Insurance Community University 1 Insight on Construction Contracts – Five Key Issues You Need To Know

Insurance Community University 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:

Insurance Community University Your Instructor Today Marjorie L. Segale, AFIS, CISC, RPLU, CIC, CRIS, ACSR, CISR Insurance Community Center, LLC Director of Education

Insurance Community University Objectives 1.Who provides Builder’s Risk coverage A.Insured(s) B.Claim proceeds recipient 2.Exculpatory clauses and insurance coverage solutions 3.Indemnity provisions and restrictions of liability coverage 4.Liability coverages required and deductibles, retentions, RRG and RPG restrictions 5.Additional Insured requirements 4

Insurance Community University 5 Understanding Contracts

Insurance Community University Definition Of A Contract: A legally binding exchange of promises or agreement between parties enforceable by law One party makes an offer for a bargain that another accepts. This can be called a 'concurrence of wills' or a 'meeting of the minds' of two or more parties. 6

Insurance Community University Definition Of A Contract: A written contract that provides clear language stating the actions that must be undertaken by both parties is the best way to memorialize a contract’s purpose 7

Insurance Community University Elements Required Competent parties – Adults of sound mind or business entities Mutual agreement to provide each other some benefit Legal purpose Consideration – Under common law – only requires an exchange of promises 8

Insurance Community University Enforceability of Contracts Primary consideration is intent of the partiesContract wording Courts may look to external standards, either express or implied, in common practice 9

Insurance Community University Enforceability of Contracts Courts may enforce the contract as a whole – Voiding only those affected clauses – Test: Would a reasonable person see the contract as a whole, even without those clauses Courts may find a breach of contract exists and allow the injured party to recover damages 10

Insurance Community University Examples Of Contracts Construction Agreements Owners / Developers Architects & Engineers General Contractor Subs / Sub- Subs Suppliers 11

Insurance Community University Construction Agreements and Risk Management Contracts are critical component in construction Contracts often not reviewed before signing (just a standard contract) Some Contractors believe – No bargaining power – No knowledge – No ability to negotiate changes 12

Insurance Community University Construction Agreements and Risk Management Appropriate language for insurance / risk not always used Many insurance agents/brokers are reluctant to review contracts – Insurance agents/brokers are NOT attorneys – Never cross the line from insurance and/or risk review into practicing law without a license 13

Insurance Community University Sections to Review Insurance – Project insurance Insured parties How much Perils / Deductibles Consequential coverage – Tools, equipment, materials, supplies – General Liability Limits and type 14

Insurance Community University 15 Builder’s Risk Coverage

Insurance Community University Builder’s Risk Purpose Builder’s Risk coverage insures the materials, supplies and equipment used to build the project – Should provide coverage from exposure to loss, during the construction, and continue until the project is completed The requirements to provide this coverage will be found in the construction agreement 16

Insurance Community University Coverage Requirements A review of the construction agreement will reveal the party required to purchase project insurance – Project Owner (this is the most common party) – General Contractor (the construction contract can be amended to require the GC to purchase the coverage) 17

Insurance Community University Contract Example “Property insurance shall be on an “all risk” or equivalent policy form and shall include, without limitation, insurance against the perils of fire (with extended coverage) and physical loss or damage including, without duplication of coverage, theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and startup, temporary buildings and debris removal, including demolition occasioned by enforcement of any applicable legal requirements, and shall cover reasonable compensation for Architect’s and Contractor’s services and expenses required as a result of such insured loss.” 18

Insurance Community University Second Example 19

Insurance Community University Contract Example The Property insurance must cover portions of the work stored off the site and also portions of the work in transit. 20

Insurance Community University Contract Example A loss insured under the Owner’s property insurance policy shall be adjusted by the Owner and made payable to the Owner as fiduciary for the insureds as their interests may appear, subject to requirements of any applicable mortgagee clause. The Contractor shall pay Subcontractors their just shares of insurance proceeds received by the Contractor. 21

Insurance Community University Structure the Policy Correctly Determine purchaser Insureds – Owner (possibly Named Insured) – General Contractor (possibly Named Insured) – Subcontractors / Sub-subcontractors 22

Insurance Community University Structure the Policy Correctly “All Risk” – Ordinance or law – Equipment Breakdown – Earthquake – Flood – Wind 23

Insurance Community University Structure the Policy Correctly Appropriate limit of insurance – Contract price – Scaffolding – Temporary structures – Debris removal – Ordinance compliance – Change orders Verify waiver of subrogation allowed in policy 24

Insurance Community University Soft Costs Coverage Consequential loss to Owner and/or GC – Loss of income – Additional costs such as architect fees, building permit fees, insurance costs, etc. Adding coverage for Owner – Endorsement to Builder’s Risk – Add as covered premises to CP BI/EE coverage Adding coverage for GC – Contract requirements – Endorsement to Builder’s Risk 25

Insurance Community University Commercial General Liability Insurance Requirements Example 26

Insurance Community University Sections to Review Business Auto – Limits and Symbols Workers’ Compensation – contract / project – Same state – different state – Monopolistic – Stop Gap – LHWCA – Foreign Umbrella limits 27

Insurance Community University Sections to Review Pollution – Remediation – Third party Deductibles / SIR / Self-Insurance / Captives / RRG / RPG – Some contracts may address any or all of these issues 28

Insurance Community University Pollution Liability and Insurance Example 29

Insurance Community University Sections to Review Pass Through Clauses Language contained in the contract between Owner and GC that affect Subs Exculpatory clauses Owner often releases any responsibility to pay damages to existing adjacent or adjoining property 30

Insurance Community University Pass Through Clause Example 31

Insurance Community University Exculpatory Clause Example If the Owner has other adjacent properties near the site, the Owner waives all rights against others. Owner and Contractor waive all rights against each other and any of the subcontractors, sub- subcontractors, agents and employees, as well as the Architect, Architect’s consultants, separate contractors described in Article 6, and all of their subcontractors, sub-subcontractors, agents and employees. All the parties must sign mutual waivers. The policies must provide such waivers of subrogation. 32

Insurance Community University Sections to Review Waiver of subrogation clauses – Which policies CGL BAP WC Umbrella 33

Insurance Community University Sections to Review Indemnification requirements – Damages – Defense – Both 34

Insurance Community University Sections to Review Additional Insured requirements – Edition date – Language required – Length of time Certificates of Liability Insurance – Too much language – Unsupported language 35

Insurance Community University Indemnification and Risk Transfer One party agrees to assume another’s liability for injury / damage to a third party – Premises – Operations – Construction Defect – Vicarious Liability – Job site management of Subs – Job site safety 36

Insurance Community University Contractual Liability Sample 37

Insurance Community University Indemnity Example Contractor agrees to release, protect, defend, indemnify and hold harmless Owner, from and against any claim, demand, cause of action, loss, expense, award, judgment, obligation to indemnify others, or liability on account of illness, injury or death to the employees, personnel or invitees of Contractor and regardless of 38

Insurance Community University Indemnity Example Continued whether caused or brought about by the acts, omissions or negligence (including active, passive, gross, sole, joint or concurrent negligence) of any member of the Owner’s group, breach of contract, fault or strict liability, and regardless of whether such illness, injury, death, loss or damage preexists the execution of this agreement 39

Insurance Community University What is Your Job? Note that there is an indemnification agreement It specifically refers to defense which is important for insurance to trigger correct Your job is NOT to discuss the legality of this language or comment on enforceability 40

Insurance Community University Additional Insured Issues Who is covered Scope of coverage When coverage ends Edition date available from insurer Indemnity can start where AI language stops coverage – Both are limited to the coverage, exclusions, conditions and limitations in the policy 41

Insurance Community University Certificate Workflow Trigger points –when to review insurance provisions >>> when you receive request for: – Additional insured status – Primary/non-contributory status; or – Waiver of subrogation 42

Insurance Community University Certificate Workflow After having reviewed the insurance provisions – Provide disclaimer letter which informs insured of what provisions you have reviewed so the insured is aware of what you have not reviewed 43

Insurance Community University Certificate Workflow Do not alter ACORD certificate form without consent from carrier Adding or deleting verbiage which does not reconcile with insurance policy may result of loss of your license Holder lists should be reviewed at renewal; send “Verification of AI Removal” letter to insured 44

Insurance Community University Certificate Workflow Notice of Cancellation – Carrier Response – Carriers might be able to provide notice of cancellation endorsements for additional insured – May charge a premium – May delegate duty of notice to producer, so read all such endorsements carefully to determine notification process 45

Insurance Community University Summary Use your construction checklists to identify specific areas of risk and insurance that you will need to understand when viewing and discussing these concerns with your insured – Needs will differ if the insured is a developer, General Contractor, Sub- contractor or Sub-sub 46

Insurance Community University Summary Describe the various types of language that can be encountered Production/Service teams should devise discussion strategy that will be used Create coverage solutions – Identify coverage differences among your various insurance companies Stay on the straight and narrow – do not verge into legal advice 47