Deconstrucng Construcon Coverage: What on Earth Do Construc*on Policies Cover?

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Beverley Maxwell
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What does CGL Coverage Issues cover to third - party property?
What does the traditional approach do?
What is excluded from the construction process?

2 Deconstruc*ng Construc*on Coverage: What on Earth Do Construc*on Policies Cover? (SESSION CODE LGL003) SPEAKERS: Peter D. Laun, Esq., Partner, Jones Day David Marino, Executive Vice President, Aon Risk Services

3 Learning Objectives Develop a practical understanding of different ways to insure construction projects. Determine how to position claims under various policies to ensure the best claims outcome. Learn how to sync insurance coverage with insurance and indemnity provisions in construction contracts.

4 Possible Program Structures; Advantages/Disadvantages Traditional approach: duplication of coverage and cost; but can maximize potential coverage OCIP: cost benefit; avoids finger-pointing; but need to watch coverage and loss-sensitive premiums CCIP: cost benefit; but loss of control by owner over insurance

5 What Types of Policies Potentially Apply? Property/Builders Risk Commercial General Liability ( CGL ) Professional Liability/OPPI Other (Workers Compensation; Auto) Performance bonds; payment bonds

6 What Do the Main Types of Policies Cover? Policy Type Types of Claims Covered Types of Claims Not Covered CGL Third- party Liability (PD, BI) Own property; construcaon defects unless third- party PD Property/ Builders Risk Professional Liability Damage to own property, property under construcaon, Damage for design errors and omissions Third- party PD unless held by insured; faulty workmanship, defecave design (unless damage to non- defecave property) ConstrucAon ways and means Bonds Varies by type Property Damage

7 Contract Drafting Issues AIA Forms Generally favorable to design professionals Not very protective of owner Subrogation -- issues relating to future property insurance Responsibility for deductibles What is fair? Depends who sets them and degree of culpable conduct that led to loss Custom Forms Many forms have outdated indemnity language can lead to clauses being struck out

8 CGL Coverage Issues Covers damage to third-party property or injury to third parties Generally does not cover re-work or correction of defective design or construction Is there an occurrence? Your work and your product exclusions Claims by insureds against other insureds

9 Property/Builders Risk Coverage Issues Coverage generally broad Limitations on coverage for faulty workmanship and defective design Line-drawing exercise for both Inherent vice and latent defect exclusions What do they really mean? Fortuity? When does property transition from builders risk to owner s property insurance? What effect does that have (e.g., subrogation)? Contract insurance requirements need to be in sync with insurance termination dates

10 Professional Liability Coverage Issues Construction issues versus design issues what is the difference What if construction team provides design assist or serves as CM? Notice/Timing issues What is a claim? What if a claim comes up years later? Notice of circumstance; related claims; effect of failure to give notice of circumstance

11 Exhaustion of Limits

12 Anti-Indemnity

13 Construction Defect

14 Common Claim Scenarios Faulty design by architect leads to damage to project itself What policy or policies are in play? How should claims be pled to maximize coverage? What are coverage risks? Faulty design by architect leads to damage to third-party property What policy or policies are in play? How should claims be pled to maximize coverage? What are coverage risks?

15 Common Claim Scenarios Faulty work by construction contractor leads to damage to project itself What policy or policies are in play? How should claims be pled to maximize coverage? What are coverage risks? Faulty work by construction contractor leads to damage to third-party property What policy or policies are in play? How should claims be pled to maximize coverage? How to deal with your work issue (may depend on type of insurance)? What are coverage risks?

16 Common Claim Scenarios Hybrid claims: faulty design and/or faulty work by contractor What policy or policies are in play? How does this get sorted out by the potentially liable parties or the insurers? What if all potentially liable parties cannot be brought into one action (drafting issue)? What if results in various underlying actions are inconsistent? May be best scenario for CCIP or OCIP

17 Anti-Indemnity Statues and Related Issues What are they? When do they apply? Can one draft around them with choice-of-law provisions? What is allowable (knock-for-knock)? The additional insured loophole closed or not closed?

18 Other Tricky Issues Duty to defend Pleadings control; can be very broad Do you really want a defense if you are paying for it and/or the claim involves bad work? Responsibility for deductibles in high-deductible programs and deductibles and loss- sensitive premiums in OCIP programs Subrogation waivers: Beware the Premiums

19 QUESTIONS?

Insurance and the Construction Failure

Insurance and the Construction Failure 18 th Annual Construction SuperConference December 12, 2003 San Francisco, California James D. Hollyday hollydaj@pepperlaw.com 1 Introduction 1. Contract Drafting

Deconstruc*ng Construc*on Coverage: What on Earth Do Construc*on Policies Cover?

What does CGL Coverage Issues cover to third - party property?

What does the traditional approach do?

What is excluded from the construction process?

Deconstrucng Construcon Coverage: What on Earth Do Construc*on Policies Cover?