Performance Bonds and CGL Insurance in

Construction Projects: Navigating Interplay

Between Insurance and SuretyMinimizing Risks and Maximizing Recovery for Defective Workmanship and Property Damage

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

TUESDAY, FEBRUARY 5, 2019

Presenting a live 90-minute webinar with interactive Q&A

Patrick R. Kingsley, Chair, Construction, Stradley Ronon Stevens & Young, Philadelphia

Marc A. Sanchez, Partner, Frantz Ward, Cleveland

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-871-8924 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail sound@straffordpub.com immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

PERFORMANCE BONDS AND CGL INSURANCE IN CONSTRUCTION PROJECTS:Navigating Interplay Between Insurance and Surety

FEBRUARY 5, 2019

Minimizing Risks and Maximizing Recovery for Defective Workmanship and Property Damage

Faculty:

Marc A. Sanchez – Frantz Ward, Cleveland

Patrick R. Kingsley – Stradley Ronon Stevens & Young, Philadelphia

COMMERCIAL GENERAL LIABILITY POLICIES

Strafford Publications, Inc.

Presented By:

Marc A. Sanchez – Frantz Ward LLP

February 5, 2019

RISK TRANSFER

• Liability Insurance

• Commercial General Liability Policy

• Umbrella Policy

• Excess Policy

• Builder’s Risk

• Performance Bond/SDI

• Contractor’s Professional Liability/E&O

• Contractual Indemnity

7

COMMERCIAL GENERAL LIABILITY

• First line of defense against claims of others

• Insurance Services Office, Inc. (ISO)

• Excess vs. umbrella

• Bodily injury and property damage

• Occurrence vs. aggregate limits

• Deductibles vs. SIR’s

• Defense vs. indemnity

8

TYPICAL CONTRACTOR INSURANCE REQUIREMENTS

• CGL – $2 MM

• Business Auto – $1 MM

• Umbrella or excess – $5 MM

• Workers’ compensation

• Typically send schedule of insurance requirements to agent – note if flow-down provision

• Some specified forms may not be available

9

DUTY TO DEFEND

• Duty to Defend requires a “civil proceeding”

• Claim arguably or potentially within policy coverage

• Resultant or consequential damage usually enough

• Obligation to pay defense costs brings insurer to the table

10

DUTY TO DEFEND

• Only a “claim” is required

• Not based on potential; claim must actually fall within policy coverage

• Usually settlement or verdict; withholding draw money probably enough

11

CONTRACTOR’S PROFESSIONAL LIABILITY COVERAGE

• Annual or project basis

• Covers design liability of contractor

• Claims Made

• Value engineering, shop drawings, CM services

12

COVERAGE

• “Bodily injury” or “property damage”

• Caused by “occurrence”

• During the policy period

• Then look to policy exclusions

13

BUSINESS RISK EXCLUSIONS

• Damage to property – “that particular part”

• Damage to your work – subcontractor exception to the exclusion

• Damage to impaired property or property not physically injured

14

INSURED CONTRACT COVERAGE

• Indemnity agreement in contract

• Assumption of liability in a contract or agreement

• Insured would have liability in absence of contract, e.g. “property damage” and “occurrence” within policy period

• CGL will cover indemnitor’s obligation; especially important if bankrupt

15

PERFORMANCE BONDS

Strafford Publications, Inc.

Presented By:

Patrick R. Kingsley– Stradley Ronon Stevens & Young, LLP

February 5, 2019

DISCUSSION OUTLINE

• Nature of the Suretyship Relationship

• Performance Bond Coverage

• Surety’s Defenses

• Surety’s Remedies

• Suretyship v. Insurance

17

The Nature of Suretyship

18

A surety agrees to answer for the debt of another.

19

Why do construction projects often include sureties?

20

SURETYSHIP

Suretyship Involves a Tri-Party Relationship

Owner = Obligee

General Contractor = Principal

Bonding Company = Surety

21

The surety is the secondary obligor and stands behind the debts and

obligations of the principal.

22

The surety is typically liable only if the principal defaults.

23

Surety is a credit accommodation.

24

If a principal cannot secure surety credit, it may have to obtain a bank

line of credit or deposit cash collateral.

25

The principal owes a duty to the surety to perform and, failing that,

to indemnify the surety for any losses it incurs due to the

principal’s default.

26

HOW DOES A PERFORMANCE BOND WORK?

27

WHAT IS A PERFORMANCE BOND?

A guarantee from a financial institution that if a principal defaults, his obligation will be fulfilled up to the penal sum of the bond.

28

PERFORMANCE BOND COVERAGE

29

PERFORMANCE BOND COVERAGE

• Completion

• Defective Work

• Delay Damages

• Penal Sum Limitation

30

PROJECT COMPLETION

31

PROJECT COMPLETION

• Financing the Defaulted Principal

• Engaging a Completion Contractor

• Tendering a Completion Contractor

• Paying the Obligee

32

DEFECTIVE WORK

33

DEFECTIVE WORK

• Pre-Default Defects

• Warranty Work

• Latent Defects

34

DELAY CLAIMS

35

DELAY DAMAGES

• Lost Profits

• Lost Use

• Financing Charges

• Inefficiency Costs

• Liquidated Damages

36

PENAL SUM LIMITATION

Paying v. Performing v. Declining

37

SURETY’S DEFENSES

• Principal’s Defenses

• Impairment of Collateral

• Improper Notice

• Cardinal Changes

• Statute of Limitations

• Standing

38

PRINCIPAL’S DEFENSES

A surety’s liability is usually no greater than that of its principal.

Usually all defenses available to the principal may be asserted by the surety.

39

IMPAIRMENT OF COLLATERAL

40

PRINCIPAL’S DEFENSES

The surety is discharged to the extent of the impaired collateral.

41

NOTICE OF TERMINATION(a/k/a Notice to Cure)

42

COMMON CURE PROVISION

Contractor’s services will not be terminated if

Contractor begins within seven days of receipt of

notice of intent to terminate to correct its failure to

perform and proceeds diligently to cure such failure

within no more than 30 days of receipt of said

notice.

43

COMMON BOND NOTICE PROVISION

AIA 312 Requirements:

• Owner must notify both contractor and surety that it is “considering declaring” a contractor default.

• Attempt to arrange a conference with contractor and surety within 15 days of notice in Step 1.

• Wait 20 days after Step 1.

• Declare a contractor default and formally terminate contractor’s right to complete the contract.

• Owner has agreed to pay contract balance.

44

IMPROPER NOTICE

Failure to follow notice and cure provisions of the

bond and/or the underlying construction contract

potentially voids the bond coverage.

45

CARDINAL CHANGES

46

CARDINAL CHANGES

A cardinal change without the consent of the surety

may discharge the bond.

47

STATUTE OF LIMITATIONS

48

STATUTE OF LIMITATIONS

• Often shorter than the general breach of contract period.

• Can usually be modified by agreement.

• Usually tolled by the “discovery rule” in the case of latent defects.

49

STANDING

Typically only the obligee has a claim under the

performance bond.

50

SURETY’S REMEDIES

• Collateral Funds

• Subrogation

• Common Law Indemnity

• Contractual Indemnity

• Right to Settle Claims of Principal and Against Principal

51

Suretyship v. Insurance

52

SURETYSHIP V. INSURANCE

• Insurance is a bilateral contract between an insurer and an insured by which the insurer agrees to assume a certain risk and pay the insured a sum of money upon the occurrence of the specified loss.

• Suretyship, on the other hand, is a tripartite relationship between an obligee, a principal and a surety, whereby the surety agrees to answer for the default of the principal.

53

INSURANCE – TWO PARTY RELATIONSHIP

54

SURETY – THREE PARTY RELATIONSHIP

55

What Triggers Coverage?

56

INSURANCE TRIGGERED BY LOSS

57

PERFORMANCE BOND TRIGGERED BY DEFAULT

58

SURETYSHIP V. INSURANCE

• The nature of suretyship presupposes that the surety will sustain no loss. If there is a claim on its bond, the surety has a common law right (and usually a contractual right) to be indemnified for its loss by its principal. Hence, suretyship is a credit accommodation.

• By contrast, an insurer has no such right. An insurer expressly assumes the risk of losses, and an insured has no obligation to indemnify its insurer for losses paid out under a policy of insurance.

59

INSURANCE PREMIUMS

Insurance premiums are calculated to create a pool

of reserves to cover expected losses of numerous

insureds.

60

BOND PREMIUMS

• Unlike an insurer, a surety does not underwrite its principal based on an actuarial determination of the risk of loss from an unknown or contingent occurrence.

• Instead, a surety issues bonds after consideration of the principal’s past performance, the principal’s ability to perform the bonded obligation, and the financial integrity and ability of the principal and the indemnitors to indemnify and hold harmless the surety against any potential losses.

• Because suretyship is primarily a credit accommodation and is not insurance, bond premiums are usually regarded as extremely low.

61

Do bonds and insurance ever overlap?

62

ACCESSING THE BONDED PRINCIPAL’S CGL COVERAGEStrafford Publications, Inc.

Presented By:

Marc A. Sanchez – Frantz Ward LLP

February 5, 2019

STANDING

1st party rights against the policy per the Indemnity Agreement (Assignment and Attorney in Fact provisions)

Equitable Subrogation – Allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment

• Surety’s 3rd party claim against the principal to enforce its common law indemnity obligations. This may be a covered loss per Exclusion 2b

64

THE GIA AND THE CGL CONTRACT EXCLUSION

SECTION 1 – COVERAGESCOVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

2. ExclusionsThis insurance does not apply to :…

b. Contractual Liability“property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.

This exclusion does not apply to liability for damages:

(2) That the insured would have in the absence of the contract or agreement; or ….

65

CGL DEFENSES

Carrier Defenses:

• No standing – Surety is not a Named Insured. Non-assignment clause

• Failure to cooperate

• Failure to give timely notice

66

NON-ASSIGNMENT

Non-assignment clause:

F. TRANSFER OF YOUR RIGHTS AND DUTIES UNDER THIS POLICY

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual Named Insured….

67

PRIMA FACIE CASE FOR COVERAGE

“Occurrence”

“Property Damage”

Majority Position – Defective work meets the definition of “occurrence.”

Minority Position – Does not; don’t reach exclusions j., l., and m.

68

TITLE

69

Saxe Doernberger & Vita PC

EXCLUSION J – THAT PARTICULAR PART

2. Exclusions:

This insurance does not apply to:

***

j. Damage to Property

“Property damage” to:

***

(6) That particular part of any property must be restored, repaired or replaced because “your work” was incorrectly performed on it.

Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.”

70

PRODUCTS-COMPLETED OPERATIONS HAZARD

19. Products-completed operations hazard:

(a) Includes all “bodily injury” and “property damage”

occurring away from premises you own or rent and

arising out of “your product” or “your work” except:

(1) Products that are still in your physical possession; or

(2) Work that has not yet been competed or abandoned.

71

EXCLUSION L – YOUR WORK EXCLUSION

Subcontractor Exception to Your Work exclusion:

l. Damage to Your Work

“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.

72

EXCLUSION M – DAMAGE TO IMPAIRED PROPERTY“Property damage” to “impaired property” or property thathas not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”; or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or an agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to “your product” or “your work” after it has been put to its intended use

73

EXCLUSION N – RECALL

Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) “Your product”;

(2) “Your work”; or

(3) “Impaired property”;

If such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

74

BONDED PRINCIPAL’S CGL

Which Policy?

Manifestation Theory, Exposure Theory, Injury-In-Fact Theory and Continuous Injury Theory

75

CONTACT

Marc A. Sanchez

(216) 515-1638

msanchez@frantzward.com

Location:

Frantz Ward LLP

200 Public Square, Suite 3000

Cleveland, OH 44114

76

Patrick R. Kingsley(215) 564-8029pkingsley@stradley.com

Location:Stradley Ronon Stevens & Young, LLP2600 One Commerce SquarePhiladelphia, PA 19103