Construction Insurance Bulletin

There are several ways for contractors and subcontractors to allocate the risks of damage on job sites to subcontractors. Constructing a contract that requires subcontractors obtain insurance is one of the best risk management strategies. The subcontractor’s coverage should also include the contractor or higher subcontractor as an insured party. With this option, contractors have the same rights as policy holders under Commercial General Liability policies. Both the hiring contractor and the party purchasing the policy have the same rights and coverage provisions. By requiring this coverage for subcontractors, general contractors are able to prevent paying for the expensive legal fees arising from damages on a job site.

When a subcontractor’s employee is injured on the job, the subcontractor usually tries to sue the higher tier subcontractor or general contractor to cover damages. The hiring party then faces the expenses of court costs, legal fees, damages and lost salary for the injured worker. However, a hiring party that requires all subcontracted parties to have CGL insurance naming them as additional insured parties has protection from such financial burdens. In some cases, the CGL policy is primary to any others. This means that CGL policies naming the hiring contractor as an additional insured party must be the first to pay legal fees and damages.

With these policies, there are no requirements for subcontractors to ask for indemnification for loss claims as a condition for the hiring party’s coverage. There is also no need for determining the faults of each party involved. Having a subcontract that requires subcontractors to provide adequate insurance is enough. The simple requirement of the policy to pay for legal fees is one of the most advantageous aspects of this coverage. Another advantage is that the scope of coverage is broad. Insurance companies must pay for attorneys’ fees whenever there are allegations of a complaint. Although the insurance company may not be required to pay all damages claimed by an injured worker, they have a strong duty of defense.

Most contractors carry General Liability insurance policies. However, very few understand the need for additional comprehensive Errors and Omissions coverage. To protect themselves from the costly results of unintentional work errors, contractors must have E&O insurance. There are several important issues to consider about this type of coverage.

Contractors are prone to errors and omissions claims. The business risks they face on a daily basis can include unintentional damage to the insured party, impairment of property, damage to products or a wide variety of other damages. Since most courts are quick to rule against contractors in these types of claims, they are much more vulnerable to trouble. Although many individuals view this coverage as unnecessary, it is important to remember that a simple Liability policy does not offer coverage for damages due to errors and omissions. This means that contractors are financially responsible for the costs resulting from client claims. Keep in mind that only E&O coverage offers protection to contractors who face these issues.

Always choose insurance companies that have experience with contractors. It is important to work only with companies that have a solid history of E&O practices specifically with contractors. Policies designed for contractors have special clauses and inclusions that are not found in other E&O policies. The best practice is to avoid relying on coverage titles, and carefully review the document’s provisions. Although every contractor benefits from this special coverage, it is especially important for those who work on design build projects or in construction management. A contractor’s E&O document is written as a claims-made form, which means that it covers omissions and errors occurring during the policy’s period. Incidents occurring prior to the enactment of the policy are not covered.

Carefully read the fine print of the policy. E&O insurance for contractors often has stipulations limiting the coverage capacity named in the policy. This emphasizes the importance of purchasing a policy that is designed to specifically describe the various types of coverage provided. Keep in mind that coverage does not include damages caused by subcontractors. For this reason, general contractors should always hire subcontractors with steady records of quality work. Paying the price for substandard work performed by others is always costly. In addition to being fully aware of what policies provide, contractors must specify their desired coverage. It is important to remember that not all E&O policies offer coverage for legal expenses.

Although all contractors makes mistakes, only those who properly protect themselves are able to recover. Susceptibility to legal action and the high risk of claims are two issues every contractor should keep in mind. Litigation can be costly, so having a solid E&O policy provides security.

Construction firms must have a financial plan in order to keep up with competition, capture surety support and grow through partnership. In today’s market, it is crucial to perfect this strategy as quickly as possible. This is especially true because of the large number of requests for proposals designed to benefit small businesses. However, these RFPs come with risks. Steep liquidated damages and consequential damages leave small businesses with no choice other than blending with larger businesses to maximize surety support.

To guarantee the bonding they need, construction firms must adopt several best practices. The following are some examples of essential best practices:

• Establishing a continuity plan that is funded by Life insurance.
• Keeping a certified public accountant who is construction oriented.
• Using job-cost accounting software to track data for financial statements.
• Maintaining ample insurance coverage.

By using these practices, construction firms can increase their surety support and company respect. In addition to the surety, this idea also applies to any team partner.

Importance of a Construction-Oriented CPA. These certified public accountants are able to provide valuable insight into a field that has an extremely difficult pre-qualification process for surety bonding. In addition to their insight, CPAs can assist in a financial statement’s required accrual-based percentage. They also know who the key players are, and they always provide helpful information about the negative effects of profit fade for contractors. Since profit fade is a detriment to sureties, contractors must submit CPA-created financial statements for jobs exceeding $350,000. Approval is based on personal credit. There are varying rules for large projects and small businesses. To learn more about these rules, discuss them with us.

Working with a Stronger Contractor. Bond capacity is the amount of work a contractor can finance at one time. This number is the amount required to complete all un-bonded and bonded jobs. Sureties typically offer bonding credit up to one and a half times the amount of the largest completed job, and they usually offer about 20 times the working capital as capacity. This is because general contractors typically finance very little of their total workload. Subcontractors are normally offered about 10 times the working capital for sureties. However, there are exceptions. An escrow agent controls the funds from projects. He or she receives the funds from the owner, pays the suppliers, pays the subcontractors and then pays the prime contractor. There are special rules for indemnification and joint ventures.

The SBA Bond Guarantee Program. This is an alternative surety option available to contractors. It is designed to establish small business contractors’ bonding credit by guaranteeing up to 90 percent of the bonded risk. In order to participate in this program, small businesses do not have to participate in the SBA’s small disadvantaged programs or 8(a). There are two different plan categories. Plan B is for corporate sureties that are maintaining, underwriting and approving bonds on behalf of the SBA. Plan A includes bond accounts that are submitted to both the SBA and corporate surety for approval. To learn about the advantages and disadvantages for small or large businesses, discuss them with an agent. Since the SBA’s program might change, it is important to learn the up-to-date information from our office.

Managing design-build risk for any entity is something that requires careful consideration. There are many differences between design-bid-build projects and design-build projects. One of the most prominent differences is insurance coverage. In both types of projects, all parties share goals and have individual concerns. Since contractual relationships in these two types of projects vary, so do the methods of balancing risks.

Understanding Liability Concerns. If a problem arises when the owner has separate contracts with the designer and constructor, it is easier to distinguish whether the problem is a design flaw or a construction mistake. However, the law has a statute of limitations for design errors and building functionality. Both types of issues can result in messy and complicated lawsuits as time passes. For example, if a building experiences air quality problems two years after its construction, the cause of the problem could be shared by two or more parties involved in its design, construction and maintenance. When these issues turn into insurance claims, the parties involved often realize that their coverage is inadequate. Since insurance for these projects has changed in the past decade, the need for evaluation is crucial. Discuss the new changes, insurance requirements and helpful suggestions with an agent.

How to Solve Insurance Deficiencies. For those who are relying on General Liability coverage, it is essential to have modifications made to the policy. For example, companies that perform design-build work should add the design-build rider or the means and methods rider. Adding a rider closes the deficiency gap for liability coverage in a general policy. Another beneficial addition for design builders is Contractor’s Pollution Liability with a fungus inclusion. This affords protection from mold that results from damages. Another option instead of the combination of CPL and CGL riders is a Contractor’s Protective Professional and Indemnity policy, which is commonly called a CPPI. This type of product includes pollution and professional liability. Since the individual options are complicated, please discuss them with one of our agents. To get a clearer picture of what should be done to enjoy the strongest protection, consider the following liability tips:

• Make sure the policy includes errors and omissions, which is layered as excess over the E&O coverage for architects.
• Study the rules for the extended reporting period.
• Ensure the policy period meets the project’s requirements.
• Carefully examine the terms, conditions and exclusions of the policy.
• Make sure the claim notification procedures are understood.
• Instead of asking for only a certificate of insurance from contractors and sub-contractors, ask to see the policy itself.

Importance of Bonding. Many people in design building misunderstand bonding. Surety bonds are made between the surety and contractor to benefit the owner. They are classified as a credit instrument. While they are meant to benefit owners, brokers usually sell them. Owners should always ask for a total performance bond in any design-build project. If they are not requested, many types of unintended consequences can produce a messy situation. It is important to ensure that the design builder purchases surety products that include the contract’s entire cost. To learn all of the insurance issues for an individual project or company, discuss them with one of our agents.

Planning Construction projects such as roads, industrial structures, stadiums, bridges, homes and various commercial buildings bring the need for a quality assurance process. Since even a tiny defect or flaw in any of these construction projects can have dangerous effects, it is imperative to develop a plan before construction begins. It is also necessary to monitor the quality assurance plan’s effectiveness throughout the span of the project. The cost of implementing a good quality assurance program is small in comparison with the possible large amount of money required to deal with the effects of lapses, defects and flaws. To better understand what a quality assurance plan in construction should include, consider the following steps.

1. Define Requirements. This should always be the first step. To accomplish this task, determine what the needs of the customer are. Listen carefully to the customer, and rephrase ideas to ensure their needs are fully understood. The structural designs of the project should be determined by the customer’s specific needs. In the design phase, it is also important to decide on types of material to use. Define the standards for the structure’s construction to determine what components must be included in the quality assurance process. It is also important to consider surrounding factors. For example, the soil and construction site must undergo several tests to check climatic conditions. All parties involved must be certain to comply with any environmental protection laws. By considering these laws during this first phase, it is easier to incorporate them into the decision of materials and design planning. Keep in mind that the site should not pose a pollution threat to bodies of water nearby. Sound pollution must also be minimal, and it should not cause inconvenience to people who live nearby.

2. Material Requirements. After the initial project requirements have been defined, it is necessary to list all of the materials and supplies that will be used. Be sure to include their respective specifications. Note any brand requests, and add reminders for materials that must be certified. All of these details are necessary to ensure that the chosen materials match the quality and design needs for the project.

3. Planning. Once the material planning is finished, start developing a plan for the task’s completion. This plan should clearly outline the workflow. Invite several tenders to obtain the building material and supplies. During this process, document each step for future reference.

4. Material Testing. It is imperative to test the materials before using them. During this process, third parties or internal laboratories test the composition of the chosen materials. Whether private or internal labs are used, a uniform set of work quality standards from various institutes dictate decisions. Issues such as steel’s tensile strength or the compression strength of bricks are tested. Based on the results of tests or trials, the chosen materials will be approved or disapproved.

5. During Construction. In this final step, quality assurance is measured throughout the construction process. Supervisors must ensure that all standards outlined in the previous steps are upheld. Several different quality assurance measures should be taken to reduce the likelihood of any breaches. Supervisors must also check workmanship quality and conformance. With the help of external and internal audits, quality checks are stronger. If quality control supervisors find any components to be below the set standards, they must determine the cause. After this, they must develop a rework plan to fix the issue.

Since the cost of rework is very high, quality assurance should never be neglected. In addition to this, the liability issues connected with poor design quality can be detrimental to a company’s budget and reputation.

The materials that a contractor brings to a job site are subject to numerous perils in a variety of locations. The contractor might take delivery of them at his main location and store them for a period of time. At some point, he will transport them to a job site where they may again sit in storage. Finally, he will cut, drill, weld, or otherwise process the materials until they become a finished part of the building. During all of these stages, the materials might suffer damage by fire, theft, flooding, or even damage in a traffic accident during transport to the job site.

Commercial Property insurance policies do not cover materials once they have been moved off of the business’s premises, and they provide little coverage for materials while in transit. To insure property that moves around, the contractor needs an Inland Marine policy, which is a policy that covers property that can easily move from one location to another. The Inland Marine policy that covers materials a contractor will install in a building is called an installation floater.

Contractors might be familiar with a similar policy known as a Builders’ Risk policy. A Builders’ Risk policy insures an entire structure during the process of its construction. The structure’s owner or the general contractor in charge of the job might purchase this policy. An Installation Floater, while similar in coverage, insures only a specific type of property during the construction, such as the plumbing or electrical systems. Subcontractors, who ordinarily have a limited scope of work on the job, purchase Installation Floaters.

An Installation Floater policy insures property used in a construction project. Although the actual policy form will vary from one insurance company to another, it will typically cover materials, equipment, machinery and supplies owned by the contractor or for which he has responsibility. The property must be used in or incidental to the fabrication, erection or construction project described in the policy. One single amount of insurance applies to the property; the limit should be the highest value for that type of property during the job. When insurance companies establish the premium for these policies, they take into account that the value of the property will start out small and increase as the job progresses. For example, if a boiler installation contractor buys an Installation Floater with a $500,000 insurance limit, the company will adjust the premium to recognize that, for most of the project, $500,000 worth of boilers and related equipment and supplies will not be there.

Installation Floaters cover all causes of loss other than those specifically listed in the policy. They cover losses caused by fire, lightning, theft, explosion, and several other perils. Typical policies do not cover losses caused by extreme events like earthquakes and floods, but some companies will consider adding these coverages for an additional premium. Most policies will also exclude damage that occurs during testing of a building component or system (for example, testing of compressors). Some companies might consider adding this coverage as well, depending on the type of property and the nature of the testing.

Beside the policy’s expiration, several other events might cause coverage to cease. Coverage ceases when the purchaser accepts the work, when the contractor’s ownership interest in the property ends, if he abandons the project, or within a stated number of days after he finishes work.

Because every Installation Floater policy is different, contractors should carefully review their policies. They should discuss any deficiencies or confusing provisions with their insurance agents. Construction contracts often require this coverage, so it is vital for a contractor to make sure he has the proper coverage.

When an individual or business buys property insurance, the primary concern is normally the replacement of the building if a fire completely destroys it. However, in many losses, a portion of the building escapes damage or machinery and equipment might be salvageable. In these situations, the policyholder and the insurance company must decide whether to repair the property or replace it altogether. The policy ordinarily states that the company will do whichever costs less. However, the answer to which costs less can become a gray area, complicated by several factors.

In some situations, the policyholder might want the property replaced, rather than repaired. For example, the business may want to replace equipment because repairing it would void the warranty. It may want to replace damaged products because buyers will be reluctant to purchase refurbished ones. The business may also fear an increased likelihood of product liability claims from these goods.

In some instances, there might be doubt as to whether repair will be less expensive than replacement. Old buildings, especially dwellings that have been converted to commercial use, might have been constructed with materials no longer in common use, such as plaster and lathe. Also, some types of machinery and equipment might be less expensive to replace because the price of a new unit has decreased, but the new unit may lack some features that the business needs.

Local laws or building codes may also affect the decision. Municipal governments often require a building to be torn down if more than a specified percentage of it needs repair, forcing the owner to replace it.

The age of the property or its components is also a factor. In the case of computer equipment, which tends to decline in price over time, replacement might well be the less expensive option. The answer may not be as clear for other types of property, such as construction equipment (assuming the policy covers such equipment for replacement cost.) A 15-year-old bulldozer that suffered damage in a rollover may be repairable, but it may also be near the end of its useful life. The same may be true of the electrical system in a 30 year-old building; perhaps only 20% of the wiring suffered damage, but it might be less expensive (and better loss prevention) to update the entire system.

Finally, buildings constructed decades ago may have architectural features, such as gables, atriums, or balconies, which are not important to the owners. Replacing the building with one lacking these features may cost less than repair.

If the policy provides Business Income or Extra Expense coverage, the company must weigh the impact of the repair/replace decision on them. For example, assume that fire has destroyed 60% of a building, forcing the business to shut down. Replacing the building with a similar one in a location ten miles away will cost 50% more than repairs would, but the business could resume operations there in three months, as opposed to a six-month shutdown if the building is repaired. When the company considers all of the applicable coverages, it may well find that replacement is the less expensive option.

Ultimately, the policyholder must negotiate the repair/replace issue with the insurance company. A business owner who is unhappy with the company’s proposed settlement should follow the steps listed in the policy for contesting it. The firm’s insurance agent can be a valuable ally at claim time, as she is familiar with the process and may be able to intervene on the firm’s behalf. Working together, all parties should be able to decide on an approach that quickly gets the business back to normal.

Employees being supervised in their work activities is an inherent element in most all employer-employee relationships. Effective supervision is a vital component in ensuring employees is completing the right work, the right way, and at the right time to make a business’s operations as efficient and profitable as possible.

Employee supervision is also necessary to discourage employees from saying things that could harm the reputation of a business, result in legal liability for a business, or reveal a business’s trade secrets. Of course, such threats are more present and concerning than ever in today’s world of advanced communication technology. It’s no longer just a question of whether or not an employee will say something inappropriate over the office phone, but rather how they use an array of work-related communication technologies such as cell phones, email accounts, and Internet browsers. As a result, many employers have turned to technology as a new means to monitor the activities of their employees.

Many employers have started to monitor the phone conversations conducted by their employees, which is usually allowed by state and federal laws for the purpose of quality control in regards to conversations between an employee and a client. Keep in mind that some states require businesses to give advanced notice to all parties involved in a call that’s being monitored. Federal law, on the other hand, allows business calls to be monitored without such advanced notice, but does require an employer to quit listening if and when they realize it’s a personal call. If a phone is designated and labeled specifically for business use only, then an employer can generally monitor calls of any nature. Additionally, employers can legally obtain a listing of every phone number dialed from a particular phone/extension and the length of the calls. Even when advanced notification isn’t required legally, employers might find doing so helpful in thwarting inappropriate communications proactively.

According to the Electronic Communications Privacy Act of 1986, employers are allowed to monitor employee e-mails when an employee provides consent, the e-mail is related to the normal course of business, and/or the e-mails are stored within an in-house network computer. The keystrokes made on an employee’s computer can even be monitored to determine how much and what type of text an employee produces.

The courts routinely have upheld an employer’s right to monitor their computer systems. For example, the court ruled against a CIA employee who downloaded pornographic material and violated the CIA’s Internet use policy. Another court ruled that there wasn’t a reasonable expectation of e-mail message privacy in a case where an employee described his management using derogatory and profane language in an e-mail.

Legal experts recommend that employers planning to monitor e-mail and Internet activity create a comprehensive, clear employee Internet and email use policy with the assistance of their legal counsel. Be sure to take the following steps:

• The policy should clearly state Internet use rules, such as the types of files that can/can’t be downloaded and the types of Internet sites that should/shouldn’t be visited, and the disciplinary actions for offenses.
• The policy should clearly state that employee communications on the employer’s computer system aren’t private and are subject to being monitored.
• Use the policy to inform employees how long computer files will be stored and deleted.
• Require employees to sign a copy of the policy before providing them with access to the system.
• Post the key points of the policy on each computer’s login screen.

Employers should keep in mind that, despite the above precautions and legal monitoring rights, an invasion of privacy lawsuit by an employee is still a possibility. Many employers purchase employment practices liability insurance to protect their financial well-being and cover the costs of litigation and unfavorable judgments.

Employers need to keep a vigilant eye on their employees, but that doesn’t mean violating an employee’s rights during the process. Avoid a lot of undue risk by using technology to your advantage, having a clear Internet and e-mail use policy, and an employment practices liability policy.

Small construction businesses require several of the same types of insurance coverage that larger businesses need. In addition to this, there are types of coverage available that are specific to the construction industry.

Property Coverage
Property insurance might be needed to provide coverage for any real property owned by the company. This coverage might also be needed to cover any personal property that is used for the business. The largest amount of property loss could involve equipment that is taken to varying sites and valuable machinery. Standard property insurance doesn’t provide coverage for such items. It’s necessary to purchase floaters from contract insurers for such items. Speak with our agents to learn what types of floaters are available and to determine which ones are the best choice for an individual business. It’s important to keep in mind that a building has a value that increases steadily as it’s being constructed. In order to ensure that it is covered properly, it’s best to purchase a special policy. This policy is called Builders Risk Insurance.

Liability Coverage
Every small business needs liability coverage. In today’s litigious world, nearly anyone can file a claim stating that they were injured by or at a specific business. Since this is common, it’s important to be prepared to face such a situation by purchasing a good liability policy. Some small construction businesses might want to have their subcontractors purchase Owners and Contractors Protective Liability Coverage, which is also called OCP. This type of insurance covers a business owner or business property owner from liability resulting from negligence of their independent contractors or subcontractors. The subcontractor or contractor is the actual purchaser of this policy. However, the benefits and protection are credited to the business owner or business property owner for whom the contractor agrees to work.

Business Vehicle Coverage
Personal car insurance policies often cover some business use of a vehicle. However, if the vehicle is used primarily for business, it’s unlikely that a personal auto policy will provide the same coverage. The policy will never provide coverage for a vehicle that is owned by a business. It’s important to have business vehicles insured with a policy that is specific for businesses. If a personal vehicle is involved in an accident resulting in injuries to others while being used for business, the injured parties can sue the insured individual personally. However, most policies don’t provide enough coverage to compensate in such a situation. Contact us to determine what amounts should be purchased for an individual business.

Plumbers, electricians, carpenters, tree surgeons and roofers who perform skilled work on a customer’s premises are just a few examples of artisan contractors. These workers are also called casual contractors. Piano tuners, interior decorators, exterminators and other skilled service providers are also considered artisan contractors. These contractors require special insurance for their tools and equipment, which are commonly moved from one site to another until each job is finished. The most affordable and efficient way for an artisan contractor to get liability and property coverage is to obtain a Business Owners Policy that is tailored to fit individual needs. Although they might be marketed under varying names, such policies usually have similar terms.

Property owned by the business and real property are covered by the BOP. The property must be located at the address of the business described in the policy. Businesses that lease or rent their locations have coverage from the BOP for tenants’ betterments and improvements. These include any installations, additions or alterations that cannot legally be taken away from the premises. Equipment that moves from one site to another and valuable machinery are items that pose the greatest risk for a significant loss. Such items are not covered under a standard property insurance policy. These items are classified as movable property, which means special contracts are required to obtain insurance. These special contracts are called floaters.

Various types of equipment and machinery are covered during transit with an installer’s floater. They’re also covered during testing. In some cases, building materials might also be covered. Policies may be written to include coverage on a reporting form or for a single job. This means that the contractor provides information to the insurer regarding each new contract. Tools and equipment floaters provide coverage for the property that is insured. Coverage is extended to any location where the movable property is used.

Liability coverage is essential for all contractors. If a customer files a lawsuit, this type of coverage will certainly be required to protect the contractor. Subcontractors’ customers might require individuals who work for them to have Owners and Contractors Protective Liability insurance. This type of coverage provides protection for business owners from liabilities resulting from negligent acts committed by contractors or subcontractors. It’s best to speak with one of our agents to learn how this type of coverage works. There might also be coverage for certain vehicles. Speak with us to learn what types of coverage are available for vehicles that are used primarily for business.