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CONSTRUCTION CONTRACT RISKS

CONSTRUCTION CONTRACT RISKS

CONSTRUCTION CONTRACT RISKS
July 29
09:05 2022

CONSTRUCTION CONTRACT RISKS

Common contract language issues for general contractors, agents and brokers

By Karen Parker and Steve Hicks


The construction industry is booming across the U.S., fueled by projects in the residential, healthcare and education sectors that will drive a reported 8.8% growth rate in 2022. The industry’s outlook could get even rosier, considering the recently passed infrastructure bill that will pump $1 trillion worth of projects into the economy over the next eight years.

As they work to keep up with demand, builders and general contractors, as well as manufacturers and suppliers of materials, are facing a trio of challenges that, taken together, could be considered unprecedented: a roiled supply chain that still hasn’t recovered from a once-in-a-lifetime pandemic, 40-year-high inflation and a historic-ally tight labor market.

This set of frenetic circumstances could cause even the most well-organized business owners to miss routine steps that should be taken regularly to protect their companies. One area of potential exposure for the building, materials, and lumber space, for example, is contract liability.

The impact of juries and contract requirements

Less-than-careful contract language exposes general contractors to the potential of multi-million-dollar jury awards and settlements. Top claims we see include transportation-related accidents and forklift mishaps. Unfortunately, these incidents and their resulting jury awards are only getting worse.

Recent reports show that the average verdict size for a lawsuit above $1 million involving a truck crash increased nearly 1,000% from 2010 to 2018—from $2.3 million to $22.3 million. Forklift accidents on construction sites have also resulted in multi-million-dollar settlements and jury verdicts.

 

Less-than-careful contract language exposes general contractors to the potential of
multi-million-dollar jury awards and settlements.

 

At the heart of many of these accidents is a labor shortage. Some general contractors may be inclined to turn a blind eye to vital contractual requirements in an effort to secure the labor needed to complete key projects. To bring much-needed, experienced labor to a project, some general contractors have questioned the importance of enforcing certain certificate of insurance issues among subcontractors or maintaining subrogation waivers. Others might consider turning a blind eye toward additional endorsements from the insurers of subcontractors to better ensure the likelihood of securing all-too-scarce qualified labor.

As a specialty insurer in the wood niche, our company has unique expertise in understanding the ins and outs of the contractor/subcontractor relation-ship and the risks involved. Independent brokers who work with our insureds can play a critical role in helping those insureds best manage their risk and operate safely under comprehensive agreements.

Despite current labor market challenges, it is always in the general contractor’s best interests—as well as that of the subcontractors involved—to avoid glossing over or minimizing the importance of standard construction contract language where risk transfer is concerned.

The fine print

Often, the most dangerous aspect of a construction-related contract designed to ensure the proper flow of liability is what is missing from the agreement rather than what is included. And while it is always recommended to have a licensed, experienced attorney review any contract between general contractors and subcontractors, there are some basic features general contractors should be aware of and look for in any template or boilerplate contract.

To ensure proper contractual risk transfer, some common components that should be featured in every general contractor/subcontractor agreement include:

  • Certificate of Insurance (with established minimum limits equal to your own)
  • Additional Insured status (for both ongoing and completed operations)
  • Waiver of Subrogation
  • Primary and Noncontributory endorsement
  • Hold Harmless/Indemnity agreement

In addition, the management of certificates of insurance presents a unique challenge for high-volume, general contractors. This is especially true on large projects where a wide variety of subcontractors, vendors and other partner contracts might be factors.

There are many software programs on the market that make the gathering, organization and recording of these certificates more manageable for general contractors. For smaller general contractors who may not need to invest in such software, there are consultants who can be hired on a project basis to manage the necessary certificates of insurance.

What does this mean for agents and brokers?

Independent insurance agents want to build a future that includes repeat business with their clients. One way to do so is making sure their insureds not only have the coverage they need, but that their rates do not skyrocket because they assumed more liability than they realized. These agents can serve as trusted advisors to general contractors looking for guidance to protect their businesses from liability costs.

Agents can benefit from working with a specialty insurer who understands the niche and can serve as a valuable resource to the agent, as well as the insured. This is also a proactive way to streamline the claims process with the carrier should anything go wrong.

As general contractors consider their insurance needs during this period of rapid growth that’s imbued with so much uncertainty, they’ll recognize the value in working with an insurer who knows the space and can provide specialized coverages to fit their unique needs.

By helping policyholders better manage their everyday risk and partnering with a specialty insurer, independent agents can play a key role in helping businesses continue to flourish and provide them with tools to keep their operations safe.

 

The authors

Karen Parker is a litigation manager at Pennsylvania Lumbermens Mutual Insurance Company (plmins.com). Steve Hicks is underwriting manager. You can reach them at kparker@plmins.com and shicks@plmins.com.

 

 

About Author

Jim Brooks

Jim Brooks

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