state construction – builders risk builders... · what is builders risk insurance? • builders...
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State Construction – Builders Risk Moderator: Texas State Office of Risk Management
Todd Holt, Deputy Executive Director,
Speakers: Arthur J. Gallagher & Co. Michael, Gillon, ARM, Area President
Chris Connelly, ARM-P, ARe, Area Senior Vice President Nick Terlecki, Producer Associate
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What are we talking about today?
1. Builder’s Risk – What is Builder’s Risk? – Types of Builder’s Risk Programs – Project & Contractual Concerns – Advantages & Objections to Owner Programs – Texas SORM Case Study
2. OPPI (Owners Protective Professional Liability) – Types of Professional Liability in Projects – OPPI Overview – Advantages of OPPI – OPPI Case Study
3. Questions and Answers
Today’s Agenda
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What is Builders Risk Insurance?
• Builders Risk is coverage designed to cover physical damage to property in the course of construction – Physical damage resulting
from covered perils (i.e. fire, water damage, wind, earthquake, etc.)
• Typically applies to the work, regardless of location (at construction site, off-site storage, in-transit)
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• Coverages Can Include:
– “Soft costs” to cover additional expenses caused as a result of covered loss, such as architect fees, interest expenses, real estate taxes, etc.
– Extra Expense: the additional amount by which the cost of completing the project exceeds the cost had damage not occurred
– Delay in Start Up: insures against income loss or specified additional expenses, that result from a delay in the completion of a construction project beyond the expected completion date as a result of covered property damage
– Damage to Existing Structure: extends coverage to remaining structure which is not part of construction project
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Builder’s Risk in Action – Hurricane Harvey
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Site Preparation
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Builder’s Risk in Action – Hurricane Harvey
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• Physical damage to facility, equipment
• Damage to Existing Structure
• Extra Expense – Dewatering – Mold
Remediation • Delay in Startup?
Coverage Elements
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• Contractor or Owner can purchase – In either case, premium is built into overall project cost – Contractor mark-up is common
• Coverage can be provided under an owner’s existing property insurance program or via a separate policy
• Individual Policies or via Master Builder’s Risk Program
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Ways to Cover Builder’s Risk
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Master and Rolling Builder’s Risk Programs
• Master BR Programs – Provides automatic
coverage for projects at pre-set rates for a defined period (typically multi-year)
– Ease in administering multiple projects
– Certain limits may be shared across all projects
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• Individual Policies – Designed for one project
specifically – Each project requires
separate underwriting and policy
– Dedicated limits per project
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• Who absorbs policy deductibles? – Preventable losses – Force majeure clauses for
natural hazards? • How to handle owner-
furnished equipment – PE may purchase for sales
tax exemption • Transparency
• Whose interest is protected? – Claim proceeds
• What happens if contractor is replaced mid-project?
• What if entity accepts partial substantial completion?
• P3 (Public-Private Partnerships) – who controls terms?
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Project & Contractual Concerns Key Considerations for Builder’s Risk Insurance
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• Project risk is held regardless of owner or contractor BR purchase
• Importance of clear contract terms – Recommend deductible/ risk-sharing with contractor to avoid
moral hazard – Clear on natural hazard deductibles (who holds the risk for larger
deductibles?) • Critical to understand insurance policy terms
– Are you sharing risk with unrelated entities? – If so, is there transparency on the volume/exposure of these
projects? – What happens if policy limits are exhausted?
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Key Takeaways for Owners
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Advantages of Owner Placement
• Transparency and control of policy terms, deductibles, limits
• Clear who holds risk and at what levels
• Includes all work, including owner furnished equipment
• No sharing of limits across unrelated entities
• FEMA Eligibility • Continuity of Coverage
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• States – Maximizing economies
of scale to reduce costs – Contract certainty
through involvement with ORM & agency facilities/ procurement departments
– Engagement with agency customers
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Texas SORM Example (August 2017)
• Contractor Terms – $219,000 Cost – $25M aggregate wind Tier 1
locations (across all projects) – $15M aggregate flood limit
(across all projects) – $10k All Perils Deductible
• 5%, minimum $250k Named Storm
– No soft costs or delay in startup – Limited coverage details
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• Owner Terms – $81,350 (63% Reduction) – Full limits $51M per occurrence
wind – Full limits $51M aggregate
flood – $10k All Perils Deductible
• $100k flat Named Storm – $2M soft costs/delay – Transparent coverage terms,
including permission to occupy
$51M University Library Project, Tier 1 Wind/Flood Area
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Texas SORM Example (February 2017)
• Similar Outcomes – 52% Reduction in Builder’s Risk
Insurance Costs – Lowered deductibles for named
windstorm and flood – Damage to Existing Building
Included – Permission to occupy – Escalation clause included – Identified contractual issues for
“acts of god” resulting in purchase of delay coverage • Contract terms critical to
understanding exceptions to liquidated damages
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$60M University Basketball Arena, Large Scale Renovation
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Objections to Owner Programs
• Common Objections – Want 100% of project risk on
contractor until time of project completion • Is this actually happening
with current contract terms? • Liquidated damages
provisions have limitations – Is the owner providing
“apples to apples” – Is the owner now absorbing
more deductible risk?
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• Challenges to Adoption of Owner Programs – Fighting the status quo – Risk management vs.
facility management / procurement
– Contractor pressure
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Launch of Texas SORM BR Program
• Building program ground-up – Agency engagement before
product rollout – Advisory group created – Identified critical agency
components • TFC – contract manager for
all agencies except universities
• Higher Ed – education campus by campus
– Understanding what procurement/contract changes required for owner purchase
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• Short-term Initiatives – Individual underwriting first – Establish market rates across the
State – Identify common challenges and
benefits – Individual agency guidance on
contracts and policy terms
• Long-term Goals – Create master statewide BR
program – Automatic addition of small
projects – Quote turnarounds within 48-72
hours – Automation where possible
OPPI (Owners Protective Professional Indemnity)
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• Construction projects are exposed to risks that result from the negligence design professional, such as architects and engineers – Ex: collapse as a result of negligent design of structure
components of structure • Common ways to transfer these risks
1. Professional Liability Insurance required by contract 2. Project-Specific Professional Liability Insurance 3. OPPI (Owners Protective Professional Indemnity)
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Professional Liability in Construction Contracts
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• Lowest Cost Option • Low policy limits – Many firms only carry $1,000,000 in total limits • Shared Limits – Traditional policy limits cover all projects undertaken by the firm
and can be eroded by other claims and defense costs • Annual policies provided on a claims made basis that must be renewed to maintain
coverage • Inconsistent terms, no guarantee of the quality of the coverage provided since each
policy will have its own unique coverage terms and conditions • In the event of claims, several policies may be triggered, and their limits may be
used to resolve disputes related to who caused a loss rather than to indemnify the owner for economic losses
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#1 Professional Liability Professional Liability Coverage – Provided by Individual Design Firms
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• Policy providing primary coverage for damages arising out of the professional negligence of all design professionals on the project. – Design professionals can include architects, engineers,
construction managers, landscape architects, land surveyors/planners and interior designers/space planners.
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#2 Project-Specific Professional Liability
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• OPPI is an excess insurance policy that indemnifies a project owner for damages arising out of the professional negligence of their contracted design professionals. – The policy also provides the insured with coverage for claims and claims
expenses that result from demands made directly against the insured by a third party.
• OPPI applies on an excess basis and only protects the owner against damages that exceed the design professionals individual policy limits. OPPI also applies on a difference in conditions (DIC) basis.
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#3 Owners Protective Professional (OPPI)
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• The policy supplements the available professional liability coverage provided by the design firms
• It provides a cost effective alternative to increasing individual project insurance. The cost of OPPI is on average 40-60% less expensive than project specific professional liability coverage
• Increased financial security through ultimate control of the program • Reduces potential adversarial relations with the design team • One policy covers the entire project duration, multiple projects can be scheduled into a single
program • OPPI includes “difference in conditions” (DIC) coverage extending protection to the owner in
the event that an underlying policy is deficient in coverage • Retroactive coverage may be afforded for those projects already in the construction phase,
provided a No Known Loss Letter is issued
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Advantages of OPPI
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• Limits available up to $50,000,000 • Coverage available for the length of the project term with an extended reporting
period (tail coverage) of 5-10 years • Self Insured Retentions start at $100,000 • Minimum liability limits required from design professionals will be negotiated to
match Insured’s contractual minimum requirements • Full retroactive coverage can be provided to projects that have already begun if a
No Known Loss Letter is issued • Coverage can be extended to provide excess contractors pollution liability,
including coverage for asbestos and mold/fungi/microbial matter • Expanded definition of consultant in policy form addresses the independent
consultants who are not part of the prime design team and are contracting directly with Insured
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Advantages of OPPI Coverage Terms Available
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• Premiums are initially developed using a rate per $1,000 in total estimated construction costs and are also auditable based on the actual construction costs at the time of completion
• The policy will have a composite rate that considers all construction within the capital improvement program. The cost of insuring renovations to existing buildings will be less than the cost of insuring new construction
• Generally we are able to include a swing clause of at least 5% so that if the actual project costs are not more than 5% of the estimated costs, there will be no additional audit premium charged
• CPPI policies are also available and typically have higher premiums than OPPI
policies. The OPPI policy reduces the likelihood that defense costs will erode the limit of insurance and gives the Insured complete control of the coverage and direct access to the policy. The OPPI has a low financial risk and minimal administration requirements from the Insured
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OPPI Cost Structures
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OPPI Success Story
• Two large-scale expansion projects – 2014-17 Intermodal Train
Facility – 2016-2020 New South Terminal
$2.1B • $40M OPPI Limit (1st project) &
$100M South Terminal • Reduced costs by having Design,
Architect and CM’s purchase $2M limit versus $5M limit respectively
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$2.7B International Airport Intermodal Terminal
Arthur J. Gallagher Risk Management Services, Inc. 200 South Orange Avenue | Suite 1350 Orlando | FL | 32801