Risk Management
Keeping up to date on construction risks
IRMI Construction Risk Conference introduces ConsensusDOCS, highlights trends and challenges, debates topics
By Donald S. Malecki, CPCU
Producers who do more than simply dabble in contracting risks know that while the market for many risks goes with the flow of insurance cycles, contracting risks, for the most part, are an exception. To find anything noteworthy about the construction industry’s insurance coverage opportunities, therefore, is relatively uncommon.
At least one piece of good news, however, was announced before 2,000 project owners, general contractors, subcontractors, agents, brokers and others who attended the 27th annual Construction Risk Conference of the International Risk Management Institute (IRMI) in Orlando, Florida, in November 2007.
A “family of construction contracts” is being introduced under the name ConsensusDOCS™ to complement those that have been offered by the American Institute of Architects (AIA) for a number of decades. These new documents have the backing of a number of organizations, including the Construction Owners Association of America (COAA); Associated General Contractors of America (AGC); American Subcontractors Association (ASA); and the Associated Builders and Contractors (ABC).
Those who deal with construction risks know that existing construction contracts are commonly used as a prototype or model, with numerous provisions amended to better tailor them to the projects in question. One set of provisions, however, that commonly is not amended deals with property and liability coverages. The reason, perhaps, is that those who are given the responsibility for preparing the documents are not as knowledgeable about insurance as they should be.
In deciding not to reinvent the wheel insofar as insurance coverage requirements are concerned, the contract drafters often do a disservice to their clients’ needs, since some parties get shortchanged on their coverages. A perfect example is builders risk insurance requirements under General Conditions A 201 of the AIA documents. As has been mentioned by this writer numerous times, the owner, general contractor and subcontractors of all tiers should be named insureds on builders risk policies.
To simply state that builders risk insurance is to be obtained by the project owner covering the “interests” of the parties, as does the AIA document, is insufficient because the insurable interests of the parties can be covered without providing the more advantageous “insured” status. It does not take much analysis to discover the difference between being covered as a named insured and having only one’s interests covered.
It is no secret, however, that some underwriters are reluctant to name everyone with an interest as a named insured on a builders risk policy. When that happens, the same result can be achieved by showing the name of the project owner and/or general contractor and accompanying the named insured description as “including subcontractors of all tiers.”
The new standard form of tri-party agreement for collaborative delivery, ConsensusDOCS 300, specifically states under Section 24.1.1 Property Insurance that the owner, constructor, subcontractors, sub-subcontractors, material suppliers and designers all be listed as named insureds on the builders risk policy to be obtained by the project owner.
What is a break from tradition is the fact that ConsensusDOCS 300 also prescribes builders risk coverage for designers and material suppliers. Neither is prescribed with the builders risk coverages prescribed by the AIA document, for example.
Speaking on the ConsensusDOCS, and also involved in drafting them, were: Ricardo Aparicio, an attorney employed as contracts manager and counsel for General Electric, Birmingham, Alabama; James E. Frey, senior vice president, Alberici Group, Inc., St. Louis, Missouri; Kevin F. Peartree, an attorney at Ernstrom & Dreste, LLP, Rochester, New York; and J. William Ernstrom, an attorney and vice president, The Walsh Group, Chicago.
Ernstrom, the moderator, stated that the drafting principles of the ConsensusDOCS are balanced risk allocation, best practices and development of a full family of documents for each project delivery system. While it was the ConsensusDOCS 300 that was the subject of discussion at the conference, Ernstrom stated that more than 70 documents are available. These documents, he said, involve general contracting, construction management, design-build, subcontract-ing and program management.
Green building—No panacea
With growing concerns for the environment and higher energy costs, the methodology of traditional construction is giving way to “green” building in commercial, residential and government property. Speaking on the ramifications of green building was Sean P. Dwyer, Esq., partner, Havkins, Rosenfeld, Ritzert & Varriale, Mineola, New York.
Green buildings, Dwyer explained, are designed, located, built and operated using environmentally friendly principles to promote occupant and public health, conserve resources and minimize detrimental impacts on the environment. The process, he added, is significant because it can result in energy and water savings, improved air and water quality, reduced waste, conservation of resources and many other advantages.
Dwyer said the construction methods of green building include design and materials, heating and cooling methods, deconstruction methods and water use. The payback between five and seven years is about 20%, he said.
According to Dwyer, conventional construction accounts for 50% of the nation’s wealth and employs about 10 million people. The problem with conventional construction, he said, is that it accounts for 65% of total U.S. electricity consumption; 39% of overall energy use; 35% of greenhouse gas emissions and 25% of timber harvests, to name a few of its drawbacks.
Unfortunately, green building is not without its potential problems. Dwyer pointed out that some of the building liability issues are: government-imposed requirements, litigation for breach of “green” requirements and projects that go sour, construction defect claims, and toxic injury claims such as mold. He added that using new methods of design, construction and technology can cause projects to exceed their budgets.
Wrap-up considerations
As one might expect at any forum involving construction methodology and insurance, wrap-up programs took center stage—given their growing popularity. Wrap-ups or consolidated insurance programs provide coverage to various entities brought together for a single purpose or project.
The fact that a wrap-up may be the only way contractors can obtain coverage that might not otherwise be available may be an important consideration to the one desiring such an approach. But there are a variety of considerations that need to be pondered.
One of the speakers on this subject was Richard Resnick, senior vice president, construction practice, Willis of New York. Resnick, who is heavily involved in wrap-ups, gave what he referred to as his top 10 wrap-considerations. We’ve included three of his considerations.
The first, he said, is whether such a program is feasible. One has to look at the hard cost vs. project cost, state limitations and experience of the general contractor, to name a few.
High on Resnick’s considerations is a commitment to safety. In fact, he refers to it as priority number one. As with other important initiatives, the commitment must come from the top, he said. There also must be contract enforcement and a partnership with OSHA, he added.
Wrap-ups are not without their risks, said Resnick. This approach is not for “the faint of heart,” he asserted.
Another important question is whether a wrap-up should be owner-controlled or contractor-controlled. One of the priority items of a contractor-controlled program, he pointed out, is the experience of the contractor.
Confirming the opinions of many producers who are not totally sold on wrap-ups were the comments of Jason Weintraub, vice president and general counsel, DRI Companies, Irvine, California.
Wrap-ups can make matters worse for all parties, Weintraub said. On many projects, the trade contractors have better, cheaper coverage on their policies, he said. And, he added, as currently constructed, wrap-up programs will produce more, rather than less, litigation between builders and subcontractors.
The notion that better coverages are available through wrap-ups, Weintrub said, is still a myth, with gaps having to do with off-site general liability, pollution, mold and subsidence. He also stated that virtually all wrap-ups are severely underfunded. The insurance industry recommends at least $60,000 per unit construction, not including defense costs.
The big question was how to make a myth a reality, from the standpoint of wrap-up coverage. Weintraub offered the following: (1) use 100% of the money charged to subcontractors to purchase real insurance with minimal exclusions; (2) follow insurance industry recommendations for per-unit coverage limits; (3) keep self-insured retentions/deductibles low or nonexistent; and (4) allow subcontractors to submit bids “net of insurance” to avoid increased administrative and construction costs.
With public-private partnerships (PPPs)—once mostly a European concept—currently making inroads into the U.S. construction market, the subject of what one needs to know about these partnerships is quite timely.
The National Council on Public-Private Partnerships defines this concept as “a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.”
The speakers, Michael Loulakis, president and CEO, Capital Project Strategies, Reston, Virginia; David Grigg, senior vice president-national director, Willis North America, New York; and Cesare J. Mitrani, executive vice president, Willis Construction Practice, explained the PPP concept and identified the key challenges in the areas of contracts, bonding and professional liability.
These speakers pointed out that many states have instituted large public-private projects, primarily highways. Among the U.S. projects are: Indiana toll roads; Chicago Skyway; Pocahontas Parkway in Virginia; New Mexico State Route 44; and the Trans Texas Corridor.
With the insurance market for residential construction insurance virtually “bone dry” as the result of construction defect litigation, the attendees were informed by two capable speakers about the insurance and non-insurance techniques for avoiding construction defect litigation. The speakers were Toni Johnson, senior vice president, Beecher Carlson Insurance Services, San Francisco, California; and Jeffrey D. Masters, Esq., partner, Cox, Castle & Nicholson, Los Angeles, California.
The author
Donald S. Malecki, CPCU, has spent 48 years in the insurance and risk management consulting business.