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Risk Management

Highlights from IRMI's Construction Risk Conference

By Donald S. Malecki, CPCU

With the momentum of wrap-up projects increasing, it comes as no surprise to note how well attended sessions featuring these programs are by subcontractors, producers, and others. Owner-controlled insurance programs (OCIPs) have had the most attention in recent years by interested parties. However, the implementation of contractor-controlled insurance programs (CCIPs) is on the rise for a variety of reasons.

Among the reasons CCIPs are growing in popularity are: More owners are requiring them, the appetite of insurers is increasing even for smaller projects, and contractors are afforded the opportunity to obtain work that often is otherwise unavailable in light of the unavailability or unaffordability of insurance. This was one of many messages conveyed at the 30th annual Construction Risk Conference of the International Risk Management Institute (IRMI) in Orlando, Florida in November 2010.

As explained by Tim Walsh, senior vice president, regional director of Aon Risk Services, Southfield, Michigan, it is not the profit potential that is the reason that CCIPs are popular today. In fact, the profit is not good, he said, but other advantages of the CCIP can produce the kind of results that may generate profit.

What is making CCIPs more attractive, Walsh explained, is that the traditional insurance approaches have too many obstacles. Examples he offered are that there are no guarantees of post-construction coverage for subcontractors, e.g., completed operations, and involvement of an expensive litigation process.

Contrary to the belief of many, Walsh, who specializes in CCIPs, said that builders risk, professional liability and contractors pollution, while commonly obtained in a CCIP program, are not considered the core coverages. What are the core coverages, he added, are workers compensation/employers liability, commercial general liability, and excess liability.

All too often the mention of wrap-up programs elicits comments regarding insurance coverages. Wrap-up policies, however, should not be created in isolation, said Steven A. Coombs, president, Risk Resources, Elmhurst, Illinois. Speaking on the subject of digging deeper on wrap-up issues, Coombs, a risk management consultant, explained that the policies should reflect the requirements set forth in the contract document and representations made in the wrap-up manuals.

Kathleen A. Creedon, owner, Wrap Strategies, Lincoln, California, who was a co-speaker with Coombs, said that the best manuals are timely, short and concise. These manuals, she added, should act as a roadmap and reflect the contractual requirements entered into between the various parties.

Another potential obstacle of traditional insurance, unlike wrap-up programs, is the exposure to horizontal application of limits. This means that with traditional insurance, the primary and excess liability policies may not apply vertically in a catastrophic event. A court, instead, may decide that the primary policies of the named insured and additional insured must first be exhausted horizontally before the excess liability policies of these parties become payable.

The Hamden, Connecticut, law firm of Saxe Doernberger & Vita made available to attendees a color-coded survey of those states that have litigated this issue, along with the case law. According to this firm's findings, vertical exhaustion applies in Arkansas, Kentucky, Missouri, Texas and Virginia. Those states observing horizontal exhaustion are California, Illinois and New York.

Joint ventures

Generally, it seems that the only time joint venture concepts are discussed is when there is a problem. In actuality, joint ventures are common in enabling and enhancing construction projects. In discussing this subject, Michael J. O'Neill, president, American Contractors Insurance Group, Dallas, Texas, explained that there are actually three types of these arrangements.

The first type of joint venture O'Neill mentioned is a "true" one because it holds the construction contract and is also the employer for all employees.

A "line item on a paper joint venture," on the other hand, is one, he added, that holds the construction contract but has no joint venture employees. O'Neill explained that the joint venture here subcontracts the work to the venture partners who, in turn, issue subcontracts to non-joint venture parties.

The third type of joint venture, O'Neill explained, is the "silent" one which either provides surety credit, project financing or expertise in return for share of the profits or losses.

While there are many advantages to joint ventures, and they are undertaken by some major projects that might not have otherwise been possible, O'Neill also said that there are tremendous exposures to loss after the conclusion of the joint venture's purpose.

For example, he said, joint ventures may be held liable to third parties for breach of warranties and construction defects after the joint venture has terminated. O'Neill also said that joint ventures may not limit their liability to third parties to the amount of ownership, and liability for negligent acts of joint ventures that survive dissolution.

With respect to closing a potential gap with the commercial general liability policy, O'Neill recommends that the last paragraph of Section II, part 4 (Who Is An Insured) be deleted. This reads: "No person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a named insured in the Declarations."

In place of that provision's deletion, O'Neill recommends blanket coverage for current and past joint ventures by an endorsement that states: "With respect to 'your work,' you are an insured for your liability arising out of the conduct of any partnership or joint venture of which you are or were a partner or member, even though such partnership or joint venture is not shown as a named insured in the Declarations. This coverage is excess over any available liability insurance purchased specifically to insure the partnership or joint venture. This coverage will not insure to the benefit of any party except you."

Whether an insurer will be willing to add this wording by endorsement will likely hinge on many variables. The reason why joint ventures are used on construction projects, O'Neill said, is to expand into new project delivery such as design/build, construction management, and integrated project delivery.

Hot topics in general liability

One workshop that was an attraction for many attendees dealt with hot topics in general liability insurance presented by Paul Becker, president, Willis Construction Practice, Nashville, Tennessee; Karen A. Reutter, senior vice president, Aon, Minneapolis, Minnesota; and Jeffrey A. Segall, senior vice president, Willis, Tampa, Florida.

Among the subjects aired were defective construction and why the courts are split on coverage; what triggers an occurrence; anti-indemnity statutes trends; horizontal exhaustion of limits; coverage opportunities on distressed properties; the increased uses for project-specific policies; and unique wrap-up issues.

One of the hot topics discussed by Becker was on choice of law. He explained that the standard CGL policy does not stipulate a state/jurisdiction for resolving conflicts in claims or coverage disputes. Some insurers and insureds nonetheless make conscious choice of law when filing lawsuits.

Without a specific choice of law designated in the policy, Becker explained that how a court will decide on where a dispute will be heard currently takes into consideration the location of the claim or where the damages occurred, place of performance, and domicile of the named insured, as well as other factors. The problem with designating a choice of law, Becker said, is that it might be advantageous for one point of law but disadvantageous for another.

Another hot topic discussed by Becker was what is known as integrated project delivery (IPD), also known as tri-party agreements. Under an IPD, he said, a cooperative business relationship is established among the project owner, design team, and the constructor in order to move a project in an orderly fashion from the design stage to delivery.

Becker explained that the goal of an IPD is to reduce disputes, quickly manage change orders, and impact cost and time on the job. Sutter Health, he said, is the first one trying this concept without any case law in sight.

Other topics

Leaders of five construction insurance markets shared their thoughts on emerging risks, insurance coverage developments, how contractors' moves into new markets affect their risk profiles, and industry challenges, among other subjects.

Moderated by Jack P. Gibson, president, International Risk Management Institute, Dallas, Texas, the speakers on the subject of insurance underwriter perspectives and prognostications, were: James E. Conroy, vice president and chief underwriting officer, Liberty Mutual National Market Construction, Boston, Massachu­setts; Daniel F. Conway, president, Construction Risk & Surety, Chartis Insurance, Inc., New York, New York; Geoffrey M. Hall, senior vice president, ACE Construction, New York, New York; Scott Rasor, president, Construction, Zurich North American, Schaumburg, Illinois; and William Sullivan, vice president, The Hartford Construction Group, Hartford, Connecticut.

The author

Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.


Discussions of wrap-ups, joint ventures, GL hot topics, and risk profiles were part of the recent conference.











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