Contractual Risk Transfer in Construction Contracts€¦ · Contractual Risk Transfer Definition:...
Transcript of Contractual Risk Transfer in Construction Contracts€¦ · Contractual Risk Transfer Definition:...
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Contractual Risk Transfer in Construction Contracts
Presented by: The Reschini Group © 2008 Zywave Inc. All rights reserved.
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Contractual Risk Transfer
Definition: Contractual Risk Transfer is the shifting of responsibility from one party to another in a construction contract. • Part of the Risk Management Process • Used as a Risk Management Technique
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Contractual Risk Transfer
Purpose: • Part of the Risk Management Process • Identify Exposures to Loss
• Property • Personnel • Net Income • Third-party Liability
• Examine Alternate Techniques • Select the Best Techniques • Implement the Chosen Technique • Monitor and Change as Necessary
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• Loss Prevention • Exposure Avoidance • Loss Reduction • Segregation of Exposure Units -
Separation or Duplication • Contractual Transfer for Risk
Control
Contractual Risk Transfer
• Current Expensing • Unfunded Reserves • Funded Reserves • Borrowing • Captive Insurers • Commercial Insurance • Contractual Transfer of Risk
Financing
Risk Control Techniques vs. Risk Funding Techniques
“the GC is responsible for site safety” “…the GC shall indemnify Owner
for any and all damages, losses, claims…”
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Risk Transfer Perspectives
Owners
Architects & Construction
Managers
General Contractors
Sub Contractors
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Risk Transfer Perspectives
Owners • Paying Customer – All Powerful • Want a No-Risk Proposition • Need Own Liability & Builder’s Risk Coverage • Rarely Draft the Contract
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Risk Transfer Perspectives
Owners Architects & Construction Managers • Draft & Manage Contracts • “Professional” Standard of Care • Little Control, Great Risk • Often-Shallow Pockets • Architect Errors & Omissions
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Risk Transfer Perspectives
Owners Architects & Construction Managers General Contractors • Responsible for Everything • Deep Pockets, Prime Target • Power Over Subs • Transfer Responsibility to Subs • Vicariously Liable
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Risk Transfer Perspectives
Owners Architects & Construction Managers General Contractors Sub Contractors • Did the Deed – Primary Responsibility • Indemnify Everybody • In Control of Own Actions • Little Power to Alter Contract Terms • Inadequate Insurance
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Indemnification Agreements
Broad Form
Limited Form
Contractual Liability
Insurance Coverage
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Indemnification Agreements
Broad Form • “Pay any and all damages, costs, expenses…” • No or Few Limitations • Even for the Sole Negligence of the Owner • Owners Favor Over GCs • GCs Favor Over Subs • Inequitable, Possibly Unenforceable
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Indemnification Agreements
Broad Form Limited Form • “Pay to the Extent of Own Negligence…” • Limited Scope “…for bodily injury and property damages…” • Everyone Responsible for Own Actions • Equitable, Likely to be Enforced • Acceptable to Contractors
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Broad Form Limited Form Contractual Liability Insurance Coverage • Included in Post-1985 General Liability Policies • Covers “Insured Contracts” • Subject to Insurance Policy Terms, Conditions, Exclusions, Limits,
etc.
Indemnification Agreements
Easements, Elevator Maintenance, Lease of Premises,
Sidetrack Agreements…and the tort liability of others assumed in an Indemnification Agreement
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Insurance Specifications
Types of Insurance Coverages
Limits & Per Project
Limits
Certificates of
Insurance
Owner Controlled Insurance Program – Wrap-ups
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Insurance Specifications
• Workers’ Compensation & Employer’s Liability
• Commercial General Liability • Business Automobile Liability • Umbrella or XS Liability • Contractor’s Equipment
• Builders Risk or Installation Floater
• Professional Errors & Omissions • Limited Job-site Pollution
Liability • Contractors Pollution Liability
Types of Insurance Coverages
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Insurance Specifications
WC- Statutory $100/500/100 EIL $1M/ $2M CGL $1M CSL Auto
Liability
$5M- $50M Umb./XS
$1M- $5M Prof. E & O $1M-$5M CPL Per Project
Limits
5-7 Yr. Comp. Ops. Tails
Types of Insurance Coverages Limits & Per Project Limits
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Insurance Specifications
• Owner > GC • GC > Owner • Prof. > Owner & GC • Subs > GC • Confirm Compliance • Avoid Uninsured Subs • Avoid Audit Charges
Types of Insurance Coverages Limits & Per Project Limits Certificates of Insurance
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Insurance Specifications
Master Policy All Parties
Contractors Bid X-Ins.
Reduce Insurance Cost
Avoid Litigation
Best Projects $500M+
Types of Insurance Coverages Limits & Per Project Limits Certificates of Insurance Owner Controlled Insurance Program (OCIP)
– Wrap-ups
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Additional Insureds
Coverage Granted
Blanket vs. Specific
Primary & Non-
Contributory
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Additional Insureds
Coverage Granted • 100% Defense Expenses to Party A • If Party B Insured – Settlement Apportioned Between Parties A & B • If Party B Uninsured – 100% Settlement to Party A
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Additional Insureds
Coverage Granted Blanket vs. Specific • Blanket- Based on relationship (vendor, lessor, mortgagee, etc.) • Blanket- Automatic If Required by Contract • Blanket- No Additional Premium • Specific- Endorsement specially lists company • Specific- Requires Underwriter Approval • Specific- Often Additional Premium Charge
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Additional Insureds
Coverage Granted Blanket vs. Specific Primary & Non-Contributory • Defense & Settlements by Party A, Until A’s Policy is Exhausted • Blanket- Automatic if Required by Contract – No Additional Premium • Specific- Requires Underwriter Approval – Often Additional Premium • Owners / Large GCs Favor • Often Unavailable for Subs
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Waivers of Subrogation
Restricts Insurer Rights
Blanket vs.
Specific
Property vs.
Casualty
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Waivers of Subrogation
Restricts Insurer Rights • Voids Insurer’s Right to Mitigate Losses by Collecting from
Responsible Parties
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Waivers of Subrogation
Blanket vs. Specific Restricts Insurer Rights • Blanket - Automatic if Required by Contract • Blanket - No Additional Premium • Specific- Endorsement Specially Lists Company • Specific - Requires Underwriter Approval • Specific - Often Additional Premium Charge
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Waivers of Subrogation
Restricts Insurer Rights Blanket vs. Specific Property vs. Casualty • Significant Casualty Change • Eliminates Disputes in Property Claims • Not Advisable for Workers’ Compensation
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Builder’s Risk & Installation Floaters
Ownership Interests
Blanket vs. Specific
Sub-limits
Deductibles & Premiums
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Builder’s Risk & Installation Floaters
Ownership Interests • Named Insured Includes: Owner, GC & Subs of All Tiers • Owners or GC Can Obtain Policy • Owner’s Property Policy is a Poor Substitute for Builder’s Risk
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Builder’s Risk & Installation Floaters
Ownership Interests Blanket vs. Specific • GCs Often Have Blanket Builder’s Risk- Limits May be Too Low • Subs Often Have Installation Floaters- Limits May Be Acceptable • Other Insurance Clauses May Cause Conflicts
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Builder’s Risk & Installation Floaters
Ownership Interests Blanket vs. Specific Sub-limits • Materials Off-site • Materials In-transit • Soft Costs • Loss of Use • Mechanical Start-up & Testing
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Builder’s Risk & Installation Floaters
Ownership Interests Blanket vs. Specific Sub-limits Deductibles & Premiums • Contract Often Vague Who Bears Deductible • Contract May Elect Owner Claim Fiduciary • Contract Typically Allows Premium to Be Charged to Owner
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Contractual Risk Transfer Checklist for Contractors Indemnification Agreement
o Avoid “Sole Negligence of Others” o Accept “Extent of Own Negligence”
Insurance Specifications o Workers’ Compensation o $1M General Liability/ Policy or Per Project o $1M Auto Liability o Umbrella or XS Liability Limits o Contractor’s Equipment
Additional Insureds o Blanket- No Premium Charge o Primary & Non-Contributory- Underwriter Approval & Premium
Charge
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Contractual Risk Transfer Checklist for Contractors Waivers of Subrogation
o GL, Auto, Umbrella - Underwriter Approval o Workers Compensation - Underwriter Approval & Premium
Charges o Contractor’s Equipment - Underwriter Approval
Builder’s Risk/ Installation Floater o Who Obtains Coverage? o All Parties are Named Insureds o Project Cost = Policy Limits o Adequate Off-site & In-transit Sub-limits o Optional Soft Cost Coverage o Who Bears Deductible Obligations? o Who Pays Premium?
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Contractual Risk Transfer Checklist for Contractors Professional Liability
o Architects & Engineers o Construction Managers o Design Builders
Pollution Liability o Limited On-site, Sudden, & Accidental o Full Contractors Pollution Liability o Auto Pollution Liability
Certificates of Insurance o Obtained From Agent o Sent to Owner o Obtained From Subcontractors o Contractor Coverage Adequate?
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