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“Wrap Up” Construction Projects

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1 “Wrap Up” Construction Projects
OCIP / CCIP “Wrap Up” Construction Projects The webinar will begin shortly There is no audio at this time This presentation is being recorded for your viewing pleasure at a future date The attendance and proctor forms are available under ‘Materials’ in the Webinar’s Console to the right The PowerPoint presentation is also available under ‘Materials’ You will receive the course number for your state near the end of class Use the ‘chat’ window for questions on the content 100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls. 1 1

2 Welcome to your Insurance Community University Audio
All of you are currently on mute Un-mute your own system Telephone Option Select Telephone on your screen Dial in the PIN number so that your number becomes active Microphone and/or Speaker Option You can use this option if you have a headset that you use with your computer 2 2

3 Participation & Chat Window
You will receive information from the monitor via the ‘Chat’ window.  Please locate window in the control panel Q & A is welcomed during the presentation and at the end of the presentation You will find the question box on your control panel Write your question in that box and send it to the presenter/organizer The presenter will take those questions in the order submitted 3 3

4 DOI Requirements When you see a slide with the hand up symbol, touch the “hand” icon on your control panel Click ONCE only If you do not raise your hand, the monitor will be in contact with you in the chat box  If you are in a group, the designated proctor is responsible to make certain you are all in attendance at all times = Hand is down 4 4

5 Polling Throughout the class we will be conducting periodic polls
We need 100% participation on the polls The polls are intended to check participation but also to create discussion topics throughout the presentation 5 5

6 Forms To Complete for CE
After class ends Return attendance form Proctors – return your form to address address is in chat window or in sent to you today 6 6

7 DOI Requirements We will file your hours with the DOI after the completion of this webinar and we have received the attendance form. You have 48 hours to return the form You will be sent a Certificate of Attendance/Completion by .  Please retain this for your records for five years. 7 7

8 Internet Disruption If the presenter looses internet connection STAY ON THE LINE The administrators will communicate with you

9 Internet Failure If the internet fails and all participants are kicked off line by Go To Training or other source then the seminar will be terminated You will receive instructions by as to how we will proceed This is a precautionary notice, only

10 This class is being recorded
Available in the University Does NOT qualify for CE

11 Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved Laurie: Marjorie:

12 Your Instructor Today Robert J. Marshburn, CRM, CIC, ARM, CRIS, CISC
Founder and Principal R. J. Marshburn & Associates Senior Educational Consultant to Insurance Community Center/University

13 Overview of Wraps

14 Polling Question #1 Question #1
Do you write any Wraps (or OCIPs / CCIPs) now? Yes No I don’t know

15 CIP Consolidated Insurance Program
Wraps put insurance coverages and all eligible insureds together under a single policy for specific project(s) and location(s) Typically written for a specific job When written for multiple jobs (for the Owner or Contractor) it is called a “rolling wrap” (ROCIP)

16 CIP Original use developed for very large municipal works jobs as a method to control Workers’ Compensation costs and utilize proper loss control At its genesis, the job sizes eligible for Wraps exceeded $250 million. Over the past decade, the job size for eligibility has reduced dramatically

17 CIP Later, CIPs included General Liability
In today’s construction environment, CIPS are used to provide Workers’ Compensation and Commercial General Liability for municipal works, large private works, smaller commercial projects and, most recently, residential construction

18 CIP One of the main reasons for this change has been the difficulties in placing traditional insurance, particularly Commercial General Liability coverages, for contractors involved in residential construction, especially condos Commercial and residential wrap policies are quite different Rolling wraps add to the confusion

19 CIP Wrap Policies are NOT standardized—each one MUST be carefully reviewed for coverage! Insurance Contract language and coverage used may create serious gaps and limitations

20 Important Terms Owner Controlled Insurance Program (OCIP)
Contractor Controlled Insurance Program (CCIP) Project Manager The party charged with overall responsibility for the job completion

21 Important Terms CIP Manager SIR – Self Insured Retention
The party responsible for the design and administration of the CIP Reports to the Project Manager SIR – Self Insured Retention

22 Typical Participants Project Owner / Developer GC
Most Wraps will include: Subs and Sub-subs Size of job Type of work Below SIR threshold Some Wraps may include Suppliers - most do NOT

23 Typically Included Coverages
Workers’ Compensation States regulate OCIPS/CCIPS Not allowed in all states, particularly monopolistic Commercial General Liability Off-site exposures excluded

24 Typically Included Coverages
Umbrella / Excess Liability Off-site exposures excluded Builder’s Risk Direct property loss and consequential loss

25 Coverages Typically NOT Included
Contractor’s Equipment Floater Business Auto Coverage Aviation Liability Professional Liability Design professional liability or engineering can be included in GL Surety Bonds

26 CIP Benefits - Loss and Litigation Control
Improved quality of work, especially water intrusion One central authority provides greater administrative control Less opportunity for cross-litigation between co-contractors Single defense – “one for all”

27 CIP Benefits - Loss and Litigation Control
One loss control program means better coordination of safety programs and more effective implementation One study of pure loss ratios on commercial wrap projects averaged 21% - 35%

28 CIP Benefits - Loss and Litigation Control
Bridges, tunnels, dams construction may yield a higher savings margin One of the more difficult areas to predict are the cost savings of reduced on the job injuries

29 CIP Benefits - Loss and Litigation Control
Dividend and cost-sharing plans predict expected losses and IBNR Final adjustment several months after the close of the project The project owner can lose even more monetary advantage if having to pay substantial portions of the WC premium up front The time value of money is diluted with a long adjustment time

30 CIP Benefits to Project Owner
Lower construction costs Reduced cost of multiple policies for contractor and subs Reduced cost of losses Proper loss control reduces application of deductibles or retentions Exposures limited to location or project; not collective for all work

31 CIP Benefits to Project Owner
Better buying power with insurance companies to Negotiate lower premiums Negotiate fewer exclusions and more favorable policy wording Periodic payment of premiums provides for better cash flow

32 CIP Benefits to Project Owner
Elimination of multiple managerial / administrative supervisors Better coordination of loss control, safety and security, record keeping Coverage availability in the insurance market - especially residential

33 CIP Benefits to Project Owner
May provide insurance otherwise unavailable On large Wraps, usually written as profit sharing plans

34 CIP Benefits to GC Same benefits as above as a CCIP
Potentially higher limits of insurance Potentially broader coverage for a specific contract Contractor’s own insurance program is protected from losses Reduced employee injury due to loss control and safety measures

35 Disadvantages of Using a Wrap
Payroll auditing procedures create additional work and costs to Owner Participation disrupts GC’s insurance programs Diminishes bargaining power with own insurance company over rates and coverages Can create gaps in coverage when project is over

36 Disadvantages to Sub Contractors
Complicated insurance procedures and specialized wording No one is protecting Sub’s interests in the project Separate Payroll and auditing procedures create additional work and administrative costs

37 Disadvantages to Sub Contractors
Participation disrupts Sub’s insurance program Shrinks payroll and receipts with own insurance company Can increase rates and result in less coverage

38 Disadvantages to Sub Contractors
Minimum & deposit or flat rate premiums Experience Modification can be affected if reports are not made separately and timely Injury to Sub’s employee will still affect their own loss ratio Sub has no control over claim – payments, response or problems

39 Disadvantages to Sub Contractors
Sub’s broker does work with no compensation Loss of control Charge back premium for Workers’ Compensation costs may be at a higher amount if Sub has a low Ex. Mod

40 Administration Causes increased paperwork and expense
Sub’s broker does work relating to wrap quote, analysis, coverage, insurance, and administration—all with no compensation

41 Polling Question #2 & #3 Question #2
Do you perform any administrative work on Wraps? Yes No I don’t know Question 3 If you answered yes to the last question: Do you? Have a specific procedure manual for all responsibilities? Make it up as we go along Write one for each project

42 Administration Fee based service
Precise description in all CIP documents, including off-site locations used for job-related activities (directly & exclusively related to work to be performed at the project)

43 Administration Contract and bid documents
CIP must be fully designed before the bid requests are distributed If the Project is controlled by the Project Owner is the GC allowed a copy of the CIP contract? (AB 2738 in California) Are Subs allowed a copy of the CIP contract? (AB 2738 requires as of )

44 Owner, Developer, GC, & Administrator Exposures
Procedural & Substantive Devising, controlling, placing, and administering wrap & insurance coverages Responsibility for uninsured events Uninsurable losses Insurance policy exclusions

45 Owner, Developer, GC, & Administrator Exposures
Responsibility for safety and claims reporting Compulsory participation usually required unless proof of acceptable Insurance provided by Sub Enrollment issues—best to provide Broad Named Insured language for “all eligible participants” to avoid unenrolled Contractor exposure

46 Owner, Developer, GC, & Administrator Exposures
Denial of representation Fraud - “illusory coverage” Excess coverage, not primary Inadequate completed ops time period Inadequate limits for project(s) Coverage exclusions Company specific forms There is NO Standard Wrap Policy!

47 Owner, Developer, GC, & Administrator Exposures
Wraps have little or no case law or statutory clarity in some states Will courts expose GL coverage to uncovered ‘wrap’ damages for construction defect? Disclosure, disclaimer, and indemnification from CIP

48 CIP Contract Provisions
Typical Binding Contract Provisions Contract stipulations (cooperation clauses) that all contractors and subs will cooperate with CIP requirements Compliance with safety standards, including materials, equipment and methods of construction

49 CIP Contract Provisions
Compliance with loss control Compliance with minimum safety standards Reporting necessary payroll, loss and other information

50 CIP Contract Provisions
Indemnification of owner and project manager for injuries to employees Does not eliminate tort liability from owner/manager Sends coverage back to CGL via action-over

51 CIP Contract Provisions
Indemnification for other losses of CIP participants Additional Insured status Parties to be provided that status 2013 ISO forms are Only to the extent allowed by law, and Only to the extent required by written Contract or agreement

52 CIP Contract Provisions
Participants in CIP usually relinquish any claim to dividends, retro refunds, profit sharing or any other form of refund, credit or audit reduction All such monies to remain with project controller (AB2738 in California does not allow profit from Wrap Insurance program)

53 Typical Binding Contract Provisions
Party responsible for all uninsured property losses (AB2738 not allow for residential wraps) Often placed on the Subs Negligent acts by Sub or Sub-sub Intentional acts Regardless of cause

54 Necessary To Purchase Builder’s Risk Coverage
Why necessary? No PD liability with Wrap covering all contractors Limit Deductible Waiver of subrogation to be included for all Builder’s Risk policy loss payments, which will be paid to project manager

55 Polling Question #4 Question #4
In reviewing indemnity agreements in the construction contract, do you: Look for language that complies with state statute Look for language that transfers as much risk as possible Tell your client you cannot review indemnity agreements as they are legal issues, not risk issues

56 Indemnification Agreement
Requirements for one party to pay costs for another party’s liability  Parties affected by the Indemnity language Owner / Developer Architect / Engineer GC / Subs / Sub-Subs Suppliers

57 Indemnification Agreement
Broad indemnity? For whom? Regardless of fault? How broad?

58 Indemnification Agreement
Can be for all tort liability except sole or willful (varies by state) Statutory law can differ between commercial projects and residential projects (dramatically so in California) Does the contract specify costs to be paid?

59 Indemnification Agreement
Does the contract specify a maximum dollar amount? Does the contract specify a time limit? How long does indemnification last? Can it extend beyond the contract term?

60 Indemnification Agreement
Is the Insurance language compliant with state statutory and case law The contract will contain language, typically toward the back of the agreement, that will indicate the state that will have jurisdiction over the contract Attorney specializing in wraps needs to provide opinion

61 Parties Typically Providing Indemnification
GC pays for Project Owner / Developer GC Subcontractor pays for

62 Indemnity For sub’s own work, or others, i.e. Builder & other subs?
Active or passive or both Active—what you did that caused the harm Passive—What you did not do, but should have, that caused the harm Active and passive only of Sub, or Active and/or Passive of GC, Owner, and other Subs?

63 Basic Indemnity Concepts and Types of Indemnity Agreements
Broad The Sub agrees to indemnify the GC for all liability, including that caused solely by GC. Intermediate The Sub agrees to indemnify the GC for all liability, except those caused solely by GC. Limited The Sub agrees to indemnify the GC only for acts of the Sub

64 Examples Intermediate Form of Indemnity Broad Form of Indemnity
Limited Form of Indemnity Indemnitor pays for the indemnitee defense and damages arising out of acts of the Indemnitor ONLY Indemnitor pays for the indemnitee defense and damages arising out anyone’s acts, EXCEPT those acts that are the sole negligence of the indemnitee Indemnitor pays for the indemnitee defense and damages arising out of anyone’s acts, INCLUDING those acts that are the sole negligence of the indemnitee

65 General Indemnity clause
Does not specifically address how much of the Builder’s negligence is indemnified At most, only passive, not active liability, is indemnified

66 California Indemnity Types
Type I—Indemnification for the Owner or GC’s Liability for any tort liability, Active or Passive, whether or not caused by the Sub or within his scope of work. Only Exceptions: 1—Sole or 2—Willful Liability, including fraud Effective , Type I is no longer allowed in Construction Contracts! (SB474)

67 California Indemnity Types
Type II—Indemnification for Passive, but not Active, Liability of the Owner or GC regardless of how caused, i.e. by the indemnifying Sub (or others), i.e. whether or not at fault Type III—Indemnification only for Passive liabilities caused by the indemnifying Sub, but not liability caused by others

68 California’s AB2738 Wrap Law
KEY PROVISIONS—Civil Code Sections to Applies after NO Indemnity or Insurance is allowed from any Contractor or Sub for a Residential Wrap Up program The only coverage will be under the Wrap! Must Obtain Quality Coverage! Recourse for “equitable indemnity “

69 California’s AB2738 Wrap Law
For COMMERCIAL Construction Type 2 & 3 Indemnity still allowed For Residential & Commercial— Allocation of Policy Costs, Deds & SIRs— NO profit can be made by Wrap sponsor from Subs on the wrap policy deductibles or SIRs— allow reasonable allocation

70 California’s AB2738 Wrap Law
CIP disclosure requirements for— Coverage Limits Term Basis for deductible or SIR trigger Copy of policy or binder Premium (bid deducts) including upcharge bid protection Confidentiality requirements for subs

71 California’s AB2738 Wrap Law
The CIP contract must be reviewed for proper language Work with experienced Wrap Attorney and TPA

72 Polling Question #5 Question #5 Strict liability means Negligent act
Imposition of punitive damages No defense possible No negligence required

73 Liability Standard Negligence or strict liability
Developer = Strict (only need to prove causation of damage, not negligence) Subs = Negligence (must prove breach of prudent person standard resulting in damage) When the Sub Indemnifies Developer, what happens to the Sub’s liability standard? Must the sub be negligent to require indemnification of the GC?

74 Liability Indemnity Coverage
Sub’s coverage for indemnity agreements No Contractual Liability coverage under own CGL due to Wrap exclusion CIP won’t cover Contractual Liability of the Subs

75 Bid Process Bids usually separate insurance costs from costs, labor and profit Referred to as a “Credit” or “Bid Deduct” on insurance

76 Bid Process Determining the charge
The CIP documents should specify method Standard amount for all Subs, or Tiered cost by class, or Based on Sub’s own cost under their CGL or Another disclosed method If not, make provision for upcharge outside California

77 Bid Process Do bid specs reserve right to do as a CIP, but quote as regular job? Used to avoid “padding” of bid Is there a copy of the coverages available for the contractor (or Subs) to review and retain for their records? If not, make provision for withdrawal conditions with no penalty for unacceptable coverage outside California

78 Bid Process Is there a disclaimer and indemnification relating to your independent review and approval of coverages and/or program

79 Coverage Issues Affect Owner, GC and Sub

80 Coverage Issues There is no standard wrap policy, although most use a standard ISO CGL as its nucleus Caution! Some do not, and are completely manuscripted The General Liability section can be broader in coverage than standard forms, particularly with commercial projects

81 Coverage Issues The General Liability section can be more restrictive than standard forms, sometimes for commercial, but especially when writing for a residential project The Workers’ Compensation portion typically follows statutory benefits and provides Employer’s Liability coverage

82 Coverage Issues - Project Owner
A structure that will be sold upon completion creates potential problems for the owner The CIP General Liability program is intended to be the only coverage that responds to present and future losses brought by new owner, occupants, or other third parties

83 Coverage Issues - Project Owner
Any damage to the property while it is under construction is excluded from the CGL Must be covered by a properly designed Builder’s Risk policy, which may (should) be included in the CIP coverage portfolio The agent/broker for the Project Owner must review coverage requirements in the construction agreement to verify proper language has been included

84 Coverage Issues – Builder’s Risk
The agent/broker must also review the Builder’s Risk policy, regardless of the party required to provide the policy The Builder’s Risk coverage ends when the project is completed according to the terms of the Builder’s Risk policy and so will be of no help for loss to the project after construction is complete

85 Coverage Issues – Builder’s Risk
The agent/broker for the GC must review coverage requirements in the construction agreement to verify proper language has been included The agent/broker for the Sub must review coverage requirements in the construction agreement to verify proper language has been included

86 Coverage Issues – Builder’s Risk
The construction agreement should state clearly that the Builder’s Risk policy will be the sole source of remedy for loss or damage to the project while under construction The Project Owner will bear any loss not covered as well as the deductible

87 Coverage Issues – Builder’s Risk
If the construction agreement attempts to pro-rate the payment of deductible among the GC and Subs, then the contract does not contain a true exculpatory agreement Note that in many jurisdictions a party cannot waive rights against another party when the loss is caused by intentional acts

88 Integration of CIP and Contractor’s Insurance Program
CG – Designated Operations Covered By A Consolidated Insurance Program Standard ISO exclusion of work done under a wrap The standard exclusion does NOT remove coverage for all operations, but rather those that are included in the wrap coverage

89 Integration of CIP and Contractor’s Insurance Program
The language used in the endorsement is less than clear and could be subject to differing interpretations Other company specific endorsements can be less or more restrictive Manuscript Contingent endorsement on CGL should exclude “insured losses” only (not work) and apply on excess policy basis

90 Coordination of Liability Coverages
Can add off site locations to wrap policy as covered location Any damage to the property while it is under construction is excluded from the CGL Solution?

91 Completed Operations Coverage under the Wrap Up
Since there are no renewals, Wrap policy must cover into the future How long? Check individual state statute as they all vary California 10 years is not enough for residential SB 800 definitions extend time (Residential only) Escrow, not date of substantial completion Turn over of ownership to HOA from Developer

92 Coordination of Liability Coverages
Contractual liability coverage Usually NO coverage on CIP Are some requirements met by Wrap? By sub’s CGL? Or neither? Indemnity coverage from “insured contract” coverage typically removed from the CIP Coverage provided in the general’s or sub’s policy, but not for Wrap due to exclusion

93 Coordination of Liability Coverages
“Insured contract” definition in CGL “That part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization”

94 Coordination of Liability Coverages
CG Amendment of Insured Contract Definition adds: “…provided the “bodily injury” or “property damage” is caused, in whole or in part, by you or those acting on your behalf”.

95 Off Site Coverage CIP will usually not include the coverage, nor the GC or Sub’s General Liability (Wrap exclusion) Events away from, but connected to site Manufactured, partially assembled, or fabricated off site, then installed on site i.e. windows, concrete, mechanical, cabinets, walls, framing, plumbing, etc. Products, assembly, fabrication, etc.—any “work” Property in transit (suppliers, vendor, & dealers who furnish materials) Add off site locations to wrap policy

96 Coordination of Liability Coverages
Additional Coverage Limitations CG & CG remove exception to “your work” exclusion; translation = no coverage for GC for Subs work For GC everything is “your work” and would be excluded On sub’s policy GC would be additional insured for coverage, but is not due to Wrap exclusion

97 Additional Liability Coverage Concerns

98 Adequacy of Limits Number of subs / Size of project
Number of projects and locations Duration of project and exposure to injury or damage occurrences Is Sub’s liability capped according to pro-rata share of coverage or other method Is excess limits coverage provided under sub’s CGL (Wrap Exclusion)

99 Defense Costs Inside or outside the limit?
Whom does the single defense really cover Is there a severability of interest clause (separation of insureds) Defense for each insured For what issues Is coverage provided under sub’s CGL (Wrap Exclusion)

100 Deductibles / SIRs Who pays? Is it allocated?
Is it specifically allocated? Is that allowed by state statute? Size of deductible / SIR Standard amount for all Subs, or Based on Sub’s own deductible under their CGL, or

101 Deductibles / SIRs Deductible per Occurrence, Claim, Unit, or Component, or Tiered deductible by class If multiple deductibles are allowed under the wrap; how many 50 subs times $10,000 equals $500,000 Are deductibles assigned with out fault or is a connection to the sub’s negligence or scope of work required?

102 Severability of Interest Clause
A provision that each insured will be treated as if separately covered under the policy—defense and coverage Coverage included in standard CGL, but often not on wraps Potential liability between different entities named on a single policy—Is there a Cross liability exclusion?

103 Builder’s Risk This policy is the solution for damage to the structure and non-attached materials and supplies ONLY during construction Must subs and suppliers be named individually—danger if omitted Whose property is it? When? What coverage applies Is there a need for Installation Floater If Builder’s Risk covers all, avoids “1st party liability” issues

104 Additional Liability Lines
Automobile liability Limit sub coverage to on-site only and provide excess over other valid and collectible insurance Aircraft Liability Non-owned is an exposure to be considered if used to assist in construction Indemnification agreements from aircraft owner Additional Insured Non-owner aviation coverage, excess

105 Additional Liability Lines
Umbrella/Excess Policy issues Exclusions, terms, and conditions can vary from underlying and leave gaps All of the issues above need to be considered for the Excess Policy (ies)

106 Excess Liability Endorsement Language (Over the CIP Insurance)
With respect to “bodily injury”, “property damage”, “personal or advertising injury”, arising out of either your ongoing operations or operations included within the “products-completed operations hazard” at the location described in the Schedule of this endorsement, the policy to which this endorsement is attached shall apply as excess insurance over any coverage available under a consolidated (wrap-up) insurance program.

107 Excess Liability Endorsement Language (Over the CIP Insurance)
This language would need to be negotiated on the contractor’s insurance program from the time of the wrap-up forward.

Review the contract requirements Who do they apply to? What do they apply to? When do they apply? How do they apply? Indemnification Insurance

Does the insurance match the contract requirements? The wrap coverages The insured’s own policies Synchronize as much as possible the contract requirements with insurance

Insured could be responsible for substantial money out of their own pocket Negotiate – Contractors, especially Subs, do not know whether or not they have any power until they try

Have Risk Manager, Agent or Broker and Legal Counsel with expertise in specific area of Wrap ups, contracts, coverage, and risk review and approve for your specific circumstances.

112 Attendance Check!!

113 Summary Challenging coverage/risk area
You can try your best and still get it wrong Get a mentor Read everything Analyze everything Keep your fingers crossed (for at least the time of the statute of repose)

114 Click Join University at the top of the bar
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