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Insurance and the Construction Failure

18th Annual Construction SuperConferenceDecember 12, 2003

San Francisco, CaliforniaJames D. Hollyday

[email protected]

mailto:[email protected]

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• Introduction

1. Contract Drafting Stagea) Consultation with Owner’s Risk Manager

2. Standard Form Insurance Policiesa) Insurance Services Office (ISO)

3. Secondary Sourcesa) International Risk Management Institute (IRMI)

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• Types of Failure/Defective Work Claims

1. Defective Work (No Bodily Injury or other Property Damage)

2. Defective Work (Which Causes Bodily Injury or Sudden Damage to Other Property)

3. Defective Work (Which Requires the Removal of Non-Defective Work to Remedy the Defective Work)

4. Defective Work (Which Causes Loss of Use of Property)

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• Owner’s Insurance

1. Builders Risk Insurance

2. Boiler & Machinery Insurance

3. Business Interruption Insurance

4. Owner Controlled Insurance Program (OCIP)

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• Builders Risk Insurance

1. First Party Property Insurance

2. “All Risk” versus “Named Perils”

3. Coverage for Period of Constructiona) What triggers the termination of the policy?

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4. Insured Parties (Owner, Contractor, and Subcontractors, as their interests may appear)a) Implied Waiver of Subrogationb) Express Waiver of Subrogationc) Subrogation Claims for Damage to Negligent Insured’s

Workd) Subrogation Claims for Damage to Other Insured’s

Work

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5. Builders Risk Coverage a) Work in Placeb) Materials in Transitc) Scaffolding and Temporary Facilitiesd) Debris Removale) Delayed Opening/Soft Costs

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6. Builders Risk Exclusionsa) Theftb) Latent Defectsc) Ordinance or Lawd) Boiler & Machinery e) Testingf) Faulty Workmanshipg) Design Error

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7. Deductiblesa) Amountb) Who Pays the Deductible

1) The Party Who Bought the Policy2) Allocation by Contract

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• Contractor’s Commercial General Liability (CGL) Insurance

1. CGL Insuring Agreement: Insured agrees to pay:

a) Those sums that the insured becomes obligated to pay as damages;

b) Because of bodily injury or property damage to which this insurance applies;

c) Caused by an “occurrence” during the coverage period.

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• Contractor’s CGL Insurance

1. ISO 1966 CGL Form (BFPD Endorsement Available)

2. ISO 1973 CGL Form (BFPD Endorsement Available)

3. ISO 1986 CGL Form (BFPD Endorsement Included)

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2. CGL Exclusions:a) Expected or Intended

Injuryb) Liquor Liabilityc) Contractual Liabilityd) Workers Compensatione) Employers’ Liabilityf) Pollutiong) Aircraft, Auto, or

Watercrafth) Mobile Equipmenti) War

j) Damage to Propertyk) Damage to Your

Productl) Damage to Your Workm) Damage to Impaired

Propertyn) Recall of Products,

Work or Impaired Property

o) Personal and Advertising Injury

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• Specific Exclusions

(b) Contractual LiabilityException to exclusion for liability assumed in an “insured contract”

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(j) Damage to Property(5) That particular part of real property on which you or

any contractors or subcontractors are performing operations, if the property damage arises from those operations;

(6) That particular part of real property that must be restored, repaired or replaced because your work was improperly performed on it.

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(k) Damage to Your Product1

1“Your Product” means any goods, or products, other

than real property, manufactured, sold, handled, distributed, ordisposed of by you.

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(l) Damage to Your WorkThis exclusion does not apply if the damaged work or the

work out of which the damage arises was performed on your behalf by a subcontractor.

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• Contractor’s CGL Insurance

1. Owner as “additional insured”

2. Owner as “additional named insured”

3. The “other insurance” problem

4. Owners and Contractors Protective Liabilitya) Insures the Owner for vicarious liabilityb) No coverage for Owner’s own negligence

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• Professional Liability Insurance

1. Errors and Omissions Coverage

a) For damages arising out of actual or alleged negligent acts, errors, or omissions in the performance of professional services for others

b) Defense Costs erode policy limits

c) Compare CGL exposures

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2. Exclusions

a) Warranty

b) Late performance

c) Costs to re-perform services

d) Claims for refunds of fees paid

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3. Other Limitations

a) Limitation of Liability Clause

b) Exclusion of consequential damages

c) “Gatekeeper” statues

d) Economic Loss Doctrine

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4. “Project” Errors & Omissions Insurance

a) Advantages

b) Disadvantages

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• Performance Bond Coverages

1. General Principles

a) Construction and interpretation of of bond language 1) “Condition” of the bond2) Statutory bond3) Is the contract incorporated into the bond?

b) Dispute resolution (Is the Surety bound)

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2. Recoverable Costs

a) Cost of completing the work

b) Costs of correcting defective work discovered after substantial completion

c) Delay damages (liquidated damages)

d) Other expenses (attorneys and expert fees)

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3. Defenses of the Surety

a) “Personal” defenses of the principal

b) Bond defenses of the surety

• Procedural defenses)• Overpayment

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• Subcontractor Default Insurance

1. Advantages

a) Saves time and expense if a claim is made

b) Works best for large contractors who can evaluate and underwrite subcontractors

c) Costs are comparable to bonds

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• Subcontractor Default Insurance

2. Disadvantages

a) High deductible and co-payments

b) Relatively new in the marketplace

c) No express payment bond provision

d) Not permitted where statutory bond is required

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