Insurance and the Construction Failure

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Blake Wood
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1 Insurance and the Construction Failure 18 th Annual Construction SuperConference December 12, 2003 San Francisco, California James D. Hollyday 1

2 Introduction 1. Contract Drafting Stage a) Consultation with Owner s Risk Manager 2. Standard Form Insurance Policies a) Insurance Services Office (ISO) 3. Secondary Sources a) International Risk Management Institute (IRMI) 2

3 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) 3

Defective Work (Which Causes Bodily Injury or Sudden Damage to Other Property) 3.

4 Owner s Insurance 1. Builders Risk Insurance 2. Boiler & Machinery Insurance 3. Business Interruption Insurance 4. Owner Controlled Insurance Program (OCIP) 4

5 Builders Risk Insurance 1. First Party Property Insurance 2. All Risk versus Named Perils 3. Coverage for Period of Construction a) What triggers the termination of the policy? 5

6 Builders Risk Insurance 4. Insured Parties (Owner, Contractor, and Subcontractors, as their interests may appear) a) Implied Waiver of Subrogation b) Express Waiver of Subrogation c) Subrogation Claims for Damage to Negligent Insured s Work d) Subrogation Claims for Damage to Other Insured s Work 6

may appear) a) Implied Waiver of Subrogation b) Express Waiver of

7 Builders Risk Insurance 5. Builders Risk Coverage a) Work in Place b) Materials in Transit c) Scaffolding and Temporary Facilities d) Debris Removal e) Delayed Opening/Soft Costs 7

8 Builders Risk Insurance 6. Builders Risk Exclusions a) Theft b) Latent Defects c) Ordinance or Law d) Boiler & Machinery e) Testing f) Faulty Workmanship g) Design Error 8

9 Builders Risk Insurance 7. Deductibles a) Amount b) Who Pays the Deductible 1) The Party Who Bought the Policy 2) Allocation by Contract 9

10 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. 10

becomes obligated to pay as damages; b) Because of bodily injury or property

11 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) 11

12 2. CGL Exclusions: a) Expected or Intended Injury b) Liquor Liability c) Contractual Liability d) Workers Compensation e) Employers Liability f) Pollution g) Aircraft, Auto, or Watercraft h) Mobile Equipment i) War j) Damage to Property k) Damage to Your Product l) Damage to Your Work m) Damage to Impaired Property n) Recall of Products, Work or Impaired Property o) Personal and Advertising Injury 12

Equipment i) War j) Damage to Property k) Damage to Your Product l) Damage to Your Work m) Damage to

13 Specific Exclusions (b) Contractual Liability Exception to exclusion for liability assumed in an insured contract 13

14 Specific Exclusions (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. 14

property damage arises from those operations; (6) That particular part of real property

15 Specific Exclusions (k) Damage to Your Product 1 1 Your Product means any goods, or products, other than real property, manufactured, sold, handled, distributed, or disposed of by you. 15

16 Specific Exclusions (l) Damage to Your Work This 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. 16

17 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 Liability a) Insures the Owner for vicarious liability b) No coverage for Owner s own negligence 17

18 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 18

or alleged negligent acts, errors, or omissions in the performance

19 Professional Liability Insurance 2. Exclusions a) Warranty b) Late performance c) Costs to re-perform services d) Claims for refunds of fees paid 19

20 Professional Liability Insurance 3. Other Limitations a) Limitation of Liability Clause b) Exclusion of consequential damages c) Gatekeeper statues d) Economic Loss Doctrine 20

21 Professional Liability Insurance 4. Project Errors & Omissions Insurance a) Advantages b) Disadvantages 21

22 Performance Bond Coverages 1. General Principles a) Construction and interpretation of of bond language 1) Condition of the bond 2) Statutory bond 3) Is the contract incorporated into the bond? b) Dispute resolution (Is the Surety bound) 22

23 Performance Bond Coverages 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) 23

24 Performance Bond Coverages 3. Defenses of the Surety a) Personal defenses of the principal b) Bond defenses of the surety Procedural defenses) Overpayment 24

25 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 25

26 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 26

INDEX. bonded contract, 289 insureds, 243. misrepresentation, 291 obtaining, 242

INDEX. bonded contract, 289 insureds, 243. misrepresentation, 291 obtaining, 242 INDEX B non-conforming tender, 284 boiler and machinery insurance, performance bond 241 default by the obligee, 288 coverage, 243 failure to notify, 289 definition of the accident, 245 material variation