Risk Management 101: Tailor Your Construction Insurance Requirements to the Discipline so You Don’t Get Taken to the Cleaners

James P. Bobotek | Pillsbury Winthrop Shaw Pittman LLP | October 3, 2017

In the world of construction, whether you’re a lender, owner, contractor or subcontractor, your success hinges largely on risk management. While there’s no substitute for sound business and construction practices (such as proper preconstruction planning, proven construction means and methods, use of experienced personnel, and stringent safety programs), among the most important project risk allocation tools are the contracts governing the various parties’ rights and obligations. Within those contracts, risk is primarily allocated through indemnity and insurance requirement provisions. When preparing insurance requirements for construction-related contracts, it is crucial to ensure these pieces are well-fitted and comfortable, like a good piece of tailoring. This requires the indemnity and risk obligations associated with each project discipline to be clearly identified and addressed.

Design professional contract requirements should include auto and commercial general liability, workers’ compensation/employer’s liability and, most importantly, professional liability coverages. Pay particular attention to the limits of the professional liability coverage; requiring excess limits for this coverage may be appropriate depending on the project’s size. Consider requiring that the coverage be “project specific,” either through a separate project policy or sublimits applicable only to the project. For large projects, a lender may consider requiring, or an owner may consider obtaining, owner’s protective professional insurance coverage, which indemnifies the owner directly for losses arising out of professional negligence of architects/engineers exceeding the limits available under the architects’/engineers’ own professional liability policies.

The entities performing construction work on the project should be required to carry auto and commercial general liability insurance, workers’ compensation/employer’s liability, and an excess liability policy providing coverage over the auto and CGL policies’ limits. Many owners also insist on payment and performance bonds from contractors and/or subcontractors. For those contractors and subcontractors performing any design-build functions, professional liability coverage should also be required. To prevent coverage gaps, contractors’ and subcontractors’ insurance requirements should include pollution liability coverage. If the owner procures the property or builder’s risk coverage, contractors and subcontractors should consider the need for an “installation floater” or similar coverage to protect their equipment and supplies onsite, offsite, and in transit.

While the liability coverage referenced above covers most project accidents resulting in (i) bodily injury, or (ii) damage to property other than what is being constructed, in most cases it does not cover damage to the structure being built. Although it is possible to obtain coverage for damage to construction projects under an owner’s existing property policy, coverage limitations in standard property insurance forms make procurement of a builder’s risk policy desirable in most cases. If a builder’s risk policy is purchased, consideration should be given to whether the owner or the contractor obtains it. This determination is best made on a project-by-project basis, taking into consideration such factors as the type of project (i.e., new construction or renovation of an existing structure); type of contract (cost plus or stipulated sum); financing/lender’s requirements (the owner may want to “bundle” soft cost and loss of income coverage with the builder’s risk policy to avoid claim delays and argument among insurers over coverage); the presence of a master property program (owner or contractor); location of project; the parties’ relative economic leverage to negotiate the most favorable premium and coverage; the contractor’s level of sophistication; and the owner’s desire to participate in project-specific risk management.

Finally, numerous risk management products, including insurance policies and bonds, are required to cover the risks presented by a construction project. To the greatest extent possible, the coverage provided by these policies should fit together. Policy provisions are drafted to create in one policy the exact coverage that was excluded by another policy—just as the pieces of a garment are sewn together without unintended gaps. Have your broker and/or attorney review all of your applicable policies to prevent gaps in coverage. You may need to amend one or more of your policies through endorsements, or purchase additional coverage, to close these gaps. Tailored properly, the project’s insurance program should fit like a well-made suit.

New Florida Federal Court Decision Exposes Construction Insurance Gap

Brian A. Wolf | Smith Currie & Hancock | June 8, 2015

Your insurance policy may not cover the costs of an expensive Chapter 558 construction defect process. Florida’s construction defect statute, Chapter 558, requires an owner to notify contractors of all alleged construction defects. After the notice is sent, the contractor notifies all of the trade contractors and a potentially expensive and time-consuming process of hiring experts, property inspections and letter writing ensues. Contractors will look to their insurance companies to cover the costs of hiring attorneys and experts to protect their interests during the process. Depending on the size and complexity of the project and the length of the owner’s list of alleged defects the 558 process can be expensive.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, Case No. 9:13-cv-80831-KAM (S.D. Fla. June 4, 2015), Altman’s insurer refused to cover Altman’s legal and expert costs incurred in the 558 process. The insurance company successfully argued that the 558 process is not a lawsuit and it is not a formal dispute resolution proceeding; thus, the insurance company is not required under the policy language or Florida law to pay for the expenses of the 558 process.

The Federal Court noted that whether an insurer is required to defend a Chapter 558 proceeding is a case of first impression in Florida. The Court had to decide whether the 558 process triggered the insurance companies duties under the insurance contract even though the owner’s allegations of construction defects were being asserted in a mandatory pre-suit notice and not in a formal dispute resolution process such as a lawsuit.

The Court reviewed the insurance policy and determined that the insurance policy specified that the insurer’s duty to provide a defense was triggered by a formal “Suit” defined as litigation, arbitration or another formal dispute resolution proceeding. Next the Court evaluated whether the Section 558 process was a formal dispute resolution proceeding. The Court did not find any Florida cases on point so it reviewed cases outside of Florida that defined dispute resolution proceedings. Although the Court acknowledged some cases that broadly defined formal dispute resolution proceedings, the Court determined that the Section 558 notice and right to cure statute provides owners and contractors with a “mechanism” to resolve a dispute and not a formal “proceeding.” Thus, the Court held that the insurance company properly denied the contractor with a defense.

The Court’s decision has significant consequences for contractors. Contractors rely on their insurance and the insurance of their subcontractors to cover legal and other costs that are inherent in participating in a 558 process. There are three things that contractors and subcontractors can do to avoid going out of pocket for legal fees in a 558 process. The first option is to seek a modification of their insurance policy that would specifically require their insurer to pay for a legal defense during the 558 process. The second option is state in their contract with the owner that 558 will not apply to the contract and thereby avoid the process altogether. Section 558 specifically allows contracting parties to opt out of 558. The last option is to send an immediate formal denial of the allegations of any 558 notice rather than engaging in the process.

Remember, 558 is supposed to protect contractors by forcing owners to give notice of defects and provide a contractor with a reasonable opportunity to cure the defects and avoid litigation. However, if the 558 process itself presents a financial burden that your insurer will not cover, then you have options. Insurers should understand that the 558 process can lead to an early resolution of owner claims and a savings to the insurance company of defense and claims costs; thus, insurers should weigh the benefits of covering defense costs of a 558 process against the costs of a formal dispute resolution proceeding.

via New Florida Federal Court decision exposes construction insurance gap – Lexology.

Construction Group Expands at The Hartford

Advise & Consult, Inc. – April 2, 2013

The Hartford is focusing on midsize and large construction companies, and as such is adjusting its Construction Group.  Expansion of its Construction Group capabilities brings underwriting, claims management and loss control facilities together as well as adding construction underwriters in key markets across the United States.

Leading the company’s insurance underwriting and sales for the construction sector is Thomas M. Boudreau, vice presdident fo construction insurance.  He will be reporting to Ross Fisher, the vice president of The Hartford Construction Group and Bond.  Mr. Bourdreau comes from AIG where he served as AIG’s construction industry practice leader and primary construction profit center manager for the United States and Canada.  He also held roles in underwriting and field sales over the past 10 years, which also included vice president of the company’s largest US region which represented more than 50 commercial insurance lines.

The Hartford Construction Group provides property and casualty insurance and risk management services for midsize and large construction companies and focuses on heavy trade contractors, commercial builders and sub-contractors.  They also offer guaranteed cost, loss sensitive and wrap-up insurance programs and claims and loss control services.