Insurance Mic

Managing the Risk of a Construction Manager

Recently, I have been asked by quite a number of my Builder Developer clients about purchasing insurance as a "Construction Manager" , INSTEAD of , and not in addition to their current general liability insurance. They are very curious about going this route due to the prospect of enormous premium savings , versus their current insurance costs structure of insuring the business as a general contractor. My immediate reply is the premium is much less expensive, however your "cost of risk" is enormous. For those of you who have not heard this stump speech, "Cost of Risk" is the amount of insurance premium a business pays plus the cost of un-insured losses equals your "Cost of Risk". The formula looks something like this: (Insurance premium + Uninsured losses= Cost of Risk).

Under a Construction Management Errors & Omissions policy, actual construction work, and the resulting liabilities of performing such work is not a covered event, which is why the rates are far less expensive. The higher the risk that is transferred to the insurance company, the higher the insurance premium is to off-set that risk. If an insurance policy quote seems too "cheap" there is a reason, not enough of your business risk has been transferred.

To understand what insurance to buy to cover your risk as a Construction Manager and to properly transfer the risk, it is critical to properly define the role, scope of work and responsibilities of the Construction Manager. Construction Management can be a blend of the functions and responsibilities traditionally performed by the general contractor and design professional. In essence, the Construction Manager could be responsible for the coordination and administration of the project, however, they do not directly participate in the design and construction of the project. The Construction Manager represents the interests of the owner by administering the construction contract, and managing the work performed, including cost, time, and quality aspects of the project. This service is typically performed on a fee basis. For purposes of this discussion we will focus on the two most prevalent models of Construction Management, each with it's own scope of responsibilities, obligations and attendant risk-reward aspects. The two models re Pure "Agency" Construction Management and "At Risk" Construction Management.

Pure Agency Construction Management

A Pure " Agency" Construction Manager is also referred to as "Agent of the Owner" , neither designing nor constructing the project. Instead, the Pure Agency Construction Manager administers the construction contract throughout the planning, design and construction phases of the project. As a general rule, the Pure "Agency" Construction Manager is usually empowered to:

1) Act on behalf of the owner regarding contract matters, including overseeing the design and construction phases of the project; and
2) Transact specified business on behalf of the owner. For example all requisitions, and payments are made by the construction manager to verify and confirm both the quality of work and billable costs submitted by the various trade contractors, or the general contractor, hired by the owner.

Under this model of Construction Management, the owner contracts separately with the Construction Manager, design professional and either a general contractor or (more frequently) various prime contractors. The Construction Manager is generally not responsible for the means or methods of construction and does not guarantee construction cost, time or quality aspects of the work as well as does not provide direct supervision of the work force on the job.

"At Risk" Construction Management

In contrast to the Pure "Agency" Construction Manager is the "At Risk" Construction Manager, who may provide construction leadership throughout all phases of the project, which may include the planning, design, contract management, direction, supervision, coordination and control of the work (especially during the construction phase). While the owner typically contracts out directly with the design professional, the At Risk Construction Manager contracts directly with the trade contractors, similar to a general contractor model. Under the At Risk model, the Construction Manager has control directly over the means and methods of construction, the management and safety of the workers, as well as delivery of the completed work consistent with the owner's cost, time and quality requirements.

Understanding the Liability For Both Pure "Agency" Construction Management and "At Risk" Construction Management

There is divergent exposures to liability contingent on which mode you choose and the scope of work associated with each model. Under the "At Risk" model, the Construction Manager will have front line responsibilities for providing the owner with the completed product in accordance with all cost, schedule and quality requirements. Failure to perform these duties will expose the Construction Manager to liability to the owner. Liability potential exists vis-a-vis the architect or engineer with whom the owner has contracted (if separate from the Construction Manager), for certain limited items related to the Construction Manager's administrative role. Another class of litigants to whom the "At Risk" Construction Manager could be liable includes third parties such as workers or other individuals injured during or after the completion of construction.

The liability exposure of the Pure "Agency" Construction Manager mirrors that of a typical design professional with a somewhat higher degree of exposure due to the administrative relationship with the Architects, Engineers, and Contractors. Please also bare in mind design professionals and most Pure "Agency" Construction Managers, contingent on their scope of work, are held to a lower standard of care, that of negligence, versus implied warranty for "At Risk" Construction Managers , which is a much higher standard of care. To understand more about the difference in the standards of care, please read the article The Inherent Coverage Gap in Design Build Insurance Programs .

Managing the Construction Management Risk

The liability risks discussed above irrespective of which model you choose, "At Risk" or Pure "Agency" , will generally fall into two categories: (a) risks to other project participants in the project, (i.e. owner, contractor(s), design professionals, (b) risks to third parties (i.e. workers of the trade contractors, or other individuals injured during or after the completion of construction. The first category (a) can best be reduced through the use of clearly defined roles, rights , responsibilities and scope of work among the various project participants. To this end, the Construction Manager should devote considerable attention to the provisions in the contract with the owner and in the case of the "At Risk" Construction Manager, in the contract with the trade contractors.

Please also pay careful attention to the contract language, assuring the bid documents and contract documents are as clear and complete as possible so as to avoid conflicts as the project progresses. One of the most important clauses in the contract is the indemnity provision, indemnifying the owner, design professional and construction manager in the event of a negligent act of the trade contractor. Assuming your indemnity provision in the contract is tight, it is equally imperative that the trade contractor have the "correct" insurance in place, insuring a pool of capital is there in waiting to satisfy the indemnity provision in the contract.

Insurance Considerations for the Construction Manager

In most instances we prefer the Construction Manager have two types of insurance to protect them from liabilities, commercial general liability insurance as well as professional liability insurance. These two insurance contracts, if designed properly, should work in tandem with one another. The commercial general liability insurance will typically respond to accidents stemming from operations of a business, especially the "At Risk" Construction Manager who is in charge of providing a safe work environment, safety and the quality of the construction. These are typically third party litigants that commercial general liability insurance will protect against. The second policy , covering an entirely different set of potential claims, is the Construction Managers Error & Omissions policy, covering them in their professional capacity as either a fiduciary or other professional service for others in their capacity where legal liability is predicated on a negligent act, error or omission. An example would be a Pure "Agency" Construction Manager who in their fiduciary capacity as Agent of the owner administering accounts payable on behalf of the owner failed to pay the premium for the Builder's Risk policy. There is a loss that would normally be covered under their builder's risk, however due to the construction manager's error or omission for failure to pay the premium, the owner no longer has coverage, thus he may litigate against the construction manager, whose Errors & Omission policy would both defend and indemnify him to the policy limits in the event of a loss.

Interestingly enough the Commercial General Liability policy excludes coverage for "Professional Services" rendered, including errors or omissions and a Construction Managers Errors and Omissions policy will typically exclude claims of a general contractor nature (e.g., actual performance of the work, construction means & methods, techniques, sequences, safe place to work, fines, and penalties). The other typical exclusions you will find on a Construction Managers E&O policy are: Pollution, Project Financing, Cost Overruns, failure to complete the project in a timely fashion.

Recommendations and Conclusions

The liabilities of the CM are expanding. In light of the increased exposure, the following risk management techniques may be useful.

1) Identify which model applies to the particular project. Are you an "At Risk" CM, or are you Purely "Agent" of the Owner, acting only in a fiduciary or advisory capacity.

2) Precise contractual language and standard contracts which clearly delineate the CM's scope of services, and responsibilities are necessary. The CMMA Owner CM Agreement, A-1, and the AIA Standard Form Agreement between Owner and Construction Manager are industry standard contracts . Standard contracts are important because they are time tested and legal precedents exist. If standard contracts are not an option, compare the standard contract to the proposed manuscript contract and ensure that the most important provisions are incorporated into the agreement.

3) Use insurance as a vehicle to transfer risk where it is cost effective. It may be necessary to retain a portion of the risk thru a high deductible to ensure the program is cost effective.

4) Coordinate both the Commercial General Liability policy and the CM Errors & Omissions policy to be certain all potential "insurable" liabilities are accounted for and transfered thru insurance whenever practical.

5) Continually review the job site activity to ensure that neither the Construction Manager nor the staff inadvertently increases their responsibilities through the course of their conduct in regard to work site safety, means and methods; likewise, they should be trained in how to respond appropriately when an unsafe work site situation or accident is observed.

Managing the Risk of a Construction Manager

Recently, I have been asked by quite a number of my Builder Developer clients about purchasing insurance as a "Construction Manager" , INSTEAD of , and not in addition to their current general liability insurance. They are very curious about going this route due to the prospect of enormous premium savings , versus their current insurance costs structure of insuring the business as a general contractor. My immediate reply is the premium is much less expensive, however your "cost of risk" is enormous. For those of you who have not heard this stump speech, "Cost of Risk" is the amount of insurance premium a business pays plus the cost of un-insured losses equals your "Cost of Risk". The formula looks something like this: (Insurance premium + Uninsured losses= Cost of Risk).

Under a Construction Management Errors & Omissions policy, actual construction work, and the resulting liabilities of performing such work is not a covered event, which is why the rates are far less expensive. The higher the risk that is transferred to the insurance company, the higher the insurance premium is to off-set that risk. If an insurance policy quote seems too "cheap" there is a reason, not enough of your business risk has been transferred.

To understand what insurance to buy to cover your risk as a Construction Manager and to properly transfer the risk, it is critical to properly define the role, scope of work and responsibilities of the Construction Manager. Construction Management can be a blend of the functions and responsibilities traditionally performed by the general contractor and design professional. In essence, the Construction Manager could be responsible for the coordination and administration of the project, however, they do not directly participate in the design and construction of the project. The Construction Manager represents the interests of the owner by administering the construction contract, and managing the work performed, including cost, time, and quality aspects of the project. This service is typically performed on a fee basis. For purposes of this discussion we will focus on the two most prevalent models of Construction Management, each with it's own scope of responsibilities, obligations and attendant risk-reward aspects. The two models re Pure "Agency" Construction Management and "At Risk" Construction Management.

Pure Agency Construction Management

A Pure " Agency" Construction Manager is also referred to as "Agent of the Owner" , neither designing nor constructing the project. Instead, the Pure Agency Construction Manager administers the construction contract throughout the planning, design and construction phases of the project. As a general rule, the Pure "Agency" Construction Manager is usually empowered to:

1) Act on behalf of the owner regarding contract matters, including overseeing the design and construction phases of the project; and
2) Transact specified business on behalf of the owner. For example all requisitions, and payments are made by the construction manager to verify and confirm both the quality of work and billable costs submitted by the various trade contractors, or the general contractor, hired by the owner.

Under this model of Construction Management, the owner contracts separately with the Construction Manager, design professional and either a general contractor or (more frequently) various prime contractors. The Construction Manager is generally not responsible for the means or methods of construction and does not guarantee construction cost, time or quality aspects of the work as well as does not provide direct supervision of the work force on the job.

"At Risk" Construction Management

In contrast to the Pure "Agency" Construction Manager is the "At Risk" Construction Manager, who may provide construction leadership throughout all phases of the project, which may include the planning, design, contract management, direction, supervision, coordination and control of the work (especially during the construction phase). While the owner typically contracts out directly with the design professional, the At Risk Construction Manager contracts directly with the trade contractors, similar to a general contractor model. Under the At Risk model, the Construction Manager has control directly over the means and methods of construction, the management and safety of the workers, as well as delivery of the completed work consistent with the owner's cost, time and quality requirements.

Understanding the Liability For Both Pure "Agency" Construction Management and "At Risk" Construction Management

There is divergent exposures to liability contingent on which mode you choose and the scope of work associated with each model. Under the "At Risk" model, the Construction Manager will have front line responsibilities for providing the owner with the completed product in accordance with all cost, schedule and quality requirements. Failure to perform these duties will expose the Construction Manager to liability to the owner. Liability potential exists vis-a-vis the architect or engineer with whom the owner has contracted (if separate from the Construction Manager), for certain limited items related to the Construction Manager's administrative role. Another class of litigants to whom the "At Risk" Construction Manager could be liable includes third parties such as workers or other individuals injured during or after the completion of construction.

The liability exposure of the Pure "Agency" Construction Manager mirrors that of a typical design professional with a somewhat higher degree of exposure due to the administrative relationship with the Architects, Engineers, and Contractors. Please also bare in mind design professionals and most Pure "Agency" Construction Managers, contingent on their scope of work, are held to a lower standard of care, that of negligence, versus implied warranty for "At Risk" Construction Managers , which is a much higher standard of care. To understand more about the difference in the standards of care, please read the article The Inherent Coverage Gap in Design Build Insurance Programs .

Managing the Construction Management Risk

The liability risks discussed above irrespective of which model you choose, "At Risk" or Pure "Agency" , will generally fall into two categories: (a) risks to other project participants in the project, (i.e. owner, contractor(s), design professionals, (b) risks to third parties (i.e. workers of the trade contractors, or other individuals injured during or after the completion of construction. The first category (a) can best be reduced through the use of clearly defined roles, rights , responsibilities and scope of work among the various project participants. To this end, the Construction Manager should devote considerable attention to the provisions in the contract with the owner and in the case of the "At Risk" Construction Manager, in the contract with the trade contractors.

Please also pay careful attention to the contract language, assuring the bid documents and contract documents are as clear and complete as possible so as to avoid conflicts as the project progresses. One of the most important clauses in the contract is the indemnity provision, indemnifying the owner, design professional and construction manager in the event of a negligent act of the trade contractor. Assuming your indemnity provision in the contract is tight, it is equally imperative that the trade contractor have the "correct" insurance in place, insuring a pool of capital is there in waiting to satisfy the indemnity provision in the contract.

Insurance Considerations for the Construction Manager

In most instances we prefer the Construction Manager have two types of insurance to protect them from liabilities, commercial general liability insurance as well as professional liability insurance. These two insurance contracts, if designed properly, should work in tandem with one another. The commercial general liability insurance will typically respond to accidents stemming from operations of a business, especially the "At Risk" Construction Manager who is in charge of providing a safe work environment, safety and the quality of the construction. These are typically third party litigants that commercial general liability insurance will protect against. The second policy , covering an entirely different set of potential claims, is the Construction Managers Error & Omissions policy, covering them in their professional capacity as either a fiduciary or other professional service for others in their capacity where legal liability is predicated on a negligent act, error or omission. An example would be a Pure "Agency" Construction Manager who in their fiduciary capacity as Agent of the owner administering accounts payable on behalf of the owner failed to pay the premium for the Builder's Risk policy. There is a loss that would normally be covered under their builder's risk, however due to the construction manager's error or omission for failure to pay the premium, the owner no longer has coverage, thus he may litigate against the construction manager, whose Errors & Omission policy would both defend and indemnify him to the policy limits in the event of a loss.

Interestingly enough the Commercial General Liability policy excludes coverage for "Professional Services" rendered, including errors or omissions and a Construction Managers Errors and Omissions policy will typically exclude claims of a general contractor nature (e.g., actual performance of the work, construction means & methods, techniques, sequences, safe place to work, fines, and penalties). The other typical exclusions you will find on a Construction Managers E&O policy are: Pollution, Project Financing, Cost Overruns, failure to complete the project in a timely fashion.

Recommendations and Conclusions

The liabilities of the CM are expanding. In light of the increased exposure, the following risk management techniques may be useful.

1) Identify which model applies to the particular project. Are you an "At Risk" CM, or are you Purely "Agent" of the Owner, acting only in a fiduciary or advisory capacity.

2) Precise contractual language and standard contracts which clearly delineate the CM's scope of services, and responsibilities are necessary. The CMMA Owner CM Agreement, A-1, and the AIA Standard Form Agreement between Owner and Construction Manager are industry standard contracts . Standard contracts are important because they are time tested and legal precedents exist. If standard contracts are not an option, compare the standard contract to the proposed manuscript contract and ensure that the most important provisions are incorporated into the agreement.

3) Use insurance as a vehicle to transfer risk where it is cost effective. It may be necessary to retain a portion of the risk thru a high deductible to ensure the program is cost effective.

4) Coordinate both the Commercial General Liability policy and the CM Errors & Omissions policy to be certain all potential "insurable" liabilities are accounted for and transfered thru insurance whenever practical.

5) Continually review the job site activity to ensure that neither the Construction Manager nor the staff inadvertently increases their responsibilities through the course of their conduct in regard to work site safety, means and methods; likewise, they should be trained in how to respond appropriately when an unsafe work site situation or accident is observed.

Use Caution When Approving Additional Insured Endorsements Issued 2004 and Beyond

In July of 2004 the additional insured endorsements had a significant change that may have a dramatic impact on the various construction firms using them. The concern emanates from the substitution of a few select words, "arising out of" versus "caused, in whole or in part, by". I can spend quite some time on the nuance of this change, but I want to focus most of the attention it's effect on New York Labor Law Claims ( Third Party Action Over).

The substitution of "arising out of" versus "caused, in whole or in part, by" substantially narrows the scope of the endorsement's coverage significantly in my opinion. The injury or damage under Additional Insured endorsement CG 20 10 07/04, must be " caused by in whole or in part" , not just the named insured's (Entity Issuing the Cert) ongoing operations (as in the current endorsements), but by the named insured's "acts or omissions" in the performance of those operations. It may be interpreted, absent any fault of the Named Insured, there will be no coverage for the Additional Insured.

If this proves true, it may be problematic in how insurance companies will apply the new endorsement to third party-over actions ( Labor Law) claims. These claims typically involve actions by employees of named insureds, such as sub-contractors, against the Additional Insureds such as General Contractors and/or owners. This is one of the largest exposures to loss construction firms face, with the average awards increasing dramatically,(see table). They often allege failure to maintain a safe work place, with the general contractor / owner having additional insured status in the sub contractor's general liability policy. These claims have been historically covered under the pre-2004 additional insured endorsement. The employee is typically not allowed by workers compensation statute to bring suit against his employer, alleging only negligence against the additional insured (general contractor/owner). The big concern is that since the suit does not allege any degree of fault or negligence against the named insured ( entity issuing the cert) subcontractor/employer, insurance carriers can take the position that the employee of the sub's injuries were not "caused in whole or in part" by the subcontractor (Entity Issuing the Cert).

Naturally, the subcontractor (Entity Issuing the Cert) will usually have been somewhat at fault even though the suit does not contain allegations against it. State laws typically vary in the obligation they place on insurers to seek beyond the allegations in the suit itself to see if a duty to defend exists. Typically the duty to defend is much broader than the duty to indemnify. The only allegations that would fall clearly outside the coverage provisions of the new additional insured endorsements (07/04 Edition) would be explicit allegations of the additional insureds sole fault. In most cases insurance carriers should consider facts beyond the allegations in the lawsuit to determine if coverage applies under Additional Insured Endorsement CG 20 10 07/04. If their named insured's (sub-contractor) acts or omissions contributed to the bodily injury or property damage, they should defend and indemnify on behalf of the additional insured even though these acts or omissions are not mentioned in the underlying suit. We may see an emerging trend whereby additional insureds attempt to prove some degree of culpability against their sub-contractors to obtain coverage under the sub-contractors general liability policies.

We realize in writing this article how difficult it is to procure these certificates in the first place. Where you can exercise the control, it may be best to request or contractually dictate that the subs cannot use this particular additional insured endorsement , CG 20 10 7/04, Instead request CG 20 10 11/85.

For more information on which additional insured endorsement to use click here.

All Additional Insured Endorsements Are Not The Same

Having the right tool for the job is imperative if you are in construction. Having the correct additional insured endorsement protecting your interest is absolutely critical, saving hundred's of thousands of dollars in most liability claims situations. The fact is most of the Development / General Contractor companies I consult with spend countless hours, and thousands of dollars on their construction contracts. Conversely the task of making sure there is a pool of capital from the sub-contractors in the event of a claim , as they flash that fancy contract is often overlooked or misunderstood. The goal of this article is to highlight the various differences between all the disperate additional insured endorsements, and make a recommendation as to which one you should request depending on which side of the transaction you fall on, and what you agreed upon in the contract you signed, and to whom. I will endeavor to give you the knowledge, you negotiate what you can in your companies best interest. If you have a staff person dedicated to managing the sub contractors Certs, make sure they book mark this post and download this table for future reference. Due to the software limitations I was unable to translate directly this table, so please down load the file for the rest of this to make sense.

Please click on this file to view and download : Evolving Coverage Standards for Additional Insured Endorsements Evolving Coverage Standar-2.doc

Some notes of interest on the various terms that have a substantial impact on the coverage afforded to the additional insureds. Pay attention to "your work" v.s. "your on going operations". "Your work" has been interpreted broadly to include both work in progress and work that has been completed. Thus the end result would be that coverage would be available to the additional insured (entity receiving the certificate) long after the work by the named insured ( entity issuing the certificate) has been done. Conversely if the Additional Insured endorsement only affords coverage for your "On Going Operations" , then once the job is complete your status as an additional insured ends, irrespective of how your contract reads with the sub, which is why it is critical that the sub-contractors policy meet the obligations set forth in the builder contract.

If you are a General Contractor / Developer/ or Building Owner CG 20 10 11/85 is the specific additional insured endorsement that you should require any construction entity below you on the food chain to carry for the reasons noted above.

If the carrier insuring the sub contractor or GC is unwilling to issue the CG 20 10 11/85 endorsement, you may request that the carrier issue CG 20 37 10/01 (Titled Additional Insured - Owners, Lessees Or Contractors Completed Operations. which adds the Products & Completed extension. without this endorsement, you will lose your status as an additional insured the moment the final check is cut, and the job is deemed complete by that particular sub-contractor or G.C. If you are the building owner. This is used in tandem with CG 20 10 ( Various Issuing Years). This is not as good as the (11/85) version because of the revised "arising out of " language was changed to "caused in whole or in part by acts or omissions of the named insured", which first appeared in the 2004 revisions. For more on that topic, I have devoted a whole article on the 2004 Additional Insured Revisions. Click here for the post (forthcoming).

If you are a Trade Sub-Contractor, I would think you would like your obligation to the job to cease once the work has been completed. Therefore it's in your best interest to use one of the narrower additional insured endorsements. If this is your chosen path, please be certain the contract you signed with the owner or G.C. is consistent with your narrow additional insured endorsement, other wise you will have promised contractually a dollar, but in effect will deliver only pennies. Remember, insurance is only a financial instrument meant to cover your contractual promises and obligations made to your clients. Make sure your insurance policies are designed and will meet the promises you have made, or you will not be in business long should you have an accident .

Case Study of a Job Site Liability Claim.

A worker, while cutting a piece of ribar, safety glasses absent, obtains a piece of debris in his eye. He informs his boss (Masonry sub-contractor), who then informs the site supervisor. The gentlemen is sent to a local hospital to get checked out. The hospital rinses his eye and sends him home. He reports to work the next day, all is right with the world. The incident report is logged into the job's daily activity, but no Notice is given to any liability insurance carrier. Notice was filed with the sub's comp carrier for reimbursement of treatment received. Does this sound familiar? Sounds like the majority of the job sites in the country, accept in the great State of New York, where the story continues due in part to the Labor Law.

Several weeks go by and the workers vision begins to fail incrementally. He mentions nothing to anyone, not wanting to risk his job or wage. Shortly there after he develops a serious eye infection that put's his eye in jeopardy. He is fails to show up for work because he is hospitalized. Several weeks, several surgeries later the worker emerges, informing his employer he will not be returning to work, his is going out on disability, how do we file the claim? The Steel Sub-Contractor notifies his disability carrier, and his comp carrier (again) , updating them on this news. The sub fails to notify the G.C. of this critical update, simply slipping his mind. He also never notified his Liability Carrier. The broker that handles the liability insurance for the sub is different than the broker who handles his worker's comp, again, sound familiar?

Quiet months pass, until the thud-some sound of legal papers being served echos in the offices of both the G.C. and the Steel Sub-contractor. Bewildered first thing they do is call their respective General Liability insurance brokers to deliver the loathsome news. Having received these calls thousands of times myself, the first questions I ask is when did this happen, did you know about it, and is there a paper trail documenting your knowledge? You can actually hear the guy blink on the other end of the phone, then panic starts to creep in. Are you telling me I may not be covered, why I am paying all this insurance premium for?

What transpired was the employee filed suit against both the G.C. and the Sub-Contractor, under the New York State Labor Law , alleging grave injury which this fits the classic definition. Since the Steel sub-contractor signed a hold harmless agreement with the G.C. promising to defend and indemnify him in the event of an employee based suit, the Steel Sub-contractor has a legal obligation to defend the G.C., and if they lose in court, then the Steel Sub-Contractor may be responsible for some or all of the judgement awarded. All of this is fact, and understood at the time the job was awarded. The problem arises because both the Steel Sub-Contractor, as well as the G.C. never gave proper notice to their respective general liability carrier.

Under the terms and conditions of almost every insurance contract there is an obligation by the insured ( G.C. & Sub-Contractor), under each of their respective insurance policies that stipulate you must give the insurance company proper notice of any incident or occurrence, this applies incidentally to additional insureds as well, put that's a whole different topic. This clause protects the insurance company by allowing them to jump on, and procure information quickly on a claim that they may have to defend and litigate at some future point. The longer the time period between when the incident occurred, and when the company was put on Notice, the less chance they will have to build a proper defense. Information, witnesses, and potential material facts become contaminated with the passage of time. I will speak at length about Proper Notice, and the Declination of Coverage in a future post. Suffice it to say, the carrier for the G.C. and the carrier for the Steel Sub in all probability will decline coverage based on improper notice of loss.

The G.C. should have reported to their carrier same day the incident was filed, having no knowledge of where the claim may lead. Although the G.C. is counting on the sub's carrier to step up, you cannot rely solely on that. The G.C. should always use their policy as a safety net. The upside is they can control their financial destiny, in absence of that, their financial destiny is in the hands of a sub contractor. Similarly the sub-contractor, aware of their promise and obligation to the G.C. must always be cognizant that any workers compensation claim may lead to a labor law claim, which will always lead to a liability claim.

In Conclusion: If you are the G.C. there should always be a closing disposition report on any job injury. As part of that closing report there should be a box that states something like "reported to G.L. Carrier" or "Reported to G.L. (General Liability) Broker." This will force your staff to recognize the importance of at least having the conversation with respective to future obligations that may appear from this particular injury. It also forces the G.C to close out , or track any job site injury for a change in condition. Hint, back injuries, and eye injuries are almost always reported to the G.L. carrier.

If you were the Sub-contractor here, be mindful of your contractual obligations, and remember to discuss all Worker's Comp claims with your Construction Liability Advisor. Make it protocol that all C-2 forms ( Workers Comp Claim Forms) are sent to both the Liability Broker and the Comp Broker if they are different. Best advice is to think of all Workers Compensation Claims as potential General Liability claims, handling them with care.

Minimum and Deposit in The Free Trade Zone

I recently had a very interesting case come across my desk for an opinion. The situation was this; a construction company bound their renewal quote with a Licensed & Admitted Insurance Carrier in the State of New York. The carrier Sirius America was operating in the "Free Trade Zone" , which is to say they did not have to use the rates filed with the NY State Insurance Department, however they still needed to meet the minimum standards set forth by the department for both forms and rates. The policy contained a Minimum & Deposit endorsement which is unusual for a Licensed & Admitted New York State Carrier, however because they were operating in the free trade zone, apparently the State let them use the endorsement.

One month into the Sirius America policy the Construction Company was notified of a delay in a project they were awarded. This delay would significantly impact their numbers for the policy period. They allegedly contacted Sirius America and tried to adjust their exposure basis downward. The carrier Sirius America, allegedly denied their request. Eight months into the policy , the Construction Company cancelled their insurance policy and moved to another carrier. Sirius came in promptly and conducted their audit. The result of the audit revealed what the client already knew, their numbers were down significantly from what they initially projected when they bound the policy.

Under normal circumstances with in the friendly confines of the NEW YORK STATE INSURANCE DEPARTMENT, this insured could expect a refund consistent with the actual, not projected exposure base, which in this case was sub contract cost, and payroll. The amount of money due back to this Construction Company was north of $200,000. However instead of a check, they received an audit statement that revealed the insurance company, Sirius America was allegedly keeping the premium. The apparent reason, although it was not specifically stated, was the Minimum & Deposit endorsement on the policy stating unequivocally in endorsement IL 12 01 11 85, " It is understood and agreed that this policy is written on an adjustable basis subject to an annual minimum and deposit premium of _____ . For purposes of this policy, the term minimum and deposit premium shall be defined as follows:

Deposit Premium: That premium which is stated in the policy declarations and payable in full by the insured at inception of the policy.
Minimum Premium: Is the lowest amount for which this insurance will be written for an annual period, (applicable to such classification(s) as indicated on schedule.)

There are a lot of issues we can address here, however for purposes of this discussion I will focus on two. First, please be very careful of the minimum & deposit endorsement. If not managed properly it can cost you plenty. To brush up on the fundamentals of the endorsement, and on how to manage it please click on this link: Managing the Minimum & Deposit Endorsement. The second issue which I will touch on further which is even more interesting, is the endorsement being legally applied?

In an informal opinion issued by the Office of General Counsel on March 27, 2002 representing the position of the New York State Insurance Department regarding the Minimum & Deposit Question " The Department has approved minimum earned premium endorsement filings (which may include an annual minimum and deposit premium endorsement) where the insurer has provided supportable evidence that the minimum earned premium equals the cost associated with issuing the policy. The purpose of allowing minimum earned premium is to permit the insurer to recover the expenses of writing the business should the policy be canceled prior to expiration, or, in the case of an auditable policy, where the audit results in a premium lower than the amount needed to cover the cost of writing the policy. "

As a footnote the Insurance Department for the State of New York understands an " annual minimum & deposit premium to be the premium an insured has to pay as a deposit on the policy, which is also the minimum dollar amount that the insured will be charged as a premium regardless as to whether the policy is written on an auditable basis, or cancelled prior to the expiration date of the policy.

The question at the heart of the matter as I understand it is the following; can Sirius America, a licensed and admitted carrier in the State of New York, operating in the free trade zone, retain more premium, than the auditable exposure permits?

The simple answer may be yes they can, however it cannot be more than the cost of issuing the policy. My initial thought was the company was not properly applying the sprit and intent of the department. By retaining in excess of $200,000 in premium for exposure they didn't have seemed to me excessive. They appear to be broadly applying the endorsement well beyond it's intended use. How can Sirius America assert and justify that it cost them in excess of $200,000 in administrative expenses to issue this policy? As I write this article the strict application of this endorsement is being argued to the State Insurance Department, and perhaps Civil Court. I have to believe wisdom and common sense will prevail, however I have seen it fall both ways.

The fact that this transaction had taken place in the "Free Trade Zone" apparently has no consequence according to this same opinion written by Sally Geisel, Office of General Counsel. " Although the rates and policy forms for insurance written in the "Free Trade Zone" are exempt from filing, an insurer is still bound by the same standards of fairness that are applied to rates that are required to be filed. Comp. Codes R & Regs. tit.11§ 16.5 (1995) states:

The rates applies (SIC) to policies issued pursuant to section 6301 of the Insurance Law shall not be excessive, inadequate, unfairly discriminatory, destructive of competition, detrimental to insurer solvency, or otherwise unreasonable. Each insurer shall maintain in it's files the premium charged for each special risk and the basis of for the rate or premium.

She further states, "Thus, such an insurer may not charge a minimum earned premium that exceeds the cost associated with issuing the policy. Additionally, such insurer may not charge a percentage based (rather than a flat charge) minimum earned premium unless the percentage actually measures the cost associated with issuing the policy. "

In Conclusion :

It is my personal opinion that companies who seek to charge more than the cost of issuing the policy are in direct violation of New York State Insurance Law, when they seek to retain premium instead of issuing proper audit refunds to their construction clients. The impact of the "Free Trade Zone" on the application of the Minimum & Deposit endorsement appears to be negligible. It will take a few cases like this one, and perhaps the Attorney General's Office stepping in to enforce fair and equitable practices, before you see carriers like Sirius America act responsibly. This is why it's so important that the insurance buyer be as informed as they possibly can. Your best strategy is avoidance when at all possible.

For a copy of the Office of General Counsel informal opinion, please email me : mstoop@bncagency.com

The Minimum and Deposit Trap

Imagine guaranteeing the IRS that you will pay at the very least the same taxes you paid last year. If you make more money this year, the IRS will invoice you the additional taxes owed. If you make less money this year, too bad, no tax refund forthcoming. You know the IRS would love that situation, thankfully however that would be illegal, unless of course you are an insurance company.

Since most contractor liability policies are audit-able, the premium you pay in any given year is an estimate, and not a firm number like for example your auto or home insurance policies. Since they are audit-able the "basis" ( i.e. payroll or gross sales) pricing factors are just an estimate for what you think your actual numbers may be in the upcoming policy year. Your true "insurance cost" is determined upon audit, which is conducted typically 3 months after the policy expires. The company sends out an auditor to look at your records, they file a report to your insurance carrier confirming both the class codes used, and the final "basis" numbers. For example if your policy premium was based on an estimated gross sales of $ 1 million dollars, upon audit it is revealed that your actual gross sales came in at $ 1.2 million, the auditor would let the insurance company know that, and they in turn would invoice additional premium to cover the additional "exposure". Anyone involved in Construction knows this drill, it works the same way with Workers Compensation. I thought I would define the audit process to assist in understanding the next and most important point.

In the last several years more and more contractor's liability policies have been written outside the friendly confines of the New York State Insurance Department. If you have one of these policies there are several clues that give it away. First, it should be on the written proposal from your current broker. It should say, "Carrier Not Licensed Nor Admitted In the State of NY". Secondly, you will have signed several acknowledgment forms which state such, one being a "Total Cost Form" which shows all of the taxes and fees charged when doing business with such a carrier. Lastly, and probably the most obvious, there will be a big red stamp on the front of the policy that states "this insurer is not licensed nor admitted in the State of New York". You can also go to this site NY State Authorized Insurance Carriers , and do a search to see if your insurance company is licensed.

I plan on doing a whole article just on the difference between doing business with an "Licensed & Admitted Carrier" , and "Non Licensed and Non Admitted Carrier" , until then suffice it to say be very careful when you are playing with a "Non Licensed and Non Admitted Carrier" , for the simple reason a lot of the consumer protection laws set up by the insurance department to protect you the insurance buyer do not apply. "Caveat Emptor" "let the buyer beware is the rule when you purchase a policy from a "Non-Licesened and Non Admitted Carrier". Minimum & Deposit" is one such example of why you must be very careful.

Minimum & Deposit basically states that irrespective of what your audit reveals, the minimum premium you the insured will be pay is (x), which is usually 100% of the annual quoted premium. Remember my prior example that states if you make less money the IRS doesn't care you still need to pay taxes on the previous years earnings because they were higher? Similar logic with minimum & deposit. If your audit reveal that your gross sales where only $500,000 as opposed to the $ 1 million you projected, you have guaranteed the insurance company that you will pay at the very least insurance premium on $ 1 million of gross sales. In this example not only will you not get a refund, but your insurance cost came in double as a percentage of sales, thus eating into a significant portion of your profit. In this example the percentage of liability insurance cost to gross sales went from 10% to 20% , if the annual premium is assumed to be $100,000.

Managing the Minimum & Deposit Endorsement

It's imperative that you the Construction client are aware of the effects this endorsement can have, and figure out a way to manage it. You can't manage what you don't know.

1) Don't commit to an unrealistic basis. If the policy is based upon gross sales, use only work 80% of work on hand as your basis. Apply the same rule of thumb to sub-contract costs, and or payroll if that is your basis. I offer 80% to give you a 20% spread for margin of error. What happens if you aren't paid timely from one of your owners, and the large check hit's your books after the policy period ended? You will pay for the insurance twice. Once in the prior period where calculated it in your estimate because it's a guaranteed number, and the other in the current period, because it will now be picked up on audit as current revenue, so you will pay premium again.

2) Estimate in your exposure basis only those signed and executed contracts that are guaranteeing a certain revenue flow. One contractor I consulted with used an upcoming job they expected to get in their "estimated exposure basis" or gross sales/sub contractor costs, only to find one month into the new policy the $13 million award did not come thru. The company, Sirius America, refused to lower their "basis" down , thus they were forced to pay premium on revenue they didn't have. Don't count your chickens before they hatch.

3) Try to negotiate the percentage of the "minimum & deposit" down from 100% of estimated exposure, to at the very least 80 %. i find that most carriers will give this concession if you ask for it You don't ask, you don't get.

4) Do a mock 6 month or 8 month audit of your exposure basis to see where you may end the policy year. If you are a head of projections see if it makes sense to hold revenue back. If you are behind projections, to the point you won't hit your minimum& deposit projections, see if you can escalate some of your payments from your owners. Talk to your accountant on some other strategies for hitting your threshold. Some of our clients are working on razor thin margins. A few points here or there can make an enormous difference.

The real goal of this piece is to make Contractor's , and Developers aware of how this endorsement can affect their profitability and results. If it's not managed, it becomes a huge tax!

The Difference Between Additional Insured and Certificate Holder

It’s amazing how few business owners know the distinction between being a Certificate Holder on a vendor or sub contractor’s policy, and being an Additional Insured. There is a clear, and measurable difference between these two Certificate of Insurance functions. I will try and keep it as simple as possible.

Certificate of Insurance simple shows you proof that the “Named Insured” actually has insurance. Think of it as your sub-contractor gets pulled over, you ask him for his insurance I.D. card, (certificate of insurance) proving that he does in fact maintain insurance. That’s all a Certificate Holder really is, someone who is provided proof the sub has insurance.

Additional Insured is a whole different matter. As an “additional insured” you are actually given coverage, and have rights under the sub-contractor’s policy in the event of a future claim. Some carriers will charge the sub-contractor a premium for this privilege because they are actually conferring coverage.

Bottom line Certificate Holder is simply proof of insurance, where as Additional Insured status gives you coverage and rights under your sub-contractors policy.

Technorati Tags: Additional Insured, Certificate Holder

Why am I paying so much for liability insurance ?

One of my favorite phrases remains, "I am always amazed, but I am never surprised". This axiom proves true for many of the construction clients I advised, and for the legislators in Albany that have created this hostile business environment for builders, contractors, and developers thru their refusal to amend, or better yet strike down Labor Law 240 & 241. The Labor Law revisions that were enacted September 10th, 1996 thru the Workers Compensation Reform Act 1996 are really the smoking gun that is responsible for the majority of the liability insurance premium increases that most contractor, developers, and general contractors now must deal with.

What is Labor Law 240 & 241 ? (The Cause)

Essentially it's Albany's gift to trial attorney's, let me explain. According to Phil Larocque, President of New York State Builders Association, "New York State courts, pressed by the trail lawyers and some building trade unions, have interpreted section 240 of the labor law to make the general contractor, builder/developer, and site owner " absolutely liable" for grave employee injuries. NYSBA believes that any worker legitimately injured on the job due to negligence on the part of the builder, contractor, or owner should be compensated accordingly, but the current law does not provide a fair playing field for a builder that is facing a lawsuit."

Technically speaking "grave injury" is defined as : death, permanent and total loss of use or amputation of an arm, leg, hand or foot, loss of multiple fingers, loss of multiple toes, paraplegia or quadriplegia, total and permanent blindness, total and permanent deafness, loss of nose, loss of ear, permanent and severe facial disfigurement, loss of an index finger or an acquired injury to the brain caused by an external physical force resulting in permanent total disability. For more information on a summary of the statutes, see Summary of Critical Labor Law Statutes

By applying "absolute liability" the only question that needs to be resolved for the injured worker, and their attorney is how much money or damages in legal parlance, they will get.The general contractor, developer, and site owner never get the opportunity to defend themselves in a court of law, they are absolutely liable. Most law suit decisions are based upon a " negligence standard" , to determine fault. Once fault, or an apportionment of fault is determined, if any, then damages are awarded based on the degree of injury. What makes this "Absolute Liability Standard" so oppressive is that the other side does not get to argue their case. It's pass go, and collect a large sum of money. Trial attorney's rarely have to go to trial, and when they do it's to get more money than is offered. They do not have to prepare a case for trial, they just collect a large settlement fee for very little effort. It's a money printing mechanism for trial attorney's. Imagine a system where your wife was always right, and you were never able to give your side of the story, you just paid up. Most of you are smiling right now because I just described the vast majority of households, mine included. My wife will never read this, so I am not concerned.

HOW THE LABOR LAW EFFECTS THE COST OF LIABILITY INSURANCE (THE EFFECT)

It took the insurance industry several years to realize that the Workers Compensation Reform Act of 1996, was having a dramatic impact on both the frequency, and severity of the claims they were receiving from their construction clients. C.N.A. in particular was brought to it's knees because they were slow to react to the new environment. The net result was that most all of the insurance carriers who underwrote construction had left the market, which resulted in a classic supply and demand squeeze. The construction market was left with the Inter-Rico program which at the time was Insurance Corp of NY, then Sirius America, and now Everest, and a few others that could charge whatever they wanted in premium, and could get it because there were no other liability carrier options.

Flash forward six years later to 2006, and there are still only a few players, who are giving decent coverage. There is still a supply and demand squeeze going on where the demand exceeds the available product (liability insurance), creating an artificially high market. However there is also a valid question by the insurance carriers about how much to charge for the risk. The law change in 1996 has no historical actuarial basis which would translate into the correct pricing for the risk. Remember the whole science of insurance is based upon actuarial analysis of risk. The law revision changed the whole paradigm from a negligence standard which is fair, equitable, and measurable to an absolute liability standard that does not allow the insurance carriers to defend themselves, and their construction clients, resulting in many claims that would under ordinary circumstances would not be paid. Left with that system in place, the carriers are only guessing how much to charge, (unmeasurable), since this absolute liability system has never occurred before relating to the labor law. Remember it's a simple equation for insurance carriers, gross premiums taken in , subtracted by the gross losses (claims), equal their underwriting profit. The net effect is high prices, which will remain in place unless we can get more insurance carriers to enter the market place. More competition will create pricing pressure, resulting in lower liability rates for the Builder, Developer, and Owner.

IN SUMMARY:

The Workers Compensation Reform Act of 1996 changed the landscape for employee job site injuries, allowing workers to sue for "grave injuries" which were otherwise covered by worker's compensation, to now go outside that Workers Compensation system and into the Tort system. This resulted in law suits and liability claims for vast dollar amounts that were not contemplated in your construction liability insurance rates before. The response by most carriers was to leave the construction marketplace, and focus on underwriting less hazardous classes of business. This confluence of events created a supply and demand vacuum , creating an artificially high market for the remaining carriers that could get any number they wanted. The law change also left in question what rates would allow an acceptable underwriting profit , considering there is no historical actuarial reference point. The net effect is high prices, which will remain in place unless we can get more insurance carriers to enter the market place. More competition will create pricing pressure, resulting in lower liability rates for the Builder, Developer, and Owner.

Be Careful of the Contractual Liability Limitation Endorsement

There is a little known, but widely used endorsement being employed by many of the insurance carriers who are underwriting, both the Sub-Contractors, and G.C./ Developers. The form number is " CG 21 39 10 93" "Contractual Liability Limitation". The effect of this endorsement is that it essentially omits critical coverage from the Definition of Insured Contract, by eliminating Item (F) "Other Business Contracts". The insurance policy's contractual liability would respond to other categories of an insured contract such as leases, sidetrack agreements, easements, municipal indemnity required by ordinance, elevator maintenance agreements, but not to other indemnity agreements pertaining to the named insured's business, namely "Hold Harmless Agreements".

If you are a General Contractor and / or Developer, you need your project managers to watch to see if the sub-contractor's policy contains this endorsement. The reason is you want their insurance policy to respond to the written contractual obligation you both had agreed to prior to the commencement of the job. In absence of this endorsement, there will be no capital to re-imburse you the G.C. or Developer for the loss. The result, your policy will pick up the claim, which will hurt you significantly when you go begin to negotiate your renewal. The only way you will know this is through ordering a copy of both the declarations page of their current policy, which should include a full listing of all the "Forms and Endorsements" contained on their policy. A simple Certificate of Insurance will not show this important information.

Another suggestion for the Project Manager would be to insist that all certificates contain the following passage in the "Remarks" section on the Certificate.

" The issuing Agent/Broker warrants that the general policy for this Named Insured Listed on this Certificate contains the following endorsements CG 24 26 (07/04) Amendment of Insured Contract Definition, and the Additional Insured Endorsement is CG 20 37 (07/04) which will provide additional insured status for "Completed Operations" as well as "Your Work"."

Please note if you are an Architect, Engineer, or surveyor, CG 24 26 (07/04) will not work for you. Those professions are specifically excluded under that endorsement. If you would like to know what endorsement to use for your profession, contact me directly or reference Arthur O'Leary's fabulous article written specifically for Architects. The link to his article is: Mysteries of Construction Insurance. He's a fabulous resource for Architects.