Construction Insurance Bulletin

Environmental exposures and pollution risks are a common concern at construction sites. Contaminated soil disposal, toxic mold contamination and the release of toxic materials through broken pipelines are just a few common types of environmental incidents. In the scope of projects, contractors face environmental exposures not just at their physical job sites but also during transportation and material disposal and at their other owned or leased properties. Contractor’s Pollution Liability (CPL) insurance is available to protect contractors against liability and financial losses when an environmental incident occurs.

Since CPL insurance applies to a broad range of construction project pollution risks, the product is appropriate for firms in various specialties including general contractors; trade contractors such as those in the HVAC, paving and concrete specialties; remediation contractors; and specialty contractors including drillers and those who perform pipeline and tank installation.

CPL insurance products are available to cover remediation costs and third-party property damage or bodily injury resulting from a pollution incident. The most comprehensive policies can be customized to cover the pollution risks of an entire project including all contractors and off-site transportation. CPL insurance is generally written on a claims-made basis to limit the insurer’s exposure to unknown future liabilities.

Although CPL insurance can protect against environmental losses, it, in itself, will not prevent potentially catastrophic reputation-damaging incidents from occurring in the first place. This is why contractors also need to incorporate environmental risk management practices into their operations.

An important initial risk management step is to develop a current environmental risk profile by conducting a thorough review of administrative control documents in order to identify possible risk and loss exposure areas. Although this process can be completed in-house, environmental consultants offer expertise and a valuable outside perspective.

To develop an environmental risk profile, the International Risk Management Institute recommends assessing the following documents and then identifying strategies to minimize or eliminate exposures to environmental risks:

• Any environmental management or mold prevention programs to make sure that a consistent approach is taken so that incidents can be prevented;
• Hazard communication programs and environmental data searches of job sites;
• Subcontractor agreement language and subcontractor’s environmental and mold management prevention systems;
• Standard client agreements;
• History of environmental losses including trends, employee communications and corrective measures that were taken;
• Corporate health and safety programs including training and incident response protocols;
• Quality assurance programs;
• CPL insurance policies; and
• Environmental assessments of owned or leased properties.

Please contact our office for more risk management ideas you can use in your operations.

If you are a general contractor for a big-budget construction project, you know you’re going to have to hire a number of subcontractors to help bring the project to completion.

So how can you be sure these subcontractors you hire can perform the work? You can’t. When hiring in the past, general contractors shifted the performance risk they assumed themselves to a guarantee form, such as a Surety Bond. Now, there is another alternative for risk transference called Subcontractor Default Insurance (SDI).

There are three main differences between a Surety Bond and SDI:

1. If the contractor uses surety bonds, each subcontractor provides their individual bond resulting in the general contractor having as many bonds as subcontractors, each with its own coverage terms. With SDI, one policy contracted between the purchaser and an insurance carrier covers all subcontractors. This ensures uniformity of coverage.
2. Under SDI if a subcontractor defaults, the general contractor and the carrier can immediately take steps to cure the default. With a surety bond, since the contract is between the subcontractor and the surety company, the surety company must investigate the situation and then determine the appropriate remedy. In essence, the surety company acts as a mediator between the general contractor and the subcontractor. This can result in delaying completion and cause possible cost overruns.
3. A surety bond is a fixed cost. SDI is an insurance product, which utilizes deductibles and co-payments. That means the purchaser assumes a portion of the risk. If there are no defaults, there is a retrospective rating component that allows for the return of a portion of the premium amount.

When you are weighing the pros and cons of a surety bond vs. SDI, it’s important to note that one of the most significant drawbacks of SDI is that there is no prequalification service provided by the insurance carrier as there is with a surety bond company. The responsibility of determining suitability to perform the work and of managing the completion of that work rests entirely with the named insured.

The policy itself has some coverage limitations and there may also be a 15 percent administrative cost for losses charged against the initial premium under certain conditions.

Finally, you may not be able to use SDI at all for certain projects. The Miller Act states that before a contract that exceeds $100,000 for the construction, alteration, or repair of any building or public work of the United States is awarded to any person, that person shall furnish the federal government with a performance bond in an amount that the contracting officer regards as adequate for the protection of the federal government and a separate payment bond for the protection of suppliers of labor and materials.

When you are considering using SDI, it’s best to consult with us, and your insurance carrier, to determine if it is right for your particular project.

More and more companies are hiring independent contractors to handle not only administrative matters, such as benefits and human resources, but also sales and distribution. With this delegation of authority to third-party suppliers comes less direct control over these operations, and greater becomes the need for clients to demand that vendors provide them with timely Certificates of Insurance (COI).

The COI proves that the insured (the third party) has purchased the insurance coverages as required by the outsourcing client. But, the COI also states that the holder of the certificate has no legal right to be covered by the insurance described in the COI, nor does it amend, extend or alter the represented coverage. The COI only shows that the outside contractor has the insurance coverage as explained on the certificate. This protects the business that has contracted with the third party against liability for negligence caused by the independent contractor up to the limits of the policy.

It is the responsibility of the independent contractor to provide the COI to the client that has hired the firm. Usually a COI is prepared by an agent/broker with a copy sent to the insurance company and the client for whom the third party has contracted to perform certain functions.

The COI contains the name of the insured, the name of the insurance companies issuing the policies as stated on the COI, what specific coverages are contained in the insurance policies issued to the insured, and various descriptions of normal policy terms, exclusions and conditions.

Most often COIs are obtained for commercial general liability to provide protection from liability arising out of the insured’s premises or operations, products and completed operations. Usually, a general form will provide broad, standardized coverage terms. In cases, where the coverage is more complex and of a higher risk, manuscript forms of a COI can be written specifically by or for an insurance company. These manuscript COIs should be reviewed carefully for the scope of coverage being provided.

There are two types of general liability forms: Claims-made and occurrence. The trigger that compels the policy to respond is the main difference between the two forms. In the occurrence policy, occurrences are covered that take place during the policy period, no matter when a claim is reported. A claims-made policy requires that the occurrence take place during the policy period and the claim be reported during the policy period. Most COIs use the occurrence form for all independent contractors as claims-made policies limit coverage.

But simply having a COI in hand does not always mean that the independent contractor has the insurance coverage. A prudent practice is to have a system to audit, review and correct the certificates to reflect the provisions in the contracts. Some clients establish an auditing program in house, while others have the insurance agent or broker manage the program as part of their fee arrangement. This cost depends greatly on the workload.

The consequences of not monitoring COIs of a third party can be costly for the firm that hired the contractor. Consider this sobering example. A business hired an independent contractor to provide distribution service for the company. An employee of the vendor had a serious car accident, and soon afterwards, the contractor ceased business. When the employee began submitting Workers Compensation claims, there was no coverage; the contractor had never maintained that insurance. Unfortunately, the company had not insisted on a COI from the independent contractor to verify this coverage. Casting about for payment of the claim, the court ruled that the vendor’s employee was a statutory employee of the company that hired the contractor. The workers’ compensation claims have totaled more than $100,000 with more to come.

This is just one of many chilling cases of companies that have been caught with unexpected losses that came from not requiring proper COIs from independent contractors and auditing them to make sure they remain current and reflect the actual coverages held by the insured. Contact us for a thorough review of your COI procurement procedures.

The best way to prevent fleet crashes and in the process lower injury frequency rates is to hire drivers based on their ability and past performance. This discovery comes from Liberty Mutual Group, which recently released the results of its annual trucker survey.

As part of the study, the company identified practices in seven key areas that contributed to lower injury frequency rates:

1. Management Programs

• Most companies that measure injury frequency rates have lower frequency rates.
• Those companies that conduct driver surveys had frequency rates 18% lower than those that didn’t conduct surveys.
• Although most companies conduct injury investigations, those that use written injury investigation forms, ask for prevention recommendations, calculate injury rates, set injury rate goals and track injury rates by customer had a 13% lower injury frequency rate.

2. Expectations

Four out of five companies have a written seat belt policy and close to 50% have both a written seat belt policy and enforcement activities. Those with both the policy and enforcement had a crash injury frequency rate that was 33% lower than those that didn’t use both.

3. Selection

• Four out of five companies use a hiring checklist to document each step of the hiring process. Those using a hiring checklist had 30% lower injury frequency rates.
• Four out of five companies have job descriptions that include essential job functions. Companies including essential job functions in the job descriptions had an 11% lower injury frequency rate.
• Four out of five companies designate a medical provider. Those using designated medical providers had slightly lower injury frequency rates.

4. Monitoring Performance

• Companies that provide technology for driver managers so they can verify available hours of service for drivers had a 37% lower crash injury frequency rate.
• One out of four companies has GPS and uses it to monitor speed. These companies had a 15% lower crash injury frequency rate.
• Two out of three companies conduct road observations. This practice results in a slightly lower injury frequency rate.

5. Transitional Work Programs

One out of four companies had someone responsible for tracking employees out of work and had written transitional work job descriptions. The group using both had a 7% lower injury frequency rate.

6. Injury Prevention

Most companies offer some form of injury prevention activities. Those that use an injury prevention manual provide regular training and have observations for enforcement had an injury frequency rate that was one-third of those that do not.

7. Training

Three out of four companies use written agendas for training. While written agendas are important, the survey found that injury frequency rates went down as the training group size became smaller. Those with written agendas and one-on-one training had a 30% lower injury frequency rate.

Employees know the risk of serious injury, or death, that can result from not following their employer’s safety regulations. However, knowing these consequences doesn’t always provide enough motivation to all employees to use approved safety procedures. To add an extra incentive, many companies have developed reward programs that give prizes to employees who follow safety rules.

These types of incentive programs work best if they have simple, well-defined rules. Well-designed programs allow employees to accrue points over time, so that they can save up for the prize they really want. However, to prevent employees from losing interest, the program should offer rewards every 30 days, or let employees “cash in” accrued points whenever they want.

The program should offer a variety of prizes. Employers can partner with a company that manufactures incentive prizes and choose the prizes they want to offer from catalogs this company would provide. When deciding on prizes, include a selection of items that can be acquired with a small number of points and those that require a larger amount. This variety will help to maintain employee interest in the program over time.

Though cash might seem to be a good incentive on the surface, it usually is not for this type of program. When employees receive cash for their accrued points, they generally use it for a functional purpose like bill paying. In order for an incentive program to be successful, the prizes should have a recreational purpose, like a t-shirt or picnic basket. However, gift cards usually work well in incentive programs, because employees can redeem them for items that they really want.

Base program reward points on the actions of individual workers, not on the actions of a department or line as a whole. If the incentives are team-based, employees might be pressured by their fellow workers not to report something that management should hear about, in order to avoid the possibility that the group would lose the incentive.

Once you start a safety incentive program, continuity is important, and the program should be terminated only for a really good reason. If an employer terminates the program because it becomes too expensive to administer, it runs the risk of employees’ low morale from this decision, and also sending the message that the employer isn’t placing a high value on safety. Sometimes employers cut incentive programs because the results are not what they expected. Remember, not every employee will choose to participate. Some will feel that the incentive program is silly or demeaning. However, those that participate will give their full support, and the safety of your workplace will increase as a result.

One of the most important ways in which you make an impact on your bottom line is through risk management. The key to successful risk management is the identification of all instances of risk retention. These are circumstances in which you are responsible for all or part of the loss.

Any risk that you as the insured can’t transfer to another party is retained by default. The deductible on your insurance policy is a classic example of risk retention. This type of retention is characterized as “known,” because you know you’re responsible for paying the pre-determined deductible before your policy pays any additional exposures up to the policy limits. Any amount of potential loss over the policy limits is also a retained risk. However, this type of retention is categorized as “unidentified,” the amount of the loss has not yet been determined.

As a general contractor, it is imperative that you identify both of these types of retention so that you can adequately protect your company. The problem arises when it comes to determining the unidentified retentions. One area in which you might be extremely vulnerable is subcontractor negligence. You can purchase additional coverage for this contingency; but the more financially prudent course of action is to require your subcontractors to carry their own Liability insurance that provides enough coverage to completely replace what you are constructing.

Here are some recommendations for handling the issue of subcontractor negligence:

• Require your subcontractors to carry their own insurance. Minimum acceptable policy limits should be specified in any subcontractor contract, and these minimum coverage requirements should reflect the size and scope of the project.
• Request periodic certificates of insurance from your subcontractors showing that their coverage is current. This will help ensure continued compliance. Additionally, you should specify in the contract that the subcontractor’s General Liability coverage is the primary coverage for the project. This will reduce your coverage to Excess coverage, meaning it won’t come into play unless the subcontractor’s coverage is exhausted.
• Consider using a subcontractor indemnity agreement as an additional option if permitted by local law. This is basically a promise by the subcontractor to reimburse you for any money you are forced to pay to the project owner because of the subcontractor’s negligence.
• Have all of your contracts reviewed to make sure that your policy continues to meet your insurance needs.

If employees don’t feel involved and represented in their company’s safety program, it is unlikely the program will be successful. A workplace safety committee is a tool that, if created and conducted properly, can increase the effectiveness of a safety program by:

• Providing structure and assigning responsibility for carrying out a workplace safety program
• Enhancing a cooperative attitude and bringing together strong interaction among various areas of an organization
• Serving as a communication vehicle for employees to voice safety concerns
• Serving as a tool for employers to promote safety to employees
• Spreading the responsibility of the safety program among employees

A safety committee will only be successful, however, if it is carefully created with structure and support. As with any safety initiative, it is imperative that management be visibly and actively involved. Members should serve on the committee and attend regular meetings. Other committee members should be chosen for their enthusiasm, potential expertise, and communication skills. The committee should include representatives from all the various departments but not become so large that it becomes cumbersome and ineffective.

To ensure that the committee doesn’t become a place for employees just to voice complaints, the committee’s goals should be clear from the start. Its primary role is always to promote and ensure the success of a company’s safety program.

The specific responsibilities of the safety committee might include:

• Develop strategic safety goals and annual action items
• Participate in development, monitoring and updating of safety program and possible safety incentives
• Hold monthly safety meetings
• Hold regular workplace safety inspections and help identify workplace hazards
• Participate in accident/incident investigations
• Ensure maintenance of injury and work hazard records
• Perform review of illness and injury records
• Organize regular safety training programs
• Consult with outside experts when necessary
• Address employee complaints and suggestions regarding safety issues
• Make safety recommendations to management
• Communicate with employees and management about safety issues and goals

Every group needs a leader and a safety committee is no exception. A workplace safety coordinator should be assigned to head the group. For many companies this will not be a separate position but rather an added role to an individual’s existing position. The coordinator is responsible for leading the committee, scheduling and heading safety meetings, serving as a point-of-contact with outside agencies and retaining safety records and documents. Safety meetings should be well documented and the records should be retained for at least a couple years. Many safety committees prepare an annual report to overview the safety trends within the organization, advertise their results, and identify outstanding safety issues.

For companies beginning a new safety committee, the following first meeting agenda is a good starting point:

• Establish the role and purpose of the committee
• Discuss the commitment required from each member
• Develop an agenda for what the committee hopes to achieve, both long and short term
• Assign action items to the members of the committee
• Take meeting notes and post the minutes as well as committee goals and action items

HOLD HARMLESS CLAUSES: WHAT YOU SHOULD KNOW

By its nature, construction is a high-risk business. When a loss occurs — for example, a fire apparently started by electrical wiring — each of those involved in the project would prefer that “the other guy” pay for the loss. So-called “hold harmless clauses” in contracts are a way one party assures that the other party will pay for, or share the cost, of a loss. For the owner or general contractor, hold harmless clauses are a way to help keep insurance premiums lower by reducing risk exposure.

Hold harmless clauses tend to generate a good deal of concern and effort, as owners pressure the general contractor, who pressures subcontractors, who pressure their subs, each trying to get as much express indemnification as possible into contracts. Express indemnification secures or protects someone from legal responsibility for a loss — that is, holds him or her harmless.

There are three types of express indemnity clauses typically found in construction industry contracts — including some that can be found in the fine print on purchase orders.

A Type One (also called “broad form”) indemnity clause states that the indemnitor, the party taking responsibility for potential risk or loss, will hold the indemnitee, the protected party, harmless from the risk in question, even if the entire loss is caused by the indemnitee. An example would be if a contractor agreed to hold a project owner harmless for any claims arising from the project, even if the claim was caused solely by the owner’s negligence.

More common is the Type Two (“intermediate form”) clause, which requires the indemnitor to assume all of the risks associated with the subject, but not if the sole cause of risk is attributable to the indemnitee. Typical intermediate form language could include the contractor agreeing to hold the owner harmless from any and all claims arising from the project, provided such 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.

A Type Three (“comparative fault”) clause holds the indemnitor responsible only for the loss caused by the indemnitor, or to the extent caused by the indemnitor. Typically, the contractor would agree to hold an owner harmless from any and all claims arising from the project, but only to the extent the claim was caused in whole or in part by the negligent acts or omissions of the contractor.

Some states have passed laws limiting the types of clauses that are allowed in contracts. Supporters of these limitations argue that the highly competitive nature of the business forces contractors and subcontractors to assume all the liability of a construction project, no matter who is at fault in an accident, if they want to win the bid. If an accident happens, the contractor could be forced into bankruptcy.

The law of the state where the work is performed is usually the law that applies. For example, a Detroit automobile company wrote a construction contract containing a Type Two express indemnification clause for work to be done in Delaware. When a loss occurred and the company tried to hold the contractor to the clause, the Delaware court threw the clause out entirely. Michigan recognized Type Two clauses, but they weren’t allowed in Delaware.

PERCEPTIONS VARY

Feelings about hold harmless clauses generally follow one’s position in a chain of relationships. For the owner or general contractor, hold harmless clauses are always desirable. It’s a different story with subcontractors, although they are often a condition of doing business. It might not make sense, however, to agree to a hold harmless clause with a general contractor who has the reputation of operating unsafely or with outrageous demands, such as holding the architect harmless even in the event of a loss that was solely due to the architect’s error.

The term “stormwater” refers to any runoff after rain or snow from a barren piece of land, an area with vegetation, or constructed areas like paved streets and rooftops. Stormwater discharges can contain pollutants in large enough quantities to contaminate a water supply. If your construction project will disturb one or more acres of land, you might need a stormwater permit. If your project will disturb less than one acre, but its part of a larger development plan that will disturb one or more acres, you might also need a stormwater permit.

However, the determination of what the appropriate compliance is for your particular construction project is far more intricate than just a “yes” or “no” answer to the above scenarios. There are four criteria, which must be met to determine a permit is needed:

1. Will your construction project disturb one or more acres of land?
2. Will your construction project disturb less than one acre of land but is part of a larger development plan that will disturb one or more acres?
3. Has your construction project been designated by the National Pollutant Discharge Elimination System (NPDES) permitting authority either on the state or federal level as one that must be regulated even though it will disturb less than one acre of land?
4. Will stormwater from your construction site flow into a separate municipal storm sewer system or a body of water within the United States?

If you answered “yes” to any of the first three questions and “yes” to the last question, then you definitely need a stormwater permit. Keep in mind that in addition to state and federal regulatory agencies, some municipalities are also required to implement stormwater control programs. You need to check with your municipality for its requirements before beginning work on the project.

Your next step is determining whether to apply on the federal or state level. If your project is located in an area requiring a federal permit, you must apply for the EPA Construction General Permit (CGP). If your location necessitates getting a state permit, then you must meet the state’s general permit requirements. You can apply for an individual state or federal permit instead of the general one; however, the individual permit process can be much longer. One of the requirements of the EPA CGP is to assess the potential affects your project will have on federally protected endangered species and on any designated critical habitat on or near your site. Although state permit requirements might vary, the EPA has established some very specific criteria:

1. Develop and implement a Stormwater Pollution Prevention Plan. It has to include:

• A description of the site that lists sources of pollution
• A description of methods that will be used to prevent pollutants from contaminating stormwater
• A description of controls for stormwater flow
• Documentation that supports that you are not in violation of the Endangered Species Act
• Documentation that supports that you are not in violation of local Total Maximum Daily Load requirements
• Clearly outlined roles of different operators
• The methodology you will use to inspect your site

2. Submit a Notice of Intent (NOI) — This notice begins coverage under the general permit and includes a certification that the activity will not impact upon endangered species or historic places.

3. Submit a Notice of Termination (NOT) — You need to submit this to EPA within 30 days after one or more of the following:

• Final stabilization has been accomplished on all portions of the site, for which the recipient of the permit is responsible
• Another operator assumes control over the parts of the site that have not achieved final stabilization
• The operator has obtained an individual or alternative NPDES permit

Tempted to hire a private investigator to spy on employees claiming Workers Compensation? You’re not alone. Luckily, covert operations can be avoided by taking a proactive approach to preventing Workers Compensation fraud.

Here are some effective tips for shielding your business.

Watch for red flags
Knowing common signals of Workers Compensation fraud is an important step in protecting your business.

Some red flags to watch out for are:

• There are no witnesses of the accident (or the only witnesses are friends/family members of the injured employee).
• It is difficult or impossible to reach the employee.
• The employee changes his or her story about the accident.
• The accident happened on a Friday afternoon but wasn’t reported until the following week.
• The accident happened outside of the employee’s normal working hours.

Not all claims that occur under these circumstances are fraudulent, but it may be worth it to take a second look.

Make safety a priority at your business
Creating a safer work environment not only lowers the chance of accidents, it also reduces the opportunity for employees to fake an injury. Your business should frequently conduct safety inspections of all work areas and any equipment. Remove hazards immediately, and be sure to document the repairs you make.

Thoroughly investigate workplace injuries
Take the time to review any surveillance videos of the area where the incident allegedly took place. Also, be sure to interview all witnesses shortly after the accident happens — and take any rumors of dishonesty or fraud seriously.

Hire wisely
People who lie on résumés are more likely to lie about workplace injuries. Make it a routine part of your hiring process to conduct background checks on all applicants. And don’t neglect to verify their references and any other information included on their applications and résumés.

Clearly communicate your Workers Compensation policies
It’s important to discuss your Workers Compensation policies with all employees. Tell them what to do when an injury occurs, and explain that insurance costs affect the amount of money available for raises and bonuses. Also, make sure you tell your employees that Workers Compensation fraud is a serious crime that will lead to termination and prosecution. Post fraud awareness posters in conspicuous locations explaining what fraud is and what its consequences are.

Implement a return-to-work program
Workers Compensation fraud is less inviting when employers have transitional duty for injured employees. Make sure your employees know that if they get injured on the job, your business will work with the doctor to help them return to work as soon as possible.

Stay in touch
Don’t lose contact with employees who are off work because of an on-the-job injury. Injured workers who are hard to get a hold of might be committing Workers Compensation fraud. Contact them periodically, and document each contact (whether you were able to reach them or not).

Get signed statements when employees leave
In your exit interviews, obtain signed statements from exiting employees stating that they have or have not had any unreported injuries at work. This will go a long way in discouraging post-termination claims.
Workers Compensation is a major expense for most businesses, and Workers Compensation fraud makes it more costly for everyone. It pays to take a proactive stance to reduce Workers Compensation fraud at your company.