Posted by: Steve Hilger On: 30th November 2010 | no responses.

By Stephen A. Hilger

The 2010 construction risk conference put on by the International Risk Management Institute, Inc., or “IRMI” took place on Monday, November 15 through Thursday, November 18, 2010 in Orlando, Florida.  Here are some takeaway thoughts and impressions from some of the various programs:

Green Building Risk Management

• The Green market was between 10% and 12% of non-residential construction starts in 2008 and it is predicted to rise to 20% to 25% by 2013.  This is a market share of about $1.75 trillion.
• Some of the biggest problems with regard to Green construction are overpromising results by the sales force.  Another problem is the raising of the standard of care, that sales may be generated based upon company statistics which are not necessarily proven, as well as claims regarding expected credits and costs which can only be developed during the initial or early design process.
• One of the problems with Green construction is that the parties do not have a contract with a third party providing the certification process.  Since they are the parties establishing or testing the building performance, their standards may be different than what everybody sitting at the table thought.  In addition, the timing of the actual certification process may be somewhat subjective.
• There are also various insurance considerations with Green construction, including the providing of errors and omissions coverage, the providing of builder’s risk coverage, and the providing of general liability insurance.
• Some special considerations for Green construction include the contract format itself, a definition of the scope of work, defining the schedule including substantial completion as well as liquidated damages, identifying the costs, specific responsibility for the indemnity requirements, all of the insurance issues, liability of bonding companies for lack of certification, as well as the warranty provisions.

Insurance Wrap-Up Issues

One of the sessions dealt with digging deeper into insurance wrap-up issues.  Some of the walkaway points from those discussions include:

• The number of insurance companies actually providing CIP programs is probably less than 10.

• There are a number of new laws and regulations emerging in some states specifically designed to deal with wrap-up programs, including New York, California, Kansas, and Texas.

• The tug of war in the CIP process is that the sponsor does not want to give away too much and the participants do not want to lose too much.  Another problem deals with the fact that CIP manuals are typically not “construction documents.”  If there is a problem on a construction project, this could complicate the issues.

• Oftentimes when contract documents are prepared, a CIP is inserted into the contract documents as a placeholder.  Since the CIP documents are not prepared until after construction commences, the obligations contained within the CIP manual and the CIP policy have never been agreed to between the parties.  These programs are therefore not available at bid time and so a lot of parties do not know exactly what coverage or protection they are being afforded.

• The typical questions to ask in a CIP program are who pays for it, who is protected, where does the CIP apply, when does the CIP apply and when does it not apply, how much coverage is available, and when does the coverage apply?

• In addition, with a CIP program, the self-insured retentions need to be identified versus the deductibles and who is responsible for the deductibles.  Any stake holder needs to have a clear understanding of the mechanics and expectations of the wrap-up program at the outset of the project.

• All of the participants in the CIP program likewise need to have a clear understanding as to who the excluded parties are.  Commonly excluded parties would involve vendors, suppliers, material dealers, delivery companies and designers and engineers.  Less commonly excluded would be abatement or hazardous waste contractors, blasting, manufacturers and fabricators, or anyone who does not have a dedicated payroll for onsite work.

• The utilization of additional insureds endorsements on CIP programs likewise creates a series of complications.

• You should also make sure that you completely understand where the wrap-up applies, particularly whether it includes the project site or a designated premises.

• You also need to know whether the CIP applies to preconstruction activities.

• You should always get a qualified insurance representative to flyspeck the CIP manual.

• There needs to be continuity in all of the contract documents relative to insurance procurement in order for the parties to be contractually obligated to participate in the CIP program.

Information Relating to Additional Insured Coverage

There was a program dealing with the changing terrain of additional insurance coverage.  Here are some of the points raised during the course of the program:

• You need to remember that insurance policies are not the contract documents which relate to the parties on the project.  Only recently have contract documents begun to incorporate the insurance policies by reference, and vice versa.

• When you have a contract provision that requires another party to name you as an “additional insured,” you may be assuming that you are getting full coverage.  However, the additional insured endorsements these days are varying widely.  Some of the endorsements are providing very limited additional insured coverage while others are very broad in scope.  You need to put into your contracts the scope of the additional insured endorsement.  Otherwise, you might find that you have less additional insured coverage than you anticipated.

• You also need to evaluate the additional insured requirements in connection with anti-indemnity statutes.  To date, Colorado, Kansas, Montana, New Mexico and Oregon all have anti-indemnity statutes which could have a material impact.

• When considering the additional insured language in the contract, you should include a waiver of claim in addition to the waiver of subrogation.

• On additional insured status, you need to make sure that the named insured will not eat up all the coverage so that there is nothing left for the additional insured.

• You also want to prepare your contracts in a way that there is “vertical exhaustion” of the additional insured’s policies.  This would mean that the additional insured’s primary insurance would cover first followed by the additional insured’s excess insurance before the additional insured’s corporate primary insurance or corporate excess insurance.

If you have any questions, please call us at Hilger Hammond, 49 Monroe Center NW, Suite 200, Grand Rapids, Michigan  49503.  (616) 458-3600.  www.hilgerhammond.com

Posted by: Hilger Hammond On: 2nd November 2010 | no responses.

…For Non-Disclosure of Material Information

By Benjamin Hammond

In Los Angeles Unified School District v Great American Insurance Company, the California Supreme Court held that a public entity owner can be required to pay additional compensation if it fails to disclose material facts which affect a contractor’s bid.

The Los Angeles Unified School District was forced to find a replacement contractor after the original contractor failed to meet certain requirements of the contract. As part of the re-bidding process, the District provided the original plans and specifications as well as a punch-list of items detailing necessary corrections. The replacement contractor was also required to correct any unlisted defects in any existing work performed by the original contractor.

The winning bid came in at a cost not to exceed $4.5 million, but as the replacement contractor delved into the repairs, it found additional deficiencies that would need to be corrected and were not previously disclosed. For example, a punch-list item to repair a few floor tiles led to the reinstallation of all tile. The contractor submitted the extra costs, totaling approximately $2.8 million, which led to litigation to determine who would bear the extra cost – the owner or the contractor.

The Court stated that, in certain circumstances, a contractor may be entitled to additional compensation for a public entity’s non-disclosure where:

a)    The contractor submitted its bid or undertook to perform work without material information that affected performance costs;

b)    The public entity was in possession of information and was aware the contractor had no knowledge or reason to seek it out;

c)    Contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; or

d)    The public entity failed to provide relevant background information.

This legal doctrine, known as the “superior knowledge doctrine”, was previously adopted by the United States Supreme Court and allows relief in cases where a public entity owner is aware of material information, but fails to disclose that information to the bidding contractor. The superior knowledge doctrine requires public entities to provide accurate plans and specifications, but they are not required to disclose information that the contractor should have discovered through due diligence.

Concern that public entities will now be exposed to more claims as a result of this decision was tempered by the Court, which stated that nondisclosure is only actionable on a limited basis and when the information materially affects the cost of performance.