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Insurance isn’t a checkbox!


On numerous occasions over the years, I’ve seen bid teams treat the insurance and performance security clauses in a contract as a “checkbox”—not recognizing that a broad range of risks are transferred into these policies.

In several instances, the bid teams were struggling to manage a particular risk on the job. Had they actually understood the underlying policies the project was purchasing, they would have realized that the risk event in question was a covered peril.

Covers today are very comprehensive and a granular understanding of them—and how each manages key project risks— can help ensure that your team’s bid is the winning one. What’s more, your team will carry the job out to plan, even in the face of a risk event affecting the project.

So among insurance policies, what are the usual suspects involved in managing risk on today’s projects?

Builders Risk Insurance (a.k.a. Course of Construction Insurance) provides coverage for both contractors and owners on property that is under construction or renovation. It can include coverage for an existing structure, delay in start-up and soft costs in the event an insured peril impacts the job site.

Wrap-Up General Liability Insurance is project-specific liability coverage issued to protect both the contractors’ and owners’ interests, both during the construction period and into the completed operations for a set period of time.

Professional Liability Insurance provides coverage for liability arising out of professional services rendered on a project—usually, but not exclusively, design services rendered. This is specialized and specific liability coverage, since professional services are excluded from both Commercial General Liability and Wrap-Up Liability policies.

Pollution Liability Insurance provides coverage for liability arising out of a pollution event on the project from its migration onto or through the project. Coverage can be purchased on a practice or project basis. Again, this is a specialized and specific liability coverage, as pollution is excluded from both Commercial General Liability and Wrap-Up Liability policies.

General Insurance Policies of the contractors come into play, depending on the requirements of the contract. If a Wrap- Up policy is not contractually required, then it is vital that each contractor and/or subcontractor on the project be required to provide evidence of general liability insurance, subject to prescribed terms and conditions.

Surety Bonds are security held by the Obligee on the bond. This can be the owner, the general contractor or the subcontractors, depending on who’s giving the bond to whom as performance security. It ensures the principal’s performance of the duties required within a specific contract. The trigger of a claim is default, as accepted by the surety company.

Contractor Default Insurance or Subguard is security usually held by the general contractor on the project to insure against subcontractor default.

There are also a few exotic covers that are available, but we’ll save those for another column.

Some companies have lost good construction projects, because they didn’t fully understand the coverage in place. In one situation, a mechanical/electrical contractor was working on a negotiated-price project to build a power plant. The contractor was looking at a multi-million dollar contingency, to manage the risk of a turbine being damaged and the costs associated with delay of getting a replacement turbine. The contractor did not realize that the builders-risk insurance placed on the project provided sufficient limits to cover off the delay costs associated with getting a new turbine into the project. Upon finding out cover existed, the contingency being put forward was withdrawn.

In another case, the contractors bidding a project raised concern with the owner over unknown pollution conditions that were either on site or on an adjacent site during the RFP phase. The environmental reports provided indicated that the site was fine, but the bidders had concerns with potential hydrocarbon risk, given certain businesses that existed near the site. The pollution insurer agreed to cover unforeseen conditions upon review of the report, and all bidders reduced the contingency they were carrying given this cover.

The covers have been expanded—and continue to be expanded—to suit the specific needs of the marketplace. Ensure that you and the people in your company are aware of all solutions available to manage risk on a project and ensure that you have access to advisors that can communicate these covers with clarity.

By David Bowcot, 2009

Published with permission of On-Site Magazine

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