Insuring the Construction Project March 29 th, 2007 ORIMS Professional Development Day.
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Transcript of Insuring the Construction Project March 29 th, 2007 ORIMS Professional Development Day.
Marsh 2F:\graphics\INTERNAL\smith\2003\03-04\030402vn.ppt
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
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Quality Control
Value Engineering
Construction SchedulingDesign Scheduling
Design Cost ControlEstablishBudget
Addenda Change Orders
ConstructionPunch
ListBid
WorkingDrawings
DesignDevelop-
ment
SchematicDesign
Archi-tecturalProgram
Budget CompatibleBudget CompatibleWith ProgramWith Program
AdvertisementAdvertisementfor Bidfor Bid
Pre-Bid ConferencePre-Bid Conference
Notice of AwardNotice of Award
Letter of IntentLetter of Intent
Sign ContractSign Contract
Notice to ProceedNotice to Proceed SubstantialSubstantialCompletionCompletion
FinalFinalCompletionCompletion
WarrantyWarranty
The Construction Process
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Typical Project Delivery Methods
Design - Bid - Build
Construction Manager
– At risk
– Not at risk
Design Build
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Project Delivery Methods
General ContractGeneral Contract
OwnerOwner
GeneralGeneralContractorContractor
Sub-Sub-ContractorContractor
Architect/Architect/EngineerEngineer
Sub-Sub-ContractorContractor
Sub-Sub-ContractorContractor
Sub-Sub-ContractorContractor
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Project Delivery Methods
Construction ManagementConstruction ManagementManager not at RiskManager not at Risk
OwnerOwner
ConstructionConstructionManagerManager
TradeTradeContractorContractor
Architect/Architect/EngineerEngineer
TradeTradeContractorContractor
TradeTradeContractorContractor
TradeTradeContractorContractor
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Project Delivery Methods
Construction ManagementConstruction ManagementManager at RiskManager at Risk
OwnerOwner
ConstructionConstructionManagerManager
TradeTradeContractorContractor
Architect/Architect/EngineerEngineer
TradeTradeContractorContractor
TradeTradeContractorContractor
TradeTradeContractorContractor
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Project Delivery Methods
Design - BuildDesign - Build
OwnerOwner
Design - BuildDesign - BuildTeamTeam
GeneralGeneralContractorContractor
Architect/Architect/EngineerEngineer
* Joint* JointVentureVenture
Architect/Architect/EngineerEngineer
GeneralGeneralContractorContractor
SubcontractorsSubcontractorsSubconsultantsSubconsultants
Design - Build Team Options:
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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
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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
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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
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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
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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
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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
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Risk Management
IndemnificationIndemnification
Limited - Contractor assumes liability to extent own fault
Intermediate - Contractor assume all-except owner sole negligence
Broad - Contractor assumes all liability
Address consequential loss
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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
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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.)
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Who is at Risk
Owner
Architect
Contractor
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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
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What are the Risks
Architects Risks
– Error in design
– 3rd Party Bodily Injury / Property Damage
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What are the Risks
Contractors Risks
– Damage to project
– 3rd party Bodily Injury / Property Damage
– Delay by performance
– Environmental
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Common Construction Insurance Coverage
Builders’ RiskBuilders’ Risk
General LiabilityGeneral Liability
Business AutomobileBusiness Automobile
Workers’ CompensationWorkers’ Compensation
Equipment FloaterEquipment Floater
Professional LiabilityProfessional Liability
Basic Coverage Basic Coverage Architect/Engineer Architect/Engineer ContractorContractor
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Common Construction Insurance Coverage
Umbrella/Excess LiabilityUmbrella/Excess Liability
Pollution Professional LiabilityPollution Professional Liability
Valuable Papers CoverageValuable Papers Coverage
Contractors’ Pollution LiabilityContractors’ Pollution Liability
Professional LiabilityProfessional Liability (CONST. MGT/Design - Build)(CONST. MGT/Design - Build)
Surety BondsSurety Bonds
Additional Coverage Additional Coverage Architect/Engineer Architect/Engineer ContractorContractor
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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
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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
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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
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General Liability (cont’d)
Limits shared amongst all contractors’ projects
No dedicated completed operations
Renewable annually
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Wrap-up Liability
3rd Party Coverage Covers all parties in the construction project
Owner-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
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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.
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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
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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
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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)
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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
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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
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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.)
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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
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Umbrella / Excess Liability
Excess of general liability - wrap-up orautomobile policy
Increases limits of primary policies
Follows form of underlying coverage
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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
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Marine Insurance
1st party coverage for property in the course of ocean transit
All risks coverage
Can include delay in start up
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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
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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)
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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
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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
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Liquidated Damages
1st party coverage
Usually taken out by contractor
Very expensive
High deductible
Small insurance capacity
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Insurance Program Options
Owner can require contractor and subcontractors to provide necessary insurance coverage
Owner can require contractor to provide aSingle Project Insurance Program (CCIP)
Owner can Provide Insurance Program (OCIP)
Combination of the above.