Contract Review: Key Terms That May Put Your Company At Risk Grady Dotson, CPCU, Vice-President of CSDZ, Utah Will Kieffer, AFSB, Surety Account Executive, CSDZ, Utah
Surety Bond Review Three Party Agreement: Owner/General Contractor = Obligee Contractor = Principal Surety Terms and Conditions of a Surety Bond follow the underlying contract between the Principal and Obligee 2
Key Surety Points Warranty Provisions Damages Time to Complete Payment Terms/Retention 3
Warranty Period Sureties are primarily concerned about Workmanship Warranty Material Warranty are termed as pass-through to the manufacturer and does not pose a direct risk to the surety company Efficiency Guarantees Will be underwritten carefully Surety Standard 1 year Most sureties will write 2 year warranty periods, some will extend out for 3-5 for well financed contractors Surety companies add a premium surcharge for warranties that exceed one year Typically 1% for each month after 12 months Example 2 year warranty = 12% surcharge on the surety premium charged for a bond 4
Damages Actual/Consequential Damages Include loss of product or profit/revenue that can be recovered Hard for surety companies to calculate their exposure, as they can be infinite in theory Liquidated Damages Damages agreed upon to a set amount before entering into a contract Typically charged by the calendar or work day 5
Time to Complete Working Days vs. Calendar Days Is the project compressed relative to its dollar amount? Are the working/calendar days consecutive or are they broken up 6
Payment Terms/Retention Key Underwriting Question CAN YOU CASH FLOW? Standard Payment Terms 14, 30, 45 or 60 day payment terms? How deposited - Check? Direct Deposit? Monitor Funds Control or Joint Checking Retention Key Underwriting Points Surety Review When Addressing Payment Terms/Retention Amount of availability under your bank line Heavy use of bank line may give a surety pause if the payment/ retention terms are not favorable Have you negotiated terms with your suppliers to be at an advantage to cash flow your project? Work with others money (overbill vs. underbill) 7
Other Key Points Jurisdiction of Contract If the applicable law of the contract falls outside of the state where the work is being performed or your GC/owner is headquartered, exercise caution Does your Subcontract refer to the terms and conditions of the Prime Contract between the Owner and GC? The Subcontract may have terms and conditions you are not aware of Ask to review the Owner s contract with the Prime Contractor Your surety underwriter will want to underwrite Prime Contract as a result may pose a greater risk to smaller contractors vs. larger contractors 8
Contractual Risk Transfer How risk is transferred through construction contracts and insurance policies Insurance requirements & Hold harmless/indemnity agreements. Additional Insured Endorsements. 9
Liability in Construction Construction Projects Are Multiple Employer Work Sites, so an injured person has more parties to sue. Compared to most businesses which are usually in a single employer setting. On Construction Projects, Contractors Frequently Clarify and Shift Responsibilities, Duties and Rights By Means of Contracts. 10
You may have two roles Higher tier/ indemnitee / promisee Usually CM/GC/Owner Lower tier/ indemnitor / promisor Subs (with GC s) & GC s (with owners). 11
Methods of Risk Transfer Two methods for transferring risk from the higher tier contractor to the lower-tier contractors Indemnification clause Insurance requirements 12
Indemnification Clauses Example of a typical indemnification clause: The Subcontractor shall defend, hold harmless, and indemnify the Contractor and the Owner from all claims, liabilities, demands, injuries, and damages arising out of or in consequence of the performance of the Subcontractor s work under this contract. 13
Anti-Indemnification Statutes Most states have statutes that place limitations on the scope of indemnity agreements in construction Statutes limit the amount of negligence that can assumed by subcontractors Laws vary by state. To the fullest extent permitted by law Additional Insured status may still be obtained per contract requirements. 14
Additional Insured Coverage Many additional insured endorsements are available in the marketplace Always get both ongoing and completed operations coverage Primary vs. excess Coverage exclusions Time Limits Statute of repose and limitation What does a certificate of insurance (COI) convey? Impact? 15
Certificates of Insurance ACORD CERTIFICATE OF INSURANCE DATE (MM/DD/YY) DATE PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION SAMPLE CERTIFICATE ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE Insurance Agency AFFORDED BY THE POLICIES BELOW. Name & Address COMPANIES AFFORDING COVERAGE COMPANY A A Insurance Company INSURED SAMPLE CERTIFICATE COMPANY B B Insurance Company Subcontractor name & complete address COMPANY C COMPANY D COVERAGES THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED TO PAY CLAIMS. CO TYPE OF INSURANCE POLICY NUMBER POLICY EFFECTIVE POLICY EXPIRATION LIMITS LTR DATE (MM/DD/YY) DATE (MM/DD/YY) A GENERAL LIABILITY 123456 01/01/04 01/01/2005 GENERAL AGGERGATE $ 2,000,000 X COMMERCIAL GENERAL LIABILITY PRODUCTS-COMP/OP AGG $ 2,000,000 CLAIMS X MADE OCCUR PERSONAL & ADV INJURY $ 1,000,000 OWNER S & CONT PROT EACH OCCURRENCE $ 1,000,000 FIRE DAMAGE (Any one fire) $ 50,000 MED EXP (Any one person) $ 5,000 A AUTOMOBILE LIABILITY 246810 01/01/04 01/01/2005 X ANY AUTO COMBINED SINGLE LIMIT $ 1,000,000 ALL OWNED AUOTS BODILY INJURY (Per person) $ SCHEDULED AUTOS X HIRED AUTOS BODILY INJURY X NON-OWNED AUTO (Per accident) $ PROPERTY DAMAGE $ GARAGE LIABILITY AUTO ONLY-EA ACCIDENT $ ANY AUTO OTHER THAN AUTO ONLY: $ EACH ACCIDENT $ AGGREGATE $ A EXCESS LIABILITY 1234567 01/01/04 01/01/2005 EACH OCCURRENCE $ 5,000,000 X UMBRELLA FORM AGGERGATE $ 5,000,000 B OTHER THAN UMBRELLA FORM EMPLOYER S LIABILITY WORKMAN S COMPENSATION AND 135791 01/01/04 01/01/2005 STATUTORY LIMITS $ THE PROPRIETOR/ X INCL EACH ACCIDENT $ 500,000 OFFICERS ARE: PARTNERS/EXECUTIVE EXCL DISEASE - POLICY LIMIT $ 500,000 DISEASE - EACH EMPLOYEE $ 500,000 OTHER DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS Per project aggregate applies to General Liability Policy. Sample Construction, Inc., the Owner and all other parties as required by contract are named as an Additional Insured on a primary and noncontributing basis. (Please attached copy of Additional Insured form or indicate form number ). A 30 day written notice of cancellation applies. CERTIFICATE HOLDER Sample Construction, Inc. 123 Nuffield Avenue Somewhere, USA 00124 CANCELLATION SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION DATE THEREOF, THE ISSUING COMPANY WILL ENDEAVOR TO MAIL 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT BUT FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO OBLIGATION OR LIABILITY OF ANY KIND UPON THE COMPNAY, ITS AGENTS OR REPRESENTATIVES. AUTHORIZED REPRESENTATIVE 16
Certificates of Insurance 17
Summary Contract language will make a difference in your project now and in the future. Treat your insurance policy like a $1,000,000 asset. Protect it. Never cut corners when it comes to reviewing your contracts. Get your agent to help. Always be careful when operating in a new state. 18
Summary Develop list of Qualified Subcontractors Use bonding to qualify subs and protect the company Require subcontractors to attach their Certificates of Insurance and A.I Endorsements to their bids Set up diary files or software to help manage COIs For repeat subcontractors, use time-based master contracts and purchase orders. BE FAIR TO SUBS. 19