Perspectives on Insurance Coverage for Construction Projects: Lessons Learned from Real Coverage Disputes

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2 Perspectives on Insurance Coverage for Construction Projects: Lessons Learned from Real Coverage Disputes

3 Outline of Presentation Introductions of Panel Topics for Discussion I. Placement of Insurance for Construction Projects II. III. IV. General Liability Insurance Builders Risk Insurance Ocean Marine Cargo Insurance V. Professional Liability Insurance Q&A & Closing Remarks

4 Today s Presenters Moderator: Jim Malloy Partner, DFL Legal Panel: Joe Luciana Partner, DFL Legal Walter Bacsik Jim Tedjeske Jim Bly Risk Manager, Dragados USA, Inc. Vice President, Legal, Kvaerner Americas Holding, Inc. Managing Director, Alliant Construction Services Group

5 I. Insurance Placement on Construction Projects Deciding what coverage is necessary for Project Project specific insurance versus general underwriting Different forms of coverage to consider General Liability Builders Risk Professional Liability Ocean Marine SDI v. Surety Underwriting Broker in sync with project team? Documentation requirements

6 I. Insurance Placement on Construction Projects Owner Controlled Insurance Programs Owner s Perspective Advantages: Risk management control (control of coverage terms, duration and scope, claims handling, etc.) and reduction of insurance costs and timing Drawbacks: Increased risk management costs, administrative burdens, and risk of loss. G/L only wrap and its benefits/costs. Contractor s Perspective Advantages: Broader coverage, coordinated claims procedure, and reduced coverage/subrogation disputes between contractor and owner Drawbacks: Coverage gap between OCIP and contractor s insurance, difference in conditions coverage, additional reporting/administrative burdens

7 I. Insurance Placement on Construction Projects Subcontractor Default Insurance (SDI) SDI v. payment and performance bonding 3 Party v. 2 Party agreement Coverage trigger = default under SDI, not proof of default Expediting the Proof of loss and RFI process Indirect costs SDI Market volatility and outlook

8 I. Insurance Placement on Construction Projects Accelerated Adjudication Bonds Newer format for more prompt resolution of bond claims Built in arbitration process with JAMS decision in 90 days Advantages of AAB v. Irrevocable letter of credit AAB approach in the subcontractor bond market v. SDI Example: Pennsylvania P3 project Advantages for Joint Venture team, owner, and subcontractors. Challenges?

9 II. General Liability Insurance Case Study: Coke Oven Battery Property Damage Coverage Issue - Construction defects as occurrences under a GL Policy Coke Oven Battery rebuild ($180 million project) Heat up process completed Battery operated continuously at levels exceeding all performance requirements Smoke from roof structures observed led to Joint Task Force investigation Joint Task Force report found bowing of upper brick work in roof: Premature grouting of roof Halloween Rains

10 II. General Liability Insurance (cont.)

11 II. General Liability Insurance (cont.)

12 II. General Liability Insurance (cont.) Owner lawsuit alleged breach of contract and breach of warranty against contractor $80 million claim Third-party beneficiary claim against engineering subcontractor Complaint incorporated non-performance listing the following Physical damage to the Battery (cracked bricks, bowed tie rods, tilted oven walls) Premature grouting Expert reports alleged damage from Halloween Rains Ultimate Result: $17.6 million settlement payment by insurers

13 II. General Liability Insurance (cont.) Insurance Coverage Disputes Insurance coverage lawsuit filed against Builders Risk Insurer, Professional insurer, and CGL insurer Professional insurer entered coverage agreement. CGL insurer filed motion for summary judgment arguing: No occurrence of property damage under the policy business risk/work product exclusion Ultimately resolved by PA Supreme Court 908 A.2d 888 (Pa. 2006) Held: claim for faulty workmanship is not an occurrence under CGL policy

14 II. General Liability Insurance (cont.) Common CGL Exclusions on Construction Claims Your Work Broad Form Property Coverage Does the subcontractor exception apply? Your Product Damage to your product and/or other property? Completed Products & Operation Hazard Expected or Intended Damage

15 II. General Liability Insurance (cont.) Coverage enhancements for G/L construction defect risk Amended definition of occurrence: The definition of "occurrence" is hereby amended to include: "Property Damage" to that portion of "your work" performed on your behalf by a subcontractor and included in the "products-completed operations hazard" may constitute an occurrence if the 'property damage" to "your work" was not expected or intended and is not otherwise excluded under the policy. Elimination or modification of damage to your work exclusion

16 II. General Liability Insurance (cont.) Coverage enhancements for construction defects (cont.) Most favorable state endorsement: The law of the state most favorable to the "Named Insured" shall govern in determining whether third-party "Property Damage" included within the "Products-Completed Operations Hazard" is caused by an "occurrence," provided that such state is a part of the United States of America including its territories and possessions; and has a substantial relationship to the "Named Insured"; or has a substantial relationship to the state in which such claim or "Suit" is brought; or is the state in which we are incorporated, or we have our principal place of business, or where this insurance contract was delivered to the "Named Insured". Removal of Impaired Property exclusion

17 III. Builders Risk Insurance Why Builders Risk? Advantages: Protects works Covers all risks unless excluded Subcontractors covered Reduce subrogation issues One package instead of multiple coverages Hypothetical example: One subcontractor damages work of other subcontractors when lifting equipment. Who pays?

18 III. Builders Risk Insurance (cont.) Case Study: Tunnel collapse causing fatality Big Dig: I-90 Seaport Access Tunnel (EB, WB, HOV and Ramps) Construction Completed on December 31, 2004 Accident in the EB Portal Concrete ceiling system attached with epoxy bolts Passenger killed/driver escaped with minor injuries July 14, 2006 legislation closed I-90 Tunnel until approved by Governor Findings of NTSB Hearing: Primary cause of the accident - use of Fast Set polymer epoxy (Powers Fasteners) subject to creep and not capable of sustaining long-term live loads

19 III. Builders Risk Insurance (cont.)

20 III. Builders Risk Insurance (cont.)

21 III. Builders Risk Insurance (cont.)

22 III. Builders Risk Insurance (cont.) Insuring Agreement: Coverage for (1) direct physical loss or damage to the property insured; and (2) loss of revenue resulting from the necessary total or partial suspension of use of the property insured occurring during the term of the Policy. However caused, except as excluded. Coverage Extensions: Debris removal, Demolition/increased cost of construction, Extra expense, Expediting expense, Professional fees, Soft costs, Contractual fines and penalties, Preservation of property. Policy Exclusions: Inherent Defect This exclusion does not apply if one of the listed perils results in collapse of the property or a material part thereof. Government Order Exclusion - the Company shall not be liable for loss incurred or sustained by or imposed on any Insured at order of any government agency, court or other authority arising from any cause whatsoever.

23 III. Builders Risk Insurance (cont.) Case Study: Hurricane Ike damage to LNG facility Storm surge inundated facility causing shutdown Construction All-Risk Insurer paid portion of claim but denied coverage as to certain costs. Coverage Issues Consequential loss/ delay in completion 72-hour period for dredging costs

24 IV. Ocean Marine Cargo Insurance Case Study: Turbines/heat recovery generators lost at sea Vessel transporting HRSG components encountered a tropical storm Shipped without notice to Owner and EPC Contractor HRSGs destroyed and remanufactured (6 month delay to the project) EPC Contractor claimed force majeure event Owner paid contractor (with insurance) to settle and meet schedule Owner and EPC Contractor notified the insurers of the incident Insurers denied coverage for failure to do pre-shipment survey

25 IV. Ocean Marine Cargo Insurance (cont.) Physical loss coverage by declaration of shipment arrived or not Consequential loss coverage by endorsement reduction in production (delay-in-startup) increase in cost to avoid reduction in production Survey warranty provision required a survey in respect of the items listed below Underwriters had the option to designate critical items for a preshipment survey warranty The policy did not define critical items Endorsement added project to the facility for delay-in-start-up

26 IV. Ocean Marine Cargo Insurance (cont.) Trial court held policy did not impose a pre-shipment survey requirement on HRSGs Eighth Circuit affirmed in Assicurazoni Generali S.P.A. v. Black & Veatch Corp., 362 F.3d 1108 (8th Cir. 2004) Missouri law applied because there was no established federal admiralty rule addressing pre-shipment survey warranties (Wilburn Boat Co. v. Fireman s Fund Insurance Co., 348 U.S. 310 (1955)). The enforcement of contracts according to their unambiguous terms, however, serves an important purpose in the law. When the parties establish a clear mechanism for determining rights and obligations, lawyers and judges should not thereafter search through and interpret copious exchanges and deposition transcripts in an effort to discern whether the parties might really have intended that which they failed to articulate in the written agreement.

27 V. Professional Liability Insurance Case Study: GC Contract with CM Responsibilities Owner/contractor agreement is for general contractor but responsibilities are at risk construction management (i.e., no selfperformance, value engineering, managing trades, etc.) Owner sues contractor for problems with sanitary system Contractor tenders claim to GL and PL insurers Professional insurer raises defense that contractor was general contractor and not engaged in professional services. Significant verdict for owner Professional insurer ultimately contributes large share. GL lesser share

28 V. Professional Liability Insurance (cont.) Case Study: Construction of baseball stadium Untimely/incomplete structural steel drawings and fabrication delays Coverage issues: Acceleration costs (and bonding/sdi issues) Coverage advantages: G/L and P/L within the same policy and the same carrier.

29 V. Professional Liability Insurance (cont.) Case Study: Flat-products steel mill facility Project Management Agreement with GMP (excluding certain equipment) Project Manager recommended contractor for design-build contract for buildings Insurer bound professional coverage under OCIP Contractor abandoned project. Owner/PM brought E&O claim for improper pre-bid design. Insurer denied coverage. Contractor stipulated to damages and arbitrated liability. Owner brought suit against PM as well. PM tendered claim to insurers

30 Q&A & Closing Remarks Questions for Panel? Thank you!