Insuring the Construction Project March 29th, 2007

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Insuring the Construction Project

  • March 29th, 2007


  • Construction Process

  • Typical Project Delivery Methods

  • Risk Management

  • Who is at Risk and What are the Risks

  • Construction Insurance Coverage

  • Insurance Program Options

  • What is an OCIP

  • Why Choose an OCIP

  • Claims

  • Conclusion

The Construction Process

The Construction Process

Typical Project Delivery Methods

Typical Project Delivery Methods

  • Design - Bid - Build

  • Construction Manager

    • At risk
    • Not at risk
  • Design Build

Project Delivery Methods

Project Delivery Methods

Project Delivery Methods

Project Delivery Methods

Risk Management

Risk Management

  • Risk Identification

  • Contractors Employees

  • Public

  • Damage to Project

  • Damage to Adjacent Property

  • Damage to Contractors Equipment

  • Losses caused by excusable delay

  • Losses caused by inexcusable delay

  • Faulty Workmanship

  • Hazardous Materials

Risk Management

  • Factors Affecting Risk Likelihood

  • Project type & site

  • Participants - “The Ark was built by Amateurs and the Titanic was built by Professionals” - unknown.

  • Budget and Financing

  • Scheduling

  • Project Delivery Method

  • Legal Issues

  • Political Issues

Risk Management

  • Environmental Exposures

  • Soil - Construction Waste/Toxic Waste/Buried Materials

  • Air - Incineration, Dust, Metal Recovery

  • Surface Water - Storm Water runoff

  • Ground Water Contamination - Boring/Drilling

Risk Management

  • Risk Allocation & Transfer is:

  • Determining how risks should be shared across the Owner, Contractors, Architect/Engineer to avoid:

    • Bid Contingencies
    • Admin/Legal Costs for disputes
    • Property damage and Bodily Injury
    • Loss of Revenue & Increased Expense from delays

Risk Management

  • How to Transfer Risk

  • 1. Transfer Risk to other parties

  • 2. Allocation of risks to party best able to control risks

  • Risk Transfer Mechanisms

  • Shifting financial obligation of certain risks to other project participants through -

  • Non Insurance transfers (Hold Harmless & Indemnity)

  • Commercial Insurance

  • Bonds

Risk Management

  • Contractual Risk Allocation

  • Contracts - Standard/Custom

  • CCDC 2 - 1994 - Stipulated Price Contact

  • CCDC 14 - Design-Build Contract Etc;

  • Choice Depends on Suitability of Standard to Owners Risk Transfer Desires

Risk Management

  • Indemnification

  • Limited - Contractor assumes liability to extent own fault

  • Intermediate - Contractor assume all-except owner sole negligence

  • Broad - Contractor assumes all liability

  • Address consequential loss

Risk Management

  • Construction Insurance is:

  • Recovery fund for damages caused by negligence - Architect/Engineer or Contractor

  • Insure (some) risks assumed in indemnity provision

  • Financial Viability

Risk Management

  • Limits Should Consider Loss Scenarios

  • Construction cost

  • Complexity

  • Consequential Loss Exposure

  • Renovation vs New

  • Environmental

  • Limits Typically purchased by Contractors

  • Other (Geography, Climate, Legal Environment, etc.)

Who is at Risk and What are the Risks

Who is at Risk

  • Owner

  • Architect

  • Contractor

What are the Risks

  • Owners Risks

    • Damage to the project
    • Delay in start up
    • 3rd party Bodily Injury / Property Damage
    • Force Majeure
    • Error in design - change orders
    • Environmental

What are the Risks

  • Architects Risks

    • Error in design
    • 3rd Party Bodily Injury / Property Damage

What are the Risks

  • Contractors Risks

    • Damage to project
    • 3rd party Bodily Injury / Property Damage
    • Delay by performance
    • Environmental

Construction Insurance Coverage

Common Construction Insurance Coverage

Common Construction Insurance Coverage

Builder’s Risk

  • 1st Party Coverage for damage to project works

  • Can include coverage for delay in start up

  • Covers all parties involved in construction

  • All risks coverage:

    • Fire
    • Lightning
    • Wind, Hail
    • Flood
    • Vandalism
  • Testing and Commissioning

Builder’s Risk (cont’d)

  • Subject to exclusions:

    • War
    • Nuclear
    • Faulty workmanship
    • Error in design
  • Exclusions vary widely - beware of frost / freezing exclusion, mechanical / electrical breakdown, faulty workmanship / error in design

  • Insures for full replacement cost

  • Needs to include transit coverage, off-site storage

  • Should be non-cancelable - important

General Liability

  • 3rd Party Coverage

  • Provided by all parties to the construction project

  • Covers bodily injury and property damage

  • Owner should be added as additional insured to contractors / subs policies

  • Subject to exclusions:

    • Intentional acts
    • Automobile
    • Workers comp.
    • Gradual Pollution
  • Includes coverage for damage to project

General Liability (cont’d)

  • Limits shared amongst all contractors’ projects

  • No dedicated completed operations

  • Renewable annually

Wrap-up Liability

  • 3rd Party Coverage

  • Covers all parties in the construction project Owner-Contractor-Sub-Contractor-Consultants (excluding suppliers and security guards)

  • Coverage for bodily injury and property damage

  • Same exclusions as general liability policy

  • Excludes damage to project

  • Dedicated Limits

  • Dedicated Completed Operations

  • Covers entire term of project

  • Should be non-cancelable - important

General Liability vs Wrap-Up Liability

General Liability Vs. Wrap-up Liability

  • Question: Which is better?

  • The simple answer: Neither, as it depends on your point of view!

  • Let’s look at the issues.

General Liability Vs. Wrap-up Liability

  • General liability

  • Either owner’s or contractor’s operational policy

  • Renews annually

  • Insures a single entity and its related firms

  • Single limit (per occ./agg. as applicable) covering all the Insured’s operations

  • Wrap-up liability

  • Project-specific

  • A specialized general liability policy

  • Covers multiple, unrelated Insureds but limited to a certain purpose i.e. the Project

  • “One Time” policy with a definitive start and finish that spans the project term plus a fixed “Completed Operations” period

A Comparison

  • Contractors arrange coverage resulting in inconsistent coverage, sub-limits and gaps

  • Individual coverage is often more restrictive

  • Claims handling is complicated with several insurance carriers involved

  • Insurance costs hidden in price of Contractors’ Bid and, though most individual policies are smaller, in total they may be more costly

A Comparison

  • Preferred by some Contractors due to established relationships with their own insurers and brokers

  • Contractor provides evidence of insurance to Owner including interest of the latter. However, such evidence is of questionable value to Owner and does not guarantee the actual existence of coverage

  • Annual aggregate limit applies to all Contractor’s operations

A Comparison

  • Owner has to administer and review the existence of the many insurance policies over the potentially many years of the Project, and thereafter

  • Small Contractors usually carry low limits of liability

  • Potential dispute between various insurers over which policy(ies) responds

  • Under this Policy, Owner has to rely on “Additional Insured” status which does not confer privity of contract

A Comparison

  • Typically lower deductibles more in keeping with Contractors ability to absorb risk

  • Policy excludes damage to Contractor’s own work after completion unless work was done by a Sub-Contractor (allows insurer to subrogate against Sub-Contractor)

A Comparison

  • Broad based coverage for damage to the Project limited only by Broad Form Property Damage (BFPD) provisions

  • Completed Operations trigger for each Contractor as each completes its own work

  • Coverage is for all operations of the Insured


  • Covers physical damage to vehicle as well as 3rd party bodily injury / property damage

  • Should cover all vehicles owned, leased or licensed

  • Should be provided by all parties to the construction project

  • Should be endorsed to give the owner notice of cancellation

Umbrella / Excess Liability

  • Excess of general liability - wrap-up or automobile policy

  • Increases limits of primary policies

  • Follows form of underlying coverage

Contractors Equipment Floater

  • Covers all equipment owned / leased by contractor (or subs)

  • All risk coverage:

    • Fire
    • Windstorm
    • Flood
    • Earthquake
    • Theft
    • Vandalism
  • Should include rental coverage

  • Replacement cost or actual cash value

  • Large contractors may self insure

Marine Insurance

  • 1st party coverage for property in the course of ocean transit

  • All risks coverage

  • Can include delay in start up

Professional Liability ( E & O )

  • 3rd Party Coverage

  • Insures against negligent act, error or omission

  • Provides coverage for financial loss, as well as bodily injury / property damage

  • Usually provided by consultants to the project (Architect, Engineer, etc)

  • Can be provided by contractor

  • No dedicated limits - covers all professionals work

  • Renewable annually

  • Owner cannot be added as an additional insured

Single Project Errors and Omissions

  • 3rd Party Coverage

  • Insures against negligent act, error or omission

  • Provides coverage for financial loss, as well as bodily injury / property damage

  • Covers all consultants on the project

  • Dedicated limit

  • Non-cancelable

  • Dedicated reporting period

  • Owner can be added as an additional insured (usually only for defence costs)

Owners Protective Insurance

  • 1st party policy for the owner only

  • Excess of the consultants E & O policy

  • Pays on judgement against consultant

  • Much cheaper than single project policy

  • Dedicated limits

  • Can also cover more than one project

  • Remove limitation of liability in contract

Pollution Liability

  • Can be 1st party clean up or

  • 3rd party coverage for acts, errors and omissions arising from:

    • Professional Services (A & E)
    • Contracting Services (Contractor)
  • Can be single project or practice policy

Liquidated Damages

  • 1st party coverage

  • Usually taken out by contractor

  • Very expensive

  • High deductible

  • Small insurance capacity

Insurance Program Options

  • Owner can require contractor and subcontractors to provide necessary insurance coverage

  • Owner can require contractor to provide a Single Project Insurance Program (CCIP)

  • Owner can Provide Insurance Program (OCIP)

  • Combination of the above.

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