents may also require coverage for completed operations in addition to ongoing operations. If completed operations coverage is being sought, look for “your work” or “products-completed operations hazard” within the additional insured endorsement or a separate endorsement specifically written to provide completed operations coverage.
Finally, contract document will often specify that additional insured coverage be provided on a primary and noncontributory basis. This is intended to clarify which policy pays first, the policy where the contractor enjoys additional insured status or the contractor’s own policy.
The issues surrounding requests for additional insured status are complex. The above suggestions are general guidelines only. The forms designed to provide this coverage differ. The contractor should have a thorough understanding of these issues and seek professional advice and counsel.
Jeff Burton
Sr. Construction Specialist
INSURICA Insurance Management Network
There are dozens of Additional Insured (AI) forms. Here are a few key areas of concern:
- Does the additional insured form provide coverage meeting the indemnity obligation the contractor has to the owner/GC? ISO forms changed dramatically in July 2004 in several ways. The new ISO forms diminish coverage under the contractual liability and the additional insured endorsements to eliminate coverage for the additional insured’s sole negligence. If the actual contract calls for the additional insured party to be provided coverage for their sole negligence by the contractor, there will probably be a gap in coverage under most additional insured forms and contractual forms.
- Does the ‘Blanket Additional Insured’ form solve the problems? Not always. Here is just one recent example. We insured a contractor who had a written contract with a school to build the structure. The written contract with the owner [school] required that the school and numerous school officials be included as additional insureds. The ‘Blanket Additional Insured’ applied. Before starting work, however, the city where the school was located required that the city itself, and several of its departments, be additional insureds for the project. They were not a part of the written contract and separate AI endorsements were necessary.
- Does the AI form put any burdens on the AI party which are unattractive or which you would feel an obligation to inform the AI of in advance? Sometimes the AI form will set forth trigger conditions of which the GC is aware (since it is the GC’s own policy) but of which the AI may not be aware. Consider the example of an AI form which stipulates that the AI must notify the insurance carrier of any occurrence that may lead to a claim. This type of AI endorsement presents a dilemma for the GC. The GC is presenting an AI form that has requirements that the AI should know about.
- Does the GC have an obligation to present these restrictions to the owner, perhaps creating a burden for himself? Does the AI form exclude ‘action over’ claims? These are the types of claims where the GC’s employee is injured, collects under worker’s compensation, but then sues the AI for their alleged negligence in the injury. The expectation of the AI is that the GC’s AI endorsement will protect them in this instance. Many AI endorsements provide exclusions for this scenario.
In short, “A rose, is a rose, is a rose,” does not apply to AI forms.
Christopher J. Brasco and Christopher M. Anzidei
Partner
Watt, Tieder, Hoffar & Fitzgerald, LLP
Without question, the increasingly common use of Building Information Modeling (“BIM”) has the potential to alter traditional divisions of responsibility between architect, engineer, and contractor. Projects that utilize BIM allow the contractor, owner, and designer to collaborate in building a digital, interactive representation of the project prior to actual construction. BIM software helps to optimize productivity and thereby reduce costs.
While BIM advocates have extolled the benefits of utilizing this new collaborative digital process to manage nearly every aspect of a construction project—design, cost, schedule, and even post-construction maintenance—less attention has been paid to the inherent characteristics of BIM with the potential to blur traditional lines of responsibility between designer and contractor. If not adequately addressed in the contract documents and managed by the parties throughout construction, this could ultimately result in wasted resources, costly claims and litigation.
The parties can clearly define the BIM ground rules in their contract documents. On projects utilizing both 2-D drawings and BIM, the parties should address which one controls in the event of a conflict. The contract documents should also address how BIM will be incorporated into the RFI, submittal, and changes processes so that all parties have a common understanding of when a contractor’s detailing of the project or an architect’s minor alterations to the design have been “accepted” or “approved” and thus can be incorporated into the project.
A “gatekeeper” should be designated in contract documents with primary responsibility for managing these processes as they relate to BIM by updating and circulating the model and ensuring it is maintained as a project record. The gatekeeper role ensures the project is built according to plans and specifications, that the owner receives proper as-built documentation for operation and maintenance on completion, and that iterations of the BIM model are preserved as project records for claims purposes, as legislatures and courts have broadly defined what constitutes a “document” for discovery and evidentiary purposes.
These brief examples illustrate the types of issues that should be addressed in contract documents to account for the appropriate division of responsibility among project participants. As with prior innovations (such as CAD and electronic scheduling software), BIM is likely to become a mainstay on construction projects and promises to be an effective project management tool so long as the parties implement procedures to utilize this tool properly.