Drones In The Construction Industry

Michael C. Kelley | Shutts & Bowen

In just a few short years, drones and the real-time data they collect have contributed to improvements across the construction industry, from overall project efficiency to visual progress reporting for clients and stakeholders. Many builders and owners are using drones to help document construction progress, particularly the turnover process, on projects that are often huge in scope and on sites that are often across a large swath of land. Engineers, design professionals and some subcontractors are using drones for planning and overall design or bid calculations, because they can see and analyze the project at a glance, in addition to being able to get close to otherwise hard to reach locations. The collection of real-time, visual and accurate data is collected immediately from a drone, as opposed to the slow and labor-intensive process of walking a site by foot. New innovations in software are making data collection by drone easier today than it has ever been in the past.

Drones are great for data collection, surveillance, aerial photography, surveying, documentation of construction progress, agriculture, search and rescue, and for advertising and marketing. But drone usage raises a number of legal concerns including privacy, safety and proper insurance coverage, as well as a duty to maintain video and still photo records made by drones. There can also be civil and criminal penalties associated with using drones – whether contractors or construction companies are aware of such, or not.

Construction companies using drones or individuals piloting unmanned aircrafts from a construction site, should consider whether the drone qualifies as an “aircraft” under their insurance policy, and if so, whether using, or even owning, the aircraft triggers an exclusion to coverage they otherwise believe they have. Having an established relationship with an attorney who understands the ins-and-outs of insurance coverage issues can be especially helpful. Construction attorneys are particularly adept at these issues, routinely resolving insurance coverage disputes and helping proactive businesses to avoid unanticipated liability issues by performing a review of existing operations.

Another common legal issue with drones is trespass and invasion of privacy. Individuals should refrain from engaging in an activity with a drone that would be illegal if a person was to do it themselves.

Finally, issues surrounding liability for relying on information procured by the use of drones (was it reasonable or negligent to so rely?), as well as a duty to maintain records (for how long?) created by drones, are still developing and will be litigated well into the future.

As with many remedies, an ounce of prevention is typically worth (in the litigation context) tens, if not hundreds of thousands of dollars of cure. If construction entities have questions concerning their commercial use of drones – whether related to fulfillment of major contract obligations or just to market the latest success story – they should seek competent legal counsel.

RE&C in Review: Compliance with Anti-Trafficking Terminology in Construction Contracts

James T. Dixon | Brouse McDowell

When examining the boilerplate terms of a construction contract before signing, pay particular attention to whether it includes a clause like this:

Contractor warrants and represents that it is and will remain compliant with all applicable laws and regulations pertaining to human slavery and trafficking.

These terms are becoming more common on private projects, though contractors working on federal projects have likely become accustomed to them.

The International Labour Organization, an agency of the United Nations, works to prevent forced labor, modern slavery and human trafficking. The global numbers are staggering, with 16 million estimated to be in forced labor, most of which are women and many of which are children.1 The U.S. Institute Against Human Trafficking, recognizing that the hidden nature of the crime makes it difficult to count victims, estimates that for sex trafficking the number of children involved exceeds 100,000.2  

While hard data defining the extent of the problem in the U.S. is hard to find, what is known for certain is that there is a problem in the construction industry. One non-profit studied data from the National Human Trafficking Hotline to identify 25 types of exploitation, with exploitation in construction identified among them.3 Trafficking in construction usually occurs in small companies, often with employers misclassifying workers as independent contractors. The majority are men from Mexico, El Salvador, Honduras and Guatemala, in the U.S. on H-2B visas or without documentation.

Cases in Minnesota and California illustrate the nature of the problem. In Minnesota, a subcontractor hired undocumented immigrants to work on projects throughout the Twin Cities, exploiting their fear of deportation in order to force them to work excessive hours, to accept low pay, to avoid seeking medical attention, and to work in unsafe conditions.5 A man who ran several construction companies in Hayward, California, used similar techniques while serving as a labor broker. In addition to his conviction, the government compelled the project developer to pay back wages. The developer denied wrongdoing but it, and its contractor, changed their subcontractor selection process.6  

Sex trafficking occurs when a commercial sex act is induced by fraud, force or coercion or involves a minor. Labor trafficking involves the use of force, fraud or coercion to subject someone to involuntary servitude or slavery.7 In 2015, an amendment to the Federal Acquisition Regulations increased compliance demands for contractors on federal projects. Primary among them was the requirement that contractors annually certify compliance plans that include investigation and remedial actions. Specifically prohibited acts include the destruction of identification documentation, the use of misleading recruiting, the charging of recruitment fees, the failure to provide return transportation and the use of substandard housing.8 Contract termination and contractor debarment and suspension are identified penalties.9 And of course there are criminal statutes in place that penalize individuals who are involved in trafficking.

The representation and warranty term cited above is a catch-all where a project owner has quite simply placed a compliance burden upon the contractor—though the law itself already imposes that burden. While the Trafficking Victims Protection Act is the primary law at issue, another act that impacts those within the construction supply chain prevents the importation of goods made using human trafficking or forced labor.10  

In general terms, all construction project participants should be well informed of the nature of their supply chains—for labor, materials and equipment. Construction companies on private projects, where the compliance terms are not spelled specifically in the contract, can be proactive and implement screening practices for subcontractors and suppliers. Labor brokers must be scrutinized carefully. Immigration documentation can be requested and checked. Many companies make their Anti-Human Trafficking Statements available on the internet. Construction executives can review those to familiarize themselves with the terms and start the process for creating and implementing their own policies. 

1 Global Estimates of Modern Slavery, International Labour Organization and Walk Free Foundation, p. 28 (2017).
3 The Typology of Modern Slavery: Defining Sex and Labor Trafficking in the United States, Polaris (2017).
5 “Man Charged with Labor Trafficking for Exploiting Undocumented Workers Sentenced,” KSTP (2020).
6 “Contractor Faces 20 Years in Prison for Forced Labor,” K. Slowey, CONSTRUCTIONDIVE (2019); “San Jose Contractor Pays $250k to Settle Labor Trafficking Suit,” K. Slowey, CONSTRUCTIONDIVE (2018).
7 Trafficking Victims Protection Act, 22 USC § 7102 (11).
8 FAR 52.222-50(b)(5).
9 22 USC 7104(k)(1)(H).
10 The Customs and Facilitations and Trade Enforcement Reauthorization Act of 2009.

Insurers Need to Do Their Homework: Review of the Use of Data, Algorithms, and Predictive Models

Jamie Bigayer and Ann Young Black | Carlton Fields

On July 6, 2021, the governor of Colorado signed Senate Bill 21-169 prohibiting insurers’ use of external consumer data and information sources (external data), as well as algorithms and predictive models using external data (technology) in a way that unfairly discriminates based on race, color, national or ethnic origin, religion, sex, sexual orientation, disability, gender identity, or gender expression (protected status). Bill 21-169 notes that while these tools may simplify and expedite certain insurance practices, “the accuracy and reliability of external consumer data and information sources can vary greatly, and some algorithms and predictive models may lack a sufficient rationale for use in insurance practices.” New section 10-3-1104.9 becomes effective on September 6, 2021, and any rules adopted by the insurance commissioner may not be effective before January 1, 2023.

Section 10-3-1104.9 requires the commissioner to adopt rules based on the different insurance types and insurance practices, which is defined as “marketing, underwriting, pricing, utilization management, reimbursement methodologies, and claims management in the transaction of insurance.” To do so, the commissioner is required to call on stakeholders and to consider factors and processes relevant to each type of insurance.

This means insurers must start their homework early so they can be ready to explain to the commissioner what data they use; from whom the data is obtained; how it is used, including whether it is used as part of an algorithm or predictive model; and whether the use of the data results in unfair discrimination as defined in section 10-3-1104.9(8)(e).

Required Rulemaking Under Section 10-3-1104.9

From the stakeholder information, the commissioner is required to adopt rules imposing reporting and governance obligations on insurers.

  • Reporting Rules – These rules must seek information on (i) an insurer’s use of external data in the development and implementation of technology; (ii) the manner in which the insurer uses external data; and (iii) the manner in which the insurer uses technology. The information is to be reported by type of insurance and insurance practice.
  • Governance Rules – These rules must require insurers to (i) establish and maintain a risk management framework reasonably designed to determine, to the extent practicable, whether the insurer’s use of external data and technology unfairly discriminates against a protected status; (ii) assess the risk management framework; and (iii) obtain officer attestations as to the implementation of the risk management framework. 

In adopting the required rules, the commissioner must (i) consider the impact of any rules on the solvency of insurers; (ii) provide a reasonable time for insurers to remedy any unfair discrimination impact of any employed technology; and (iii) provide a means by which insurers can use external data and technology that the insurance division has found not to be unfairly discriminatory.

Questions Raised by Section 10-3-1104.9

As part of the rulemaking process, insurers may want to raise their hands to ask questions on section 10-3-1104.9. Some questions  include:

What is unfair discrimination?

In response to industry concerns regarding the definition of unfair discrimination, section 10-3-1104.9(8)(e) imposes a three-prong test:

  • The use of external data or technology has a correlation to a protected status;
  • The correlation results in a disproportionately negative outcome for such protected status; and
  • The negative outcome exceeds the reasonable correlation to the underlying insurance practice, including losses and costs for  underwriting.

To better understand this three-prong test, insurers at the stakeholder meetings should seek clarification. For example:  

  • How is the correlation between the use of the external data or technology and the protected status determined?
  • How can an insurer test for the correlation, when section 10-3-1104.9(7)(a) makes clear that insurers are not required to collect information regarding protected status from applicants or policyholders? At the NAIC Special (EX) Committee on Race and Insurance during the 2021 NAIC Summer National Meeting, Colorado Commissioner Michael Conway noted that insurers do not need to collect specific data on race to be able to test for discriminatory outcomes, and Colorado will expect insurers to do such testing.
  • How is a negative outcome on protected status determined and then quantified to determine if it exceeds a reasonable correlation?
  • What is a reasonable correlation to determine what exceeds such correlation?

What is “to the extent practicable”?

An insurer’s risk management framework will be required to be reasonably designed to determine, to the extent practicable, whether the insurer’s use of external data and technology unfairly discriminates against a protected status.

The terminology “to the extent practicable” was added in response to insurer concerns that they may not have the tools available to design the risk management framework. As the commissioner considers rulemaking, insurers may wish to ask whether “to the extent practicable” will take into account:

  • The size of the insurer or the amount of business for a particular type of insurance that the insurer conducts.
  • The fact that the insurer does not have the information to assess whether third-party vendor technology uses external data. And what happens if the third- party vendors refuse to share the information.

What is meant by algorithm?

Section 10-3-1104.9(8)(a) defines an algorithm as “a computational or machine learning process that informs human decision making in insurance practices.” However, this broad definition leaves insurers to wonder whether “algorithm” would be interpreted to include even the use of simple computational programs such as Excel or other automation tools in connection with traditional underwriting. How far does the definition go?

What is external data?

Section 10-3-1104.9(8)(b)(I) defines external data as “a data or an information source that is used by an insurer to supplement traditional underwriting or other insurance practices or to establish lifestyle indicators that are used in insurance practices.” Section (8)(b)(I) gives the following examples: credit scores, social media habits, locations, purchasing habits, homeownership, educational attainment,  occupation, licensures, civil judgments, and court records. However, many of these data points and other “lifestyle indicators” are obtained directly from the consumer as part of the application. Before the final exam, insurers might want to attend office hours to understand:

  • Is information acquired in an application considered external data?
  • Does such information become external data if it is used in an algorithm or predictive model?

What is meant by traditional underwriting?

Section 10-3-1104.9(7)(b)(II) and (IV) note that insurers are not required to test “traditional underwriting factors being used for the exclusive purpose of determining insurable interest or eligibility for coverage” or “longstanding and well-established common industry practices in settling claims or traditional underwriting practices” unless they are included in the insurer’s testing of its use of technology. But the following questions remain:

  • What is meant by traditional underwriting factors and traditional underwriting practices? Are traditional factors and practices in an electronic medium or process now considered nontraditional?
  • If traditional underwriting factors and practices are lumped in with an insurer’s use of technology, what is really exempt from having to be tested?

How Insurers Can Start Preparing for Class

  • Begin to inventory what data is used, from whom the data is obtained, and how it is used, including whether it is used as part of an algorithm or predictive model, for each type of insurance the insurer issues and for each insurance practice where data is used. This includes seeking information from the insurer’s marketing, product design, underwriting, administrative services, claims, and fraud units. Insurers should take a broad view of data, algorithms, and predictive models to ensure everything that might be scrutinized by Colorado is considered.
  • Inform the insurer’s marketing, product design, underwriting, administrative services, claims, and fraud units that subject matter experts from different business units will be needed for consultation as the Colorado insurance department holds stakeholder meetings and in developing governance around the use of data, algorithms, and predictive models.
  • Review third-party contracts to determine what rights the insurer has (i) to obtain information about the data being used and the construction and operation of any algorithms and predictive models and (ii) to require the cooperation of the third party in the face of a regulatory review. Additionally, these rights and obligations should be incorporated into any new third-party contracts.
  • Begin to outline a plan for satisfying the reporting and governance rules outlined above. This includes determining how the various business units will coordinate to compile the required information to be reported, as well as how each business unit will participate in and be responsible for the ongoing requirements of the risk management framework to be developed.

Surety Bonds vs. Subcontractor Default Insurance

C. Andrew Gibson | Stoel Rives

With construction teams navigating the effects of the COVID-19 pandemic and the world’s material supply chains, securing project performance has perhaps never been at such a premium. If a contractor cannot timely perform, or if a subcontractor simply pulls out of a new project bid in order to pursue a more attractive opportunity, the project owner and/or prime contractor face potentially significant damages. These include corrective work, costs of completion or substitute performance, and delay. Two chief security options exist to protect against such risks: performance bonds and subcontractor default insurance (SDI). Choosing one over the other requires informed decision-making as each type of security carries its own unique characteristics and project consequences.

Security structure and form

A performance bond is a three-party agreement between the principal (the contractor or subcontractor), the obligee (the owner), and the surety. The surety agrees via the bond to answer for the principal’s default in performance. Any damaged party may make a claim. In contrast, SDI is a two-party agreement between the insured contractor and the insurer in which the insurer undertakes to indemnify the insured against loss resulting from a contingent default. SDI only protects against subcontractor default — not default of the prime contractor — and only the general contractor — not the owner — may assert a claim.

History and legal precedence

Suretyship has been around for millennia, with references found in ancient Greece and the Old Testament. In 1884 the American Surety Company began underwriting construction performance bonds, and in 1894 Congress passed the Heard Act requiring surety bonds on federally funded projects. Performance bonds’ long history and statutory frameworks provide considerable legal authority that help predict outcomes of disputes under a bond. Conversely, SDI has a much shorter history. It was first introduced by Zurich N.A. Insurance Company in 1995 and then subsequently offered by others. As such, with SDI there is virtually no legal precedent from which to glean interpretation of disputes, with just a dozen or so reported cases and most not interpreting policy language.


Performance bonds are required by statute for most public projects exceeding $100,000 and are often used for private projects. Although courts have imposed insurance-like duties (such as claims-handling procedures) on sureties, bonds are not insurance policies. Typical SDI projects are large and involve annual volume thresholds in the tens of millions of dollars or projects exceeding $100 million. SDI is also likely not an acceptable substitute for bonds on public projects.

Premiums and personal security

Bond premiums vary but can range from 0.5 percent to 1.5 percent of the contract amount, with the average above 1 percent. While there are no deductibles, bonds require an indemnity agreement and collateral, often with guarantees putting an officer of the contractor personally on the hook. SDI policies do not require collateral. SDI premiums are typically lower and can be 50 percent to 70 percent the cost of a bond, not counting deductibles and co-pays. This lower cost can provide an advantage in bidding a project. However, many SDI policies carry large deductibles, from $350,000 to $2 million with co-pay sharing at $1 million-$5 million.

Subcontractors and risk shifting

A performance bond surety screens and prequalifies subcontractors and investigates and responds to any default. However, the surety also has a self-interest in denying the predicate of a default occurrence. Under SDI, the contractor screens the subcontractors and retains the majority of risk through deductibles and co-payments. The contractor might also run into difficulty with subcontractors reluctant to share sensitive financial data. Still, the contractor retains control of project completion and can maximize efficiencies to avoid further delays and increased costs.Recoverable damages

On a performance bond damages generally cannot exceed the penal sum of the bond, which can pose a problem in projects involving numerous change orders if the bond sum does not include those changes. Also, delay damages are not typically recoverable on a bond, though courts in Pennsylvania and California have allowed recovery. SDI tends to afford broader recovery for damages, including the cost of completion, losses due to corrections of defective work, indirect losses including possibly liquidated damages, and legal costs.

SDI can provide some advantages in the form of lower costs, control over subcontractor selection, and direct management of default situations. However, there are financial risks to the general contractor, which may also face opposition by subcontractors in the prequalification process. Also, SDI is limited to subcontractor defaults and not those by the general contractor. The dual insurance relationship of SDI is not a clear substitute for the tripartite surety bond setup, and the lack of legal decisions regarding SDIs injects a higher level of uncertainty as to how the policies might be interpreted. Project participants should carefully consider the benefits and risks of all options to best secure project performance.

No Showing of “Appreciable Prejudice” Required Because Insured Violated Consent to Settle Provision

Elizabeth Fisher | Wiley Rein

The United States Court of Appeals for the Third Circuit, applying New Jersey law, has held that an insurer can deny coverage under a claims-made policy, without demonstrating “appreciable prejudice,” if the insured fails to comply with a clear condition precedent to coverage requiring the insurer’s written consent before agreeing to settle a claim.  Benecard Servs., Inc. v. Allied World Specialty Ins., 2021 WL 4077047 (3d Cir. Sept. 8, 2017).  The court also held that several exclusions barred coverage and that the insured could not maintain a bad faith claim against the insurers unless it established coverage in the first instance.

The policyholder, a company that managed prescription drug benefit plans, was sued for, among other things, breach of contract and fraudulent misrepresentation.  The parties settled the lawsuit.  The policyholder had an insurance program including both claims-made E&O and D&O coverage.  Up until the settlement, the E&O insurer had advanced defense costs, but it denied indemnity coverage based on the insured’s failure to obtain its consent prior to settling.  The D&O insurers denied coverage based on policy exclusions.  In the ensuing coverage action, the United States District Court for the District of New Jersey granted summary judgment in favor of the insurers. 

The Third Circuit affirmed.  As to the E&O policy, the court explained that it unambiguously required that the insured obtain the insurer’s consent to settle.  The court further noted that the insurer need not demonstrate “appreciable prejudice” under New Jersey law to deny coverage based on failure to comply with the consent provision under claims-made policies with such a requirement.  In doing so, the court rejected the insured’s arguments that its noncompliance was excused because it believed that defense costs had exhausted the policy limits and that the insurer violated its duty of good faith and fair dealing because it failed to remind the insured of the consent clause when it knew the insured was considering settlement.

The appellate court also held that the district court correctly determined that exclusions in the D&O policies barred coverage.  First, the appellate court addressed “Third Party” and “Professional Services” exclusions, holding that, despite some overlap between the exclusions, each unambiguously barred coverage for the lawsuit.  Second, the court held that a “Managed Care Activities” exclusion, which applied to “any actual or alleged act, error or omission in the performance of . . . Managed Care Activities” precluded coverage because the term “act” was broad enough to encompass misstatements or misrepresentations as well as poor or non-performance in the policyholder’s management of prescription drug plans.

Finally, the court held that a policyholder could not maintain a bad faith claim against an insurer unless it could first establish as a matter of law a right to summary judgment on the substantive coverage claim or that its claim for coverage was valid and uncontested, which the court noted were “essentially the same” test.  Because the insured had not established coverage, it could not pursue its bad faith claim.