I recently attended a conference of underground construction professionals to discuss insurance and risk management issues. Before starting my presentation, I asked the following two questions: (i) “How many of you are involved in claims resolution either with insurance companies or with contractors when something goes wrong during or after construction?” (ii) “How many of you are involved in the construction contract formation phase and have input into issues of insurance and allocation of liability before the deal is signed?”
You already have guessed the answers that I received. Almost all of the attendees dealt with the problems after the fact; almost none dealt with the contracts and insurance before the fact.
Therein lies the problem.
Let’s review some of the reasons why the above situation is so perilous:
- Insurance Structure Decisions. The first, and most important, issue regarding insurance coverage for any construction project is how to structure the insurance. Put most simply, are all the parties – owner, contractor, subcontractor, architect, engineer, etc. – going to be responsible for their own insurance, or is the project going to be covered universally for all through an owner-controlled (“OCIP”) or contractor controlled (“CCIP”) insurance program. The decision whether to go to a project-based insurance program is a complex one that raises issues of cost, administration and historical comfort. Project-based programs offer several advantages, such as (i) reduced disputes among insurance companies over allocation issues, (ii) reduced disputes over responsibility for and cause of loss, and (iii) close relationship between scope of project and scope of coverage. However, parties may not feel comfortable losing total control over the administration of the insurance, and these policies potentially add cost to the project. It is a fundamental decision that should be discussed among the dealmakers and those responsible for implementing the deal before the deal is signed.
- Lack of conformity between insurance and construction contract. Insurance can only be beneficial if it corresponds with the risks that the parties assess need to have addressed. Thus, the scope of insurance must match the scope of the project, the limits of insurance must bear reasonable relation to the value of potential loss, and the types of insurance purchased must match the areas of potential exposure. Equally important, the technical aspects of the insurance contracts must match the construction contracts regarding such things as (i) who specifically are the insured parties, (ii) how are risks allocated among parties to the contracts, (iii) how are different sources of insurance ranked for purposes of responding to claims (e.g., primary vs. additional insurance).
- Types of coverage to be purchased. No one in business likes surprises (unless they are favorable). After an event of loss has taken place, the words, “I don’t think we’re covered,” are not happy ones. For this reason, it is crucial to consider all potentials areas of loss at the deal-making stage and determine what coverage should be purchased. Ordinary general liability, builders risk and first-party property coverages, for example, typically do not cover environmental damage, cyber-related loss, and professional liability, and there may be restrictions on loss resulting from (among other things) flood, mold, defects, and workmanship. Therefore, it is important to review policies and coverage at the deal-formation stage to assure that all appropriate insurance has been considered for purchase. One issue of particular importance in this regard is the decision whether to purchase coverage for “business interruption,” an increasingly costly result of property damage at a project.
- Taking care of potential claim problems before they arise. Those of you who have been through construction dispute resolution that involves insurance understand the complex, burdensome and time-consuming process that often needs to be undertaken. Tasks that appear to be simple often turn into frustratingly challenging problems. Take, for example, the simple process of placing an insurance carrier on notice of a loss. Seems simple, right? Well, answer these questions: (i) Do you have up-to-date copies of all insurance policies with respect to which your company is a named insured; and (ii) Are you aware of all insurance policies of contractors upon which your company is an additional insured, and do you have copies of those policies. If the answer to these questions is not an emphatic “Yes,” providing notice may be difficult, and as we all know, providing late notice may be fatal to your claim.
This particular issue is easy to resolve in the contract-formation stage through a requirement that applicable insurance policies be produced by the parties. In an age of easy access to all sorts of relevant data and information, there is little reason to risk having insurance claim notification difficulties because of lack of knowledge of the insurance that was required to be provided under the construction contracts.
These are but a few of the issues that should be considered before construction contracts are finalized and before insurance considerations are deemed closed. They are issues that require the combined input and experience of both dealmakers/contract writers and those responsible for implementing the deal and handling any resulting claims. In the case of insurance, an ounce of prevention – in this case prior review and attention – is worth well more than an pound of cure.
Barry Fleishman is a partner at the firm Shapiro, Lifschitz & Schram based in Washington, D.C. He focuses his practice on complex policyholder insurance coverage issues.
EDITOR’S NOTE: This is the first in a series of articles related to the topic of Risk Management. If you are interested in contributing, please contact Jim Rush, TBM editor, at firstname.lastname@example.org.