Construction Insurance Bulletin

Most construction projects involve written contracts. A contractor signs a contract with the project owner, with the general contractor, or with a subcontractor on the project. The contract normally spells out the obligations of the contractor regarding, among other things, the insurance the contractor must carry and liability that he will assume. Construction contracts often contain “indemnification” agreements under which the contractor agrees to assume some of the owner’s or general contractor’s liability for accidents that occur during the project. Should something happen, will the contractor’s General Liability insurance policy pay for the damages he assumed?

The policy is probably similar to the Insurance Services Office’s Commercial General Liability Coverage Form. This form covers the injury or damage for which the insured is liable because he assumed liability in an “insured contract” executed prior to the accident. It also covers attorney fees and other litigation expenses to defend the owner or GC if the contractor agreed to assume those costs in the contract. By an insured contract, the form means:

• A lease of premises
• A sidetrack agreement with a railroad
• An easement or license agreement
• An indemnification agreement with a municipality
• An elevator maintenance agreement
• Other business contracts

Contractors are mainly concerned with these “other” business contracts, as construction contracts fall into this category. The general liability form covers the tort liability of one party assumed by another. This means that, for coverage to apply, the first party must have some legal responsibility for injury or damage suffered by someone else.

For example, assume GC hires SC to run the cabling in an office building GC is constructing. GC and SC sign a contract in which SC agrees to assume GC’s liability for injuries and damage SC may cause during the project. One of SC’s employees trips over a toolbox that was resting on a ladder, and the falling tools injure an employee of another contractor on the job. The injured employee sues both GC and SC for medical costs and pain and suffering. Because SC agreed to assume GC’s liability for injury or damage suffered by a third party (GC’s tort liability), the contract qualifies as an insured contract. SC’s liability insurance will cover GC’s liability and provide legal defense for GC.

The insurance will not cover all of a GC’s tort liability, however. A third party must suffer bodily injury or property damage before coverage will apply. Suppose GC turns the completed building over to the owner, and the owner finds that computer networks do not work in four offices. The owner determines that the problem is the result of faulty cabling, and he sues GC and SC. Even though SC has agreed to assume GC’s liability, the liability insurance will not cover this loss. That is because the building owner did not suffer property damage. The building is defective, but it has not been damaged.

Contractors should expect to find indemnification agreements in most construction contracts. Because of this, the contractual liability coverage contained in general liability insurance policies is critical to their financial health. It is very important for contractors to review their liability policies to ensure that their insurance companies have not limited this coverage.

Contractual liability coverage is vital to a contractor’s business. Make sure that it does all that you need it to do. Contact us for assistance with this important coverage.

Environmental claims are often unpredictable and despite the fact that associated liabilities can easily cripple a business, most contractors underestimate their potential magnitude. Without sufficient insurance protection, the consequences of such claims can range from costly business interruption to bodily injury and/or property damage lawsuits. The best way to account for this unpredictability is to manage the risks that can lead to environmental claims.

The only way to develop an effective risk management strategy is by conducting a thorough site pollution assessment to determine the various levels of exposure.

Time is a critical factor in this type of assessment. Exposures can exist from both past and future pollution release events. Of the two, past exposures can be more easily qualified and managed. Commonly referred to as “legacy exposures,” these previous events are the known/unknown issues associated with the history of a site. Some typical legacy exposures include:

• Accumulations of small discharges
• Inappropriate storage and handling practices
• Poor structural integrity
• Use of pesticides and herbicides

Legacy exposures might be dormant currently, but can re-emerge during site development, or operation expansion. They can even remain inactive on the property being developed while surfacing in neighboring properties. Such exposures could also be former release events that posed minimal risk initially, and required little remediation. However, now they require additional cleanup. Or the added remediation of these events could also be the result of a change in regulatory standards.

The second level of exposure results from the possible future occurrence of a pollution release event. Known as “operational exposures,” these risks can trigger a major cleanup effort, as well as bodily injury and property damage loss. These events can be sudden and easily identified, or they can be the outcome of a gradual process that has gone unnoticed.

The preferred way to manage these exposures is by transferring risk via an environmental insurance policy. Environmental insurance should be part of the risk management strategy of real estate owners, facility operators, and any other party with a financial interest in a site. An environmental policy can be written to cover only legacy concerns for transactions where there is a risk transfer from seller to buyer. It can also be written to cover only operational risks for a leased location, or if the insured feels that the site history does not warrant coverage for legacy events. Additionally, policies can also be crafted to provide full coverage for a single site or multiple locations.

At the end of each fiscal year, OSHA shines a light on its enforcement activities by releasing its list of the top ten most cited standards for the period. Leading the hit parade in 2007, was 2005 and 2006’s front-runner, scaffolding (29 CFR 1926.451), weighing in at a hefty 7,592 violations (as of October, 2007).

But lying beneath the surface of this statistic is a far more complex interplay of violations. According to the January-March 2008 edition of Safety Bulletin, published by SafetyResources.com, the top five sections of this standard that were cited include:

• 1926.451 (g)(1) – Failure to provide fall protection
• 1926.451 (e)(1) – Failure to provide proper access
• 1926.451 (b)(1) – Failure to ensure adequate platform construction
• 1926.451 (c)(2) – Failure to properly support scaffolding
• 1926.451 (g)(1)(vii) – Lack of personal fall arrest or guardrail systems

If employers had focused their compliance efforts on these sections of the standard, they could have not only reduced worker’s compensation costs by lessening their employees’ exposure to some extremely serious workplace hazards, but they would have also significantly reduced their risk of receiving a citation.
Reducing exposure under this standard begins with having a “competent person” inspect scaffolds. OSHA clearly defines this individual as one who:

• Has been trained to understand the requirements of scaffold standard 29 CFR 1926.451.
• Is able to identify scaffold hazards.
• Has the authority to take immediate action to correct defects and eliminate hazards.

This person is obliged to inspect the scaffold after it has been built, before it is used, and periodically during its usage. The term “periodically” is deliberately meant to be vague because the frequency of the inspections is determined by a number of factors such as the type of scaffold, weather conditions, how much usage it receives, how old it is, and how often sections are added, removed, or altered.

These factors influence how quickly safety-related defects can possibly develop. However, the term “periodic” is also meant to imply that inspections take place frequently enough so that problems are discovered before they become a threat to your employees’ safety.

OSHA also mandates that scaffolds be inspected for signs of defects before every shift. They should also be inspected after any event that could undermine their structural integrity.

To make inspection easier, Business & Legal Reports, Inc (BLR) compiled a checklist that they published in the April 25, 2008 edition of their email newsletter Safety Daily Advisor:

• The scaffold does not block exits, egress, paths, fire alarms, and fire suppression systems.
• The scaffold is erected at a safe distance from power lines.
• Ladders, stairs, ramps, etc. provide safe methods for accessing the scaffold.
• The scaffold is plumb and level, and resting on stable footing and a firm foundation (including base plates on supported scaffolds).
• Diagonal cross bracing is used to support the scaffold’s legs.
• All required guys, ties, or bracing is installed to maintain the scaffold’s stability.
• Working level platforms are fully planked between guardrails, and secured to prevent movement.
• Scaffold platforms are at least 18 inches wide.
• Indoor scaffolds are made of fire-retardant wood or other suitable materials.
• The scaffold’s platform is free of debris and slipping/tripping hazards.
• Guardrails are firmly in place on all open sides/ends, where required.
• Toe boards, screening, area barricades, or canopies are installed to provide adequate protection against falling objects.
• Personal fall arrest systems are provided for all employees when they are working more than 10 feet above a lower level.

The current shift toward a global economic community requires effective and efficient management in order for a company to stay competitive. One of the most significant areas that needs to be controlled is risk. An organization that is serious about controlling the potential costs associated with risk must develop a business-focused approach to its safety management process.

A company can take the following five steps to create a business-focused safety program:

1. Take an enterprise-wide approach to safety management. Most organizations are organized vertically, meaning the company is subdivided into functional departments. These departments operate independently of one another, oftentimes each with its own goals. Similarly, most company’s safety departments have been vertically organized and managed, making that department independent from other departments within the organization. However, if the safety management process is to be effective, it cannot be compartmentalized. A company must weave safety into the organization’s framework by making safety a consideration in every aspect of every department’s daily operations.
2. Measure how safety affects the bottom line. Stop looking at the adverse cost of injury in terms of exposures and incidents, and instead measure its impact on all aspects of the organization’s operations.
3. Raise safety’s presence in the organization. The successful implementation of an enterprise-wide safety program necessitates having it headed by a senior executive who has the CEO’s and board members’ ears, and the power to implement change.
4. Think continuity. Safety should be an ongoing activity and behavior, and not a focused activity, or priority program, only when the number of worker injury incidents rises.
5. Think lean. A truly safe work environment is one that espouses the principles of lean management. It transcends departmental borders to create cross-functional integration, and it eliminates waste through a holistic view of operations. A business-focused approach to safety addresses risk within organizational systems, procedures and processes, and minimizes risk across the board through collaboration among different departments.

The key to the success of any well-formed safety management program is that it develops a mechanism for improving overall business performance. Strive to make your safety program the catalyst that gets management and workers involved in something that is universally valued and operationally important. Consider how this works in practice:

• Employees want a safe environment that protects their health.
• First-line supervisors want a workforce that is productive and consistently meets daily production goals.
• Middle mangers want to stay on schedule and on budget, and they depend on the workforce to be productive.
• Senior management wants a project to be profitable, and they rely on middle management to keep a project focused as to time and budget.

All of these goals can be met only if safety becomes the guiding principle in every aspect of every project. Whenever safety is sacrificed for the sake of cutting time or costs, it usually ends up backfiring because worker incidents increase, slowing down production and adding to the cost of getting things done — which works against any company’s business interests.

With construction, there is always a risk that something will go wrong. Whenever it does, the usual consequences are delay and additional cost — which can range in degree from minor to catastrophic.

Insurance is one method for dealing with potential risks. However, insurance is not often the most economical or efficient method. Some risk can be successfully handled by such methods as; risk avoidance, risk prevention, risk control, risk retention, risk sharing, and risk transfer. Each of these concepts is explored below.

Risk Avoidance. Some risks are simply better if avoided. If you have reason to believe that corners will be cut on a project that could lead to unsafe conditions or results, the best way to handle the risk might be to avoid becoming involved. Similarly, if a supplier offers you cheaper material, but you suspect it might be defective, avoiding the risk makes sense.

Risk Prevention and Risk Control. Because these two are often so closely related as a practical matter, we will discuss them together, although there is a technical distinction:

Risk prevention is action to prevent a negative event, such as keeping debris out of passageways to prevent someone from tripping and falling.

Risk control is action to reduce the amount of the loss should a negative event occur, such as having emergency phone numbers posted by the telephone so help can be quickly summoned if needed.

Entire books are devoted to the subject of how to prevent and control risk on construction projects of every kind, so the topic is far too large to be covered in this brief article, except for a few main points.

The first is that successful risk prevention must be lead from the top. Second, the responsibilities of supervisors, managers, and all other employees should include safety and risk prevention and control. Consequently, both supervisors and employees need loss prevention and loss control training on an ongoing basis.

Risk Retention. Every construction firm retains some risk. Minor risks, such as having to redo a few days worth of work due to errors, are always retained and funded out of the operating budget. Retaining risk is a sensible option only when you can quantify the risk and know how you would fund the risk should a loss occur. Insurance policy deductibles are one way of retaining risk.

Risk Sharing. In some cases, it’s possible to share risk through agreements with other parties involved in a construction project. Typically, with regard to liability, a clause in the contract would stipulate that each party would be liable for any loss to the extent his actions or omissions contributed to the cause of the loss.

Risk Transfer by Means Other than Insurance. Risk can be transferred to parties other than one’s own insurers.

One way to transfer risk is to be listed as a named insured on the other party’s insurance contract, which would effectively extend the other party’s coverage to you, as well. For example, as a general contractor, you may require an electrical contractor to add you to his liability insurance policy. If there were a loss covered by his policy, such portion of the loss that might otherwise fall on you would be covered by his insurance.

Express indemnification clauses in contracts — also known as hold harmless clauses — are a common way of transferring risk in the construction industry. There are three types of clauses each representing a different degree of risk transfer. In a typical Type Two clause, a general contractor agrees to hold the owner harmless from any and all claims arising from the project, provided the claim is caused in whole or in part by the negligent act or omission of the contractor and regardless of whether the claim is caused in part by the negligent act or omission of the owner.

As you can see, there are various methods of dealing with risk. Give us a call today to explore what combination of insurance and noninsurance ways of handling your company’s risks makes sense for your firm.

Drug and alcohol-dependent employees are hazardous to their workplace and a company’s bottom line. Up to 40% of industrial fatalities and 47% of individual injuries are linked to alcohol consumption and alcoholism according to the United States Department of Labor. The financial cost of alcohol and drugs in the workplace is staggering. The increased absences, accidents and errors created by alcohol and drug abuse cost American businesses $81 billion and 500 million lost workdays a year.

Employees in safety-sensitive positions who operate vehicles, machines and tools are not the only ones who can create a dangerous situation with their substance abuse. Today a high percentage of employees have access to security-sensitive information which, when handled improperly, can lead to costly mistakes and leave a company with huge liabilities.

Employees who have alcoholism and drug dependency can be found in every type and size of business. An estimated 14.8 million Americans are current illicit drug users and 77% of them are employed. Research shows, however, that they tend to seek out businesses that do not have formal programs in place to deal with the problem. The “employer-of-choice” for drug users are small and medium sized companies who are also the most likely to not have a formal program in place. Just 17% of full-time employed heavy drinkers work for very large companies with more than 500 employees.

Thus, the best way to guard against the heavy cost of substance abuse among employees is to establish a strong alcohol- and drug-free workplace program. Although each company has specific needs to consider, five components are common in effective programs: A drug-free workplace policy, supervisor training, employee education, employee assistance, and drug testing.

Clearly the foundation of a drug-free workplace program needs to be a written policy addressing the issue. Core components might include the rationale behind creating the policy such as to protect the safety and well-being of employees and customers; a clear description of prohibited behaviors including the use, possession or sale of illegal drugs; and an explanation of the consequences for policy violations.

Because supervisors most closely interact with the workforce, it is imperative that they receive special training in dealing with the issue. Supervisors should not be expected to diagnose substance abuse or counsel employees but rather be trained to monitor poor employee performance, identify potential symptoms of substance abuse and know how to refer employees for help.

For a program to be effective, employees not only need to be educated on the specifics of the company’s alcohol- and drug-free workplace policy, they also should be provided general information on addiction, its impact on their personal and professional lives and locally available treatment resources.

For certain companies, drug testing might be an appropriate component to a drug free workplace program. However, the specific local, state and federal laws regarding when, where and how testing is performed must be followed. The Department of Labor recommends that legal counsel be consulted before starting a drug-testing program.

Through its Working Partners for an Alcohol- and Drug-Free Workforce program, the Department of Labor has created a multitude of resources to help American businesses effectively combat alcohol and drug abuse in the workforce. Training and educational materials, links to treatment resources and guidelines for developing a program can all be accessed at www.dol.gov/workingpartners.

In 1980, Congress passed The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) to address the issue of cleaning up hazardous substances at inactive or abandoned sites. The law is sometimes referred to as the “Superfund” because the cleanup program it established includes a Trust Fund used by the EPA and other agencies to clean up hazardous waste sites when the original polluter cannot be identified. CERCLA also requires the immediate reporting of any releases of hazardous substances at a construction site if the amount released meets or exceeds the level designated by the law as a reportable quantity.

The Emergency Planning and Community Right-to-Know Act (EPCRA), originated from CERCLA. This law requires the use of emergency planning, and provides citizens, local governments, and local response authorities with information regarding the potential hazards in their community. Before beginning the bidding process, the owner or developer needs to research the history of the construction site to find out if there was any hazardous substance use or disposal at the site. This review will give contractors a better understanding of potential risks and liabilities.

There is the likelihood that your project will be subject to Superfund or EPCRA requirements if hazardous substances are discovered during construction activities such as grading, digging or demolition. If your site was previously used for industrial or commercial activities that might have created hazardous substances, or there is the possibility that waste was disposed at the site, you should test the soil, surface water, and groundwater before beginning.

To determine if your construction site is subject to EPCRA emergency planning requirements, you need to determine if it meets both of the following criteria:

• An extremely hazardous substance or any substance regulated by your state or local authority is stored on site.
• A substance above the designated Threshold Planning Quantity is stored on site. The quantity varies by substance.

As for responsibility for meeting CERCLA requirements, if hazardous substances are discovered during construction, the contractor or subcontractor who first discovers it is responsible for notifying the general contractor, developer or owner. Because the hazardous substance was at the site before construction began, the developer or owner is responsible for seeing that the hazardous substances are handled and disposed of properly.

However, if you excavate or spread soils containing a hazardous substance, you might be responsible under CERCLA as an operator, arranger, or transporter:

• You may be an operator if you spread soil that contains a hazardous substance on the land.
• You may be an arranger if you dispose of a hazardous substance or arrange to have it removed from the construction site.
• You may be a transporter if you move hazardous substance from one location to another.

If there is a hazardous substance release above the reportable quantity for CERCLA, you must immediately notify the National Response Center at 1-800-424-8802 and your State Emergency Response Commissions (SERC) and Local Emergency Planning Committees (LEPC). If there is an extremely hazardous substance release above the reportable quantity for EPCRA, you must immediately notify your SERC/LEPC. If no notification occurs, the owner, contractor and subcontractor may all be held responsible.

The penalties for non-compliance are stringent. EPA has the power to impose administrative, civil, and criminal sanctions on a property owner and/or contractor. Administrative penalties and civil penalties can reach $32,500 per violation per day. In addition to fines, you might need to cover legal fees. If legal action is taken against your construction site, you could also be the recipient of increased scrutiny by regulatory agencies at all the construction sites that you operate. Contact us. We can help you to identify and examine important developments in regulations.

Musculoskeletal injuries, which are injuries to the muscles, joints, or bones, are the most common injury problem in the construction industry. Ergonomics, a branch of industrial hygiene, identifies the risk factors that can cause these injuries and seeks to develop solutions to prevent their occurrence. Ergonomic changes, generally, are not expensive and can be very simple.

There are four main risk factors that cause musculoskeletal injuries:

• Awkward posture — positions that cause the body to stretch itself to the extreme, like overhead reaching, bending, stooping, and twisting.
• Forceful exertion — movements that require extreme force like pushing or pulling.
• Repetition and duration — performing the same movements over and over for an extended period of time.
• Contact stress — continuous pressure on the body from a hard surface or sharp edge.

Overcoming these risk factors starts with proper planning. The first consideration should be to minimize the time workers spend manually handling heavy materials. This can be accomplished by making sure crane time is available, forklifts are used as often as possible, and materials are delivered close to the work area. Materials that are not in use should be stored so they’re accessible and easier to reach, but not in the way of ongoing work. Try not to store materials above shoulder height or at ground level. You also need to ensure that walkways are clear so carts and dollies can be used easily to transport materials.

The next consideration is the kinds of tools and equipment being used. Ergonomically designed tools have a lighter weight, require less force to operate, fit the hand better, and are more comfortable to use. Workers should use carts, dollies, and hoists to move materials as much as possible rather than relying on physical strength. They should also use handles when carrying loads and protective equipment, such as kneepads and shoulder pads, to reduce the contact stresses of kneeling work or carrying materials. It’s also important to establish a weight limit for heavy loads above which an employee is required to seek help from a co-worker if a load needs to be moved.

Training is the third consideration in any effective ergonomics program to combat musculoskeletal injuries. Teach employees to incorporate stretching programs before work begins each day to help lessen the instances of injury. Workers and foremen should also be trained on how to identify ergonomic risk factors and how to report them. Finally, instill in your workers that they must report injuries no matter how slight as soon as they happen. They should never try to “work hurt.”

The old saying that “those who do not learn from history are doomed to repeat it” is indeed applicable to an organization’s safety program. The best way to avoid future accidents is to examine why and how an accident occurred. Only then can you determine effectively how to keep a similar accident from happening again.

A thorough accident investigation should be designed to objectively gather information and not to place blame. Accidents are generally complex incidents in which multiple factors, both indirect and direct, can lead to a failure of people, equipment, or the work environment. An effective investigation should reveal what happened so that new safety protocol or training can be developed from the findings.

The following tips can help you conduct an accident investigation effectively:

• Make sure the site is safe to enter before initiating an investigation.
• Secure the area and do not disturb the scene if it is safe to do so.
• Make sure the individuals involved in the accident get appropriate medical care.
• Following an event, begin the investigation as quickly as possible in order to secure the site and have access to as much information as possible.
• As part of your safety program, define protocol for employees to follow when dealing with an accident site in order to preserve it for investigation.
• Also as part of your safety program, develop accident investigation checklists and guidelines so that the correct protocol is followed.
• Have materials on-hand which would be needed to conduct an investigation should an accident happen. Such materials might include a camera and film or video recorder and blank tapes, protective equipment, notebook and pens, any necessary accident checklists or report forms, containers for preserving evidence, and a measuring tape.
• Identify all possible witnesses and interview them as quickly as possible following the incident, while it’s fresh in their minds. Also interview those who were present prior to the incident or arrived shortly after.
• When conducting an interview, ask questions that will garner a comprehensive picture of the accident, series of events leading to the accident, and surrounding conditions including the condition of any equipment, the weather, instructions from supervisors, and the protocol under which employees were operating.
• Use a camera, video camera or sketches to document the accident site;
• Preserve evidence.
• Analyze all the gathered information to establish exactly how the accident occurred and what steps need to be taken to prevent it from happening in the future.

Surety companies typically issue surety bonds through surety bond producers, also known as agents or brokers. A surety bond producer will know and understand different bonding companies’ underwriting standards and practices, and can match the needs of a contractor with the right surety company.

One of the surety bond producer’s most important functions when working with contractors is to prepare them for the surety company’s prequalification process. The producer starts by reviewing financial documents that the contractor will submit. This includes an analysis of the contractor’s working capital, net worth, and current revenue. The producer will also examine completed contracts, current contracts, and proposed bids.

After reviewing the data, the producer can discuss with the contractor the amount of risk they are taking on their total work program, and the profitability of that work.
After completing this analysis, the producer will recommend a line of surety credit to help the contractor avoid overextending. The producer will also format the contractor’s submission to meet the surety company’s requirements, and guide the contractor through the presentation.

An important part of the producer’s job is to maintain communication, both with — and between — the contractor and surety company. The first line of communication is with the contractor itself through site visits and visits to the contractor’s office. The second line of communication is between the contractor and the surety company through periodic reports on work progress, financial performance, and business plans.

Because of the important role the surety bond producer plays as an external advisor, choosing the right producer is an important task for a contractor. According to the Surety Information Office, a surety bond producer should have these qualities:

• A reputation for integrity and respect in the industry.
• A personal interest in the contractor’s success.
• An ability to build solid relationships with surety underwriters.
• An understanding of the construction industry and the construction management process, including estimating, bidding, building and cost control systems, as well as an understanding of basic credit principles.
• Knowledge of accounting and finance, especially construction accounting procedures, and the ability to analyze financial statements, work-in-progress, and cash flow.
• Knowledge of construction, subcontracts, and contract law.
• Authority to issue bonds on the surety’s behalf (within limits).
• An awareness of local, regional, and national construction markets.
• Experience in strategic planning and management practices to promote successful contracting.
• An active role in the construction community through involvement in and support of local and national construction and surety industry associations such as the National Association of Surety Bond Producers (NASBP), the Associated General Contractors of America (AGC), and the Associated Builders and Contractors (ABC).

Consider this checklist of qualities, and recommendations from your associates in the industry, when choosing this important advisor for your company.