CONTRACTOR SAFETY LIMITING YOUR LIABILITY MARCH 20, 2013

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1 CONTRACTOR SAFETY LIMITING YOUR LIABILITY MARCH 20, 2013 Scott C. Bellack Senior Vice President Cleveland, Ohio

2 Questions Who is in the audience? Who is responsible for the contractor selection process or involved in the process? How many deal with contracts associated with hiring a contractor? How many are responsible for actual contract language? How many are responsible for ensuring that the contractors have appropriate levels of insurance coverage? How many are responsible for collecting and reviewing certificates of insurance? 1

3 Overview Construction projects typically involve an intricate web of contractors, vendors and timetables, sophisticated legal contracts, insurance requirements, and unique operational site safety risks. Cost overruns, schedule delays, unforeseen events and legal disputes can quickly undermine a project s performance, increase costs, ruin budgets, and exacerbate unsafe work environments. Limited capital funding, slim contractor margins, demanding contract requirements, and fast track delivery schedules leave little room for error, further compounding construction project risks. 2

4 Top Project Risks Design error Faulty workmanship, means and methods Natural hazards Release of pollutants Unsafe acts and/or conditions Regulatory noncompliance Unavailability of labor Loss of capital funding Unavailability of materials or equipment Inaccessibility to the worksite 3

5 Project Risk Consequences Third party bodily injury Third party property damage Injury to workers or employees Damage to surrounding operations Direct physical damage to the work Failure to perform to specifications Government fines and/or mandated actions Remedial design or construction Cost overrun Failure to complete on schedule Project shut-down 4

6 Common Road Blocks in Managing Project Risk No common understanding of key risk and correlation among risk Responsibility for risk transferred to lowest possible denominator Risk mitigation and risk financing operating in silos and is not coordinated across functions Assumptions are made based solely on past experience Risk management and appropriate safety personnel not considered in the initial planning process 5

7 Traditional Risk Management Questions What insurance coverages should I require in my construction contracts? What limits are adequate and/or available? Are there additional project specific coverages that I should consider? 6

8 Are There Better Questions to Ask First? What are the key risks with my specific project? How much risk are we retaining? How do these risks differ from our existing risk management expertise? Can additional risk management strategies be used to reduce uncertainty to the risk profile of my project for an acceptable cost? After considering the benefits of each strategy, which opportunity has the risk/return profile that best fits the project goals and my company s appetite for risk? 7

9 K.I.S.S. A Simple Risk Model We usually don t have much say! AVOID Just don t do it Screening ASSUME RISK REDUCE Selection Policy Just do it Procedure TRANSFER We can impact Our insurance Their insurance Project specific insurance 8

10 Mitigate Risk Through Proper Assessment and Monitoring Why assessment and monitoring? Approximately 40-50% of all construction projects are behind schedule Only 26% of construction projects finish within their original budget Time and money the heart of any project Helps to manage CHANGE What is risk assessment? A process aimed toward increasing both the level of knowledge of risk how it is ultimately managed The effective management of a project impacts risk management results such as loss control, claims management and cost 9

11 Managing Changes in the Project Oversight recognizes CHANGE Claims (and loss) typically arise from change Change in the design Change in the conditions Change in expectations Change in behavior 10

12 We All Want to Hire Safe Contractors This is certainly an area where time should be spent Select a safe contractor using company criteria State your company s safety expectations in a contract the same way your fundamental terms and conditions are stated Communicate your safety expectations to pre-qualified contractors prior to awarding the contract As best you can ascertain the contractors commitment to safety Audit and monitor work while it is being done to ensure safety expectations are being met Periodically evaluate performance in each prior step 11

13 We All Want to Hire (Financially) Responsible Contractors Again, first-things-first, we want to hire a contractor that we believe values job-site safety Once you have satisfied yourself, as best you can, that you have narrowed your choices down to a select, safe few, you need to talk with legal and risk management to determine what language you want in your contract and decide whether your contractors can meet those standards But always keep in mind A signature on a contract by the contractor does not indicate that they are capable of complying with your safety and insurance requirements, but instead that they will have a legal document that can be used to hold the contractor accountable for non-compliance. 12

14 Sample General Requirements THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL Workers Compensation and Employers Liability Insurance Workers Compensation: As required by the WC Laws of the state(s) where the services are being performed or in any other state(s) where employment may emanate. Employer s Liability: $X00,000 Commercial General Liability Insurance General aggregate: $X million Products/completed operations aggregate: $X million Each occurrence: $X million Personal and advertising injury: $X million Medical expense (any one person): $X,000 13

15 Sample General Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL Commercial General Liability Insurance (continued) Policy requirements: Products/completed operations coverage must be maintained for a period of at least two years after final payment (including coverage for additional insureds). Policy must be on an occurrence policy form and include: premises operations, independent contractors, products/completed operations, broad form property damage, contractual liability (including liability for employee injury assumed under a contract as provided in the standard ISO policy form). Business Automobile Insurance $X million combined single limit for bodily injury and property damage in any one occurrence Policy requirements: Policy to include contractual liability (including liability for employee injury assumed under a contract as provided in the standard ISO policy form) for the liabilities assumed under the indemnification clause of this agreement for claims resulting from the ownership and/or operation of vehicles and automotive equipment described above. 14

16 Sample General Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL Umbrella/Excess Liability Insurance Each occurrence: $X million General aggregate: $X million Products/completed operations aggregate: $X million Policy requirements: Policy to apply excess of commercial general liability, auto liability and employer s liability coverages Additional Insureds All general liability, umbrella/excess liability and automobile liability insurance policies required under this agreement shall include an endorsement naming the XYZ Company and any other persons as designated in the contract as Additional Insureds. 15

17 Sample General Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL Primary and Non-Contributory The insurance policies required to be carried under this agreement shall include an endorsement stating that the coverage afforded the Additional Insureds/Indemnified Parties will be primary to any other coverage available to them and provided on a non-contributory basis. As such, XYZ Company and all other Additional Insureds/Indemnified Parties shall not be liable for the payment of any premiums, deductibles, claims, co-insurance, retentions or any other costs or expenses under the aforementioned insurance policies. Policy Changes/Cancellation It is agreed that certificate holder will not materially change, modify or fail to renew any insurance policies required to be maintained pursuant to this agreement without a minimum of 30 days, advanced written notice to XYZ. 16

18 Sample Detailed Requirements THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL 17

19 Sample Detailed Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL 18

20 Sample Detailed Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL A-1. Higher Risk Contractors All Others Contractors involved in major building construction, repair and renovation (concrete, masonry, structural steel, demolition, etc.) A-2. Higher Risk Contractors Pollution Risks - same as A-1 above B. Moderate Risk Contractors Maintenance testing and monitoring of equipment, heating, air conditioning, plumbing, light masonry, ventilation control (dust collection systems) C. Lower Risk Contractors Light carpentry, dry walling, painting, decorating D. Service Firms Security firms, janitorial services, light equipment repair (office machines, computers, etc.), food service, landscaping E. Manufacturing Firms Manufacturers of major production equipment or components F. Trucking Firms Contract haulers that transport finished product on behalf of XYZ Company 19

21 Sample Detailed Requirements (continued) THE FOLLOWING IS FOR SAMPLE PURPOSES ONLY AND DO NOT CONSTITUTE RECOMMENDATIONS FOR TYPES AND LIMITS OF COVERAGE REQUIREMENTS VARY BY COMPANY CONSULT YOUR LEGAL COUNSEL G-1. Professional Firms Design and Engineering Services Geotechnical, surveying, foundations, architectural and structural design and engineering firms that furnish services to XYZ Company G-2. Professional Firms Non-Design Work Firms providing consulting or training services to XYZ Company 20

22 Consider Site-Specific Builder s Risk Insurance Builder s risk covers property and materials Typically purchased by the contracting party Covers insurable interest of all parties Pays covered losses without regard to fault Coverage under existing property program can be problematic Evidence of insurance for contractors Waiver of subrogation Deductibles Gaps in coverage and sub-limits Annual, as opposed to term, coverage and pricing 21

23 Consider Site-Specific Builder s Risk Insurance (continued) Builders risk considerations Contractor s policy will not cover equipment and materials supplied and installed by the contracting party Soft cost limits available to cover financial consequences of delayed completion (due to covered loss) Expediting expenses covered to ensure timely completion Sub-limits adequate to cover items in transit and off-site storage 22

24 Consider Site-Specific Professional Liability Insurance Scope and coverage Covers bodily injury and property damage Covers damages due to loss of use Allegations of professional liability Negligent preparation of plans, drawing, designs and specifications Errors involving site surveys, soil testing, subsurface conditions, elevations and grading Failure to comply with local building codes Negligence in selecting or recommending building materials Suits relating to costs, estimates, specifications and supervision 23

25 Consider Site-Specific Professional Liability Insurance (continued) Design firm coverage Practice limit shared by all jobs Typically a low limit, low aggregate Project specific professional liability Limit dedicated to one project Single source of responsibility for claims Coverage encompasses all design firm project participants Owner s protective form available 24

26 Questions, Comments, Concerns, Issues, Clarifications Scott C. Bellack, CPA Senior Vice President Marsh USA Inc. Workforce Strategies 200 Public Square, Suite 1000 Cleveland, Ohio p: c: e: 25

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