The Good, The Bad & The Ugly

Transcription

1 The Good, The Bad & The Ugly OCIP/CCIP from a Subcontractor s Perspective Presented By: Richard. B Usher and Donald W. Gregory, Esq. 1

2 INSURANCE IS: The business of accepting/financing Risk Transfer for payment of a fee (premium) Provides defense and liability protection for claims brought against you by third parties Provides financial protection for your assets Provides financial means to pay for injuries and lost wages to your employees and there are lots of other details WHAT ARE WRAP UPS? Insurance and risk control programs intended to protect most or all participants in a project, multiple projects or facilities under a single set of insurance policies 2

3 THE WRAP UP PROPOSITION? You buy your insurance directly from me (the Sponsor) and that will be a better deal for both of us! WHAT IS WRAP UP INSURANCE? Financial protection of YOUR assets, purchased for you by someone else. Doesn t something in that statement sound fundamentally wrong? Richard Forsberg Forsberg Engerman Company 3

4 WHAT SUBS SHOULD KNOW Before jumping on board a Wrap Up The Risk The Cost The Details EVALUATING RISK AND COST 1) What insurance protection will I have and for how long will I have coverage? 2) What are the costs, direct and hidden? 3) How will the program be managed and administered? 4) How will the program affect my current safety program and business insurance? 5) What control will I have over potential risk problems? 6) What will happen if/when the insurance is insufficient and/or goes away? 4

5 WRAP UPS TYPICALLY INCLUDE 1) General and Excess Liability 2) Worker s Compensation and Employer s Liability WRAP UPS MAY INCLUDE 1) Design Liability 2) Pollution Liability 3) Rigger s Liability 4) Off site Operations 5) Builder s Risk Course of Construction Property Coverage 5

6 WRAP UPS COMMONLY EXCLUDE 1) Automobile Liability 2) Contractor s Owned/Rented Equipment 3) Off site Operations WRAP UPS AKA: Controlled Insurance Program CIP OCIP Owner Sponsored Best when owner is actively involved CCIP Contractor Sponsored CMCIP Construction Manager Sponsored DBCIP Design Builder Sponsored May be best when Contractor controls Gatekeeper Wrap Up 6

7 Wrap Ups may be written as: Project Specific Insurance Program (PSIP) A Program that provides insurance coverage for a specific project location, for a specific period of time Rolling Wrap Up A program that provides insurance coverage for multiple projects. Some large General Contractors and owners insure under rolling or perpetual programs No specific termination date COST SAVINGS IS A DRIVER To the sponsoring owner/developer/homebuilder or general contractor An important recent development Until recently, wrap up programs were sold almost exclusively for cost saving reasons 7

8 COVERAGE AVAILABILITY: WRAP UPS are often the ONLY source of liability insurance for condominium construction and/or apartment to condo conversions Insurance carrier reactions/withdrawal due to the proliferation of completed operations construction defect litigation including class action suits Underwriter unwillingness to extend broad risk transfer coverage from trade contractor liability policies on behalf of developers and up tier contractors NOTES: Wraps ups for condo projects often do not include workers compensation coverage Because coverage as opposed to cost savings is the primary driver Liability only rolling wraps are also common for production track housing Limited availability of broad risk transfer coverage from trade contractors 8

9 WRAP UP PROJECT CHARACTERISTICS Large Projects Usually apply to large construction projects with hard costs of $ million or more Annual insurance premiums of $2 million or more High Labor Costs Usually (when Work Comp is included) involve a large number of contractors and subs with high labor costs, usually 25 30% or more of total project costs Single Entity Control of all contractors and subcontractors at the defined site or for the designated project When work is confined to a single location. The wrap up will be for a defined site or a designated project 9

10 Restricted Access Wrap ups work best for complex, laborintensive projects Restricted access to the worksite makes safety management loss control effective State Requirements Wrap ups must satisfy all state requirements Public & Private work project restrictions by state Some states will not allow Workers Compensation to be included Some states have project size minimums Some state legislatures have additional restrictions Kansas 10

11 WHAT ARE BENEFITS OF WRAP UPS Some advertised benefits may: be only a perception not accrue to Sponsors and Participants alike Broadened Coverage Insurers are usually willing to provide broader coverage under a wrap up than to individual contractors Everything is negotiable with enough premium on the table 11

12 Potential additional coverages: Pollution Liability Mold Coverage Professional Liability Asbestos Abatement Subsidence EIFS Manuscript endorsements Other Potential Coverage Benefits Standard exclusions can be removed Higher limits Elimination of problems associated with uninsured and under insured contractors and subcontractors 12

13 HOW ARE COSTS REDUCED IN WRAP UPS Centralized insurance coverage Single policy covering all entities Economies of scale Efficient administration Strong risk management and loss control Less Administration Reduces staff time for Sponsor to: follow up for proof of insurance verify proper coverage and limits deal with multiple agents and brokers Reduced risk of subcontractor coverage lapses 13

14 Comprehensive Safety Program Enforce a uniform safety program resulting in fewer losses How Are Insurance Costs Reduced Implementation of Large Deductibles, Loss Sensitive Retrospective Programs, and Dividend Plans Best programs share the cost savings with Participants Increased economic incentive to Sponsor for loss prevention 14

15 Reduced insurance costs May save on insurance premiums for all participants (1 to 3% of total project cost is a rule of thumb ) Loss ratios wrap up programs are generally below 35% when the ultimate premium is determined on a loss sensitive basis, return premium will go to the Sponsor following project completion and policy termination Anticipated return premium is incentive for early termination 15

16 Competing Interests One Off Sponsor Desire to cut costs (e.g. early termination) vs. Participant/Contractor/Subcontractor desire to maintain long term coverage Is the Sponsor a Participant? Single purpose entity? Reduced cross litigation Involving two or more contractors on the project Single carrier 16

17 Reduces action over litigation The potential of suits against the owner or project manager by employees of the contractors and subcontractors alleging failure to provide safe work place, improper supervision, etc. Presenting unified defense (e.g. injured subcontractor employee case against general contractor) Reduced CD litigation Cost Cost of defense consolidated Less reason to point the finger 17

18 Reduction of Markup On the contractor s and subcontractors markup of insurance costs Because everyone thinks subs are making money on their insurance programs! The Best Wrap Up Programs Collaboration Transparency Joint Safety Administration Cost Sharing Loss sensitive plan returns shared 18

19 Tools for Wrap Risk and Cost Control ASA Subcontractor Bid Proposal ASA Subcontract Offer Terms For Project Using Wrap Up Insurance ASA Subcontract Addendum Pertaining To Project Specific Insurance ASA Questions For Consolidated Insurance Programs Sponsors/Administrators CIP QUALIFICATION QUESTIONS Subcontractors should request review of CIP by sub s broker prior to entering into contract. Contract pricing risk is not reasonably possible without understanding coverage breadth and quality 19

20 The benefits and burdens Starting point to Discover costs increased and burdens shifted to subcontractor Understand the bidding process Question unclear language in the bid solicitation Attend pre bid meetings Document Review Provide copy of key documents to your insurance broker and/or attorney Policy Endorsements Program manual Contract documents incorporating the wrap by reference Wrap Manual Wrap Policy Language Are these consistent? 20

21 Professional review Make sure your broker/agent will focus on your individual risk profile Request complete Wrap Up/Contract Review: Wrap Up Manual and Contract Terms Complete Policy forms including: Named Insured endorsement and Deductible/SIR language Professional assistance Ask your broker to: Assist with enrollment forms Help manage claims and loss history Track E Mod Unit Statistical Reports Calculations Pay your broker/agent to pay attention You may have to take exception to any deduct in order to pay your broker to represent you Contract Language 21

22 Sponsor s Broker Issues The Sponsor s Broker and Program Administrator have a duty to properly represent the coverage available to the Enrolled Participants Put the Sponsor s Broker and Program Administrator on Notice that you will rely on them to procure adequate coverage Subcontractor Challenges with CIP CIP Programs vary significantly ask the appropriate questions. There is NO standard Wrap Up Policy Get all the information and evaluate your risk and cost BEFORE you leap! 22

23 What May Not Be Covered by CIP? Professional services: design and engineering? Site preparation? Pollution clean up? Transport of hazardous materials? Off site manufacturing (products liability coverage)? Off site fabrication incorporated into the project? Maybe not covered by CIP? Work in transit? Exterior insulation finish systems (EIFS)? Asbestos, Fungus and mold? Earth quake, movement, subsidence? Early sunset? Flood? Rental equipment AI status for rental company? 23

24 Maybe not covered by CIP? Punch list work? Non enrolled subcontractors? Warranty Repair work? Damage to other contractor s work? Defense of suits among/between wrap insureds?? Strategy and Solutions? Qualify your bids! Endorse your practice policies Hard to Come By DIC (difference in conditions) & Excess coverage 24

25 What Wrap Up Limits are Adequate? Rules of thumb : Limits of 25 to 33% of total project costs over $40 Mil? Limits of 80 to 100% of total project cost under $20 Mil? Per unit for residential (e.g. $25 100k/unit) Refreshing Limits Verify Adequate limits Rolling wraps Annually renewing limits Policy aggregate Project Aggregate Different limits for Sponsor and Participants Wasting policy defense costs deducted Inside the Limits 25

26 Potential Gaps in Wraps Restricted excess policy? E.g. primary policy covering design when excess policy does not Excess over SIR will not respond when primary fails or SIR is not funded Cross Liability Exclusions Named Insured v Named Insured Coverage Termination Challenges Sponsor s Termination for Convenience. Is there a corresponding right for Sub to terminate and get paid? Can you even get replacement coverage? Try to have CG 2131 Limited Wrap Up Exclusion Endorsed to your policy in lieu of CG

27 CG Wrap Up Exclusion This exclusion applies whether or NOT the consolidated (wrap up) insurance program: (1) Provides coverage identical to that provided by this Coverage Part; (2) Has limits adequate to cover all claims; or (3) Remains in effect. Inadequate Coverage Duration E.g.: 10 year statute of limitations, but Completed Operations coverage for only three years Clock stopping Tolling of Statutory limitations/repose period Premium financing company terminates program for lack of payment? 27

28 CIP Beware: Will the Completed Operations Hazard be fully covered to Statute of Repose? What about Personal Injury? When will you know the real Cost of the Risk? Potential Gaps in Wraps Overly broad cross suits prohibition? Subrogation waiver applies when insurance does not apply? Economic loss claims between participants prohibited? No indemnity for third party action over? 28

29 Solutions: Condition bid to require waiver of subrogation applies only when coverage is actually provided by CIP carve out actions over for bodily injury claims from WOS Protect your E Mod Worker s compensation losses caused by other trades but not recoverable from negligent subcontractor due to subrogation waivers? Solution: Negotiate exception to subrogation waiver to allow recovery from guilty subcontractor s Wrap coverage 29

30 Potential Gaps in Wraps Insolvent Carrier E.g. carrier becomes unable to pay claims before the end of the policy period. Surplus lines carrier not covered by Guarantee Fund or Fund is Limited Solutions? Cut through Endorsement to Excess Liability Carrier Sponsor required to replace insurance or provide funds to pay claims Sponsor Indemnifies Subcontractor obtains own policy as change order if practical and available Subcontractor Right to Terminate Contract 30

31 Builder s risk issues? Soft costs coverage? Delayed opening coverage? Flood and earthquake covered? Policy Warranties, e.g. security, fencing, lighting? Pollution and cleanup costs for covered event included? Builder s risk issues? What limit on this coverage? Does the policy cover resulting loss caused by faulty or defective: Design or specifications? Workmanship, repair, construction, renovation, remodeling or grading and compaction? Materials used in repair, construction, renovation or remodeling? 31

32 Builder s risk issues? Is coverage provided for increased cost due to ordinances, regulations or laws? Builder s risk issues? Is the interest of the Architect/Engineer included? Is there a professional services exclusion? Does coverage include reasonable compensation for Architect s services and expenses required as a result of an insured loss? 32

33 Builder s risk issues? Does the policy permit beneficial occupancy? Is coverage included for Contractor s and Subcontractors profit and overhead? Is testing coverage provided? Builder s risk issues? Is coverage provided for damage to existing or adjoining properties? Are expediting expenses covered? Does this include extra expense to continue the project? When does coverage end for the construction team? 33

34 Builders Risk Solutions Condition your bids! Sweat the details Ask all the questions Review your coverage to consider filling the gaps What s it going to cost? Unknown/disproportionate premium credit against subcontractor s bid subsidizing of high risk subs Worksheet deducts that take too much credit? Do subcontractors participate in any return of premium? Flat Umbrella How will premium charges be allocated? 34

35 Possible Solutions Condition bid to: Limit premium credit to $X per $100 of payroll or $X per $1,000 Contract Sum Delete Audit Provision Flat Price Reserve right to challenge administrator s credit calculation Get worksheet right CIP Beware: Are SIRs fully funded or collateralized? Specific and/or Aggregate Stop Loss? (Self Insured Retention) For how much? For how long? Is it an SIR or a Deductible? Insolvent Developer Shell LLC 35

36 Deductibles and SIRs Undisclosed/disproportionate contribution by subcontractors to deductibles and SIR s? SIR Solutions Require Plan Sponsor to disclose all deductibles and SIR endorsements Require Plan Sponsor to Provide Evidence of Security for SIR Negotiate limited deductible application to sub same as practice policy Contract for Sponsor to indemnify for SIR Limit subs liability to indemnify if SIR not funded 36

37 CIP Beware: Does your coverage actually apply to offsite activities Solutions: Get an underwriter s opinion/commitment upfront. Broker Fees/Commissions: Broker commissions/charges for dealing with wrap (e.g. 15% of premium credit)? Solution: Work with broker to calculate fee amount to include in bid Condition your bid to limit deduction to accommodate fee to broker 37

38 Potential Cost Impact Impact to balance of subcontractor s non wrap insurance program? E.g. loss of retroactive adjustments Increased rates on Office Policy Auto driven account Solution: Work with broker to calculate amount to include in bid OPEN ENDED SAFETY MANDATES Will you be able to manage your own safety program? Safety program impacts to methods and means and loss of efficiency? Solution: Contract language Build cushion % into bid 38

39 Return to Work? Loss of control of return to work programs? Sponsor wants injured worker off workers compensation and back on subcontractor payroll Penalties might apply review the fine print Solution: Negotiate that subcontractor controls when its workers return to work Costs Delayed Payment Delay in final payment pending insurance program performance review? Solution: Condition bid to require interest be paid on delayed final payment 39

40 Offsite Coverage How will you report offsite payroll associated with the wrap up project? Where will you pay Worker s Compensation premium? AI Status Sponsor of wrap still requires subs to name sponsor as additional insured on sub s own policy? Be sure coverage grant is limited to offsite only AN UGLY CASE STUDY LARGE COMMERCIAL PROJECT WITH CCIP Building Skin Delaminates & Must Be Repaired/Replaced Time is of the essence to repair and mitigate damages Conflicting reports as to whether cause is bad material, improper design or bad installation 40

41 WHAT WENT WRONG? Insurer had right to veto settlement (with supplier) and did Slow to fund repairs/fix Supposed to avoid GC/Sub finger pointing, but separate claim adjusters and posturing Does not avoid finger pointing as to design or materials WHAT WENT WRONG? Disagreements about deductibles: Multiple claims/deductibles or single? Deductible in prime or subcontract applies? Deductible split among claimants? Can deductible be shifted downstream thru indemnity? 41

42 Extra Costs to Subs Administrative costs/paperwork preparation Per project monthly and supplemental payroll reports Loss reports Solution: Include administrative burden estimate in bid Include reimbursement for excess administrative costs and expenses Administration Issues Challenges Prequalification standards, e.g., E Mod under 1.0 Enrolling lower tier subs Sub Sub contract language changes coordination Security clearance employee background checks Drug testing policies 42

43 Administration Issues Challenges When will individual Contractors receive complete copies of all insurance policies provided by the CIP? Who is responsible for monitoring certificates of insurance? Will there be a full time CIP administrator dedicated to the project? Administration Issues Challenges Who will manage claims during the project? After project completion? How often will claims reviews take place during the project? After project completion? Will the entire construction team participate in the claims reviews? 43

44 Administration Issues Challenges How often will loss runs be issued? After project completion? Who will consolidate and distribute safety statistics? Who is responsible for reporting loss and payroll information for unit statistical reports? Will all Subcontractors receive copies prior to filing? Administration Issues Challenges Solutions: These administrative points are often negotiable When not negotiable, account for them in bid! They will cost you $$ 44

45 CIP Beware: Is Rigger s Liability [on the hook] coverage included? Right to Indemnify [Contractual Liability] and grant AI For rental equipment? Will your equipment/scaffold be used by others? Scaffold use agreements CIP Beware: Damage to your equipment caused by other enrolled subs covered? Damage to your work covered by builder s risk? Will you have third party claim rights for damage by other subs? Waivers of Subrogation? Are they Coordinated? 45

46 Look before You Leap! Condition Your Bid! Sweat the Subcontract Details Q&A Thanks for Participating 46