Insuring Collaboration

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Jacob Peregrine Day
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1 Insuring Collaboration Traditional and Innovative Solutions Michael Hastings, Marsh Inc. Gregg Bundschuh, Esq., Greyling // Nov 3, 2011

The Associated General Contractors of America (AGC) is a Registered Provider with The American Institute of Architects Continuing Education Systems.

2 The Associated General Contractors of America (AGC) is a Registered Provider with The American Institute of Architects Continuing Education Systems. Credit earned on completion of this program will be reported to CES Records for AIA members. Certificates of Completion are available on request. This program is registered with the AIA/CES for continuing professional education. As such it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product. Questions related to specific materials, methods, and services will be addressed at the conclusion of this presentation.

3 Insuring Collaboration Presentation Outline Defining principles of collaborative project delivery Defining principles of insurance applicable to design and construction Adapting contemporary insurance policies to apply to a collaborative process New policies and programs and who will lead the way

4 Insuring Collaboration Comprehensive Analysis of British vs US Approach AFFIX BLAME AND SUE

5 Integrated Project Delivery Definition Integrated Project Delivery (IPD) is a project delivery approach that integrates people, systems, business structures, and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication and construction - AIA California Council

6 Integrated Project Delivery Degrees of Collaboration Collaboration Level 3 Required Multi-Party Contract Collaboration Level 2 Enhanced Collaboration Level 1 Typical Integrated Project Delivery For Public and Private Owners, 2010

7 Integrated Project Delivery Construction Users Roundtable Observation The Committee concluded that the difficulties experienced in typical construction projects are artifacts of a construction process fraught by lack of cooperation and poor information integration. The goal of everyone in the industry should be better, faster, more capable project delivery created by fully integrated, collaborative teams - Collaboration, Integrated Information, and the Project Lifecycle in Building Design, Construction and Operation, WP-1202, August 2004

8 Integrated Project Delivery Einstein on IPD Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction. - Albert Einstein

9 Integrated Project Delivery What is Changed What is Gained / Enhanced Increased collaboration throughout design, planning, and execution Earlier / better decisions Reduced RFI s and rework Elimination of waste (Lean) Shared risk and reward Stakeholder success dependent upon project success Higher quality What is Lost / Diminished Established roles and responsibilities for each team member Defined standard of care applicable to design/construction roles Traditional risk allocation Clear lines of cause and responsibility for loss which, among other things, define the application of liability insurance

10 Integrated Project Delivery Effect on Insurance How does IPD affect the role of insurers and application of policies to pay losses, reduce uncertainty, and provide risk management and claims services addressing: Third-Party Claims bodily injury, property damage or economic loss, including injury to construction workers Project Outcome Risk cost and schedule Project Performance Risk design or construction defects in completed work

11 Insuring IPD Insurance Defined Insurance Mechanism Many independent insureds Homogeneous exposure to loss Definitive loss Calculable Accidental (from the standpoint of the insured) Insurance Contract Aleatory Contract Contract Uberrimae Fide (of Utmost Good Faith) Contract of Indemnification / Actual Loss Sustained Contract of Adhesion Policy Conditions Right of Subrogation

12 Insuring IPD Policy Conditions First Named Insured Pay premiums / receive return premiums Keep records necessary for premium calculation Notify insurer of material change or cancellation In Event of Claim Promptly notify insurer in writing of claim or any situation likely to give rise to a claim Cooperate with insurer s defense of claim Refuse, except solely at your own cost, to voluntarily make any payment, admit liability, assume any obligation, or incur any expense without our prior written approval Protect insurer s right of subrogation Pay the self-insured retention / deductible amount when due

13 Insuring IPD Applicable insurance policies Critical Coverages Professional Liability General Liability Builders Risk / Property Other Important Coverages Environmental Liability Workers Compensation Automobile Liability Aircraft/Watercraft Liability Railroad Protective Liability Contractors Equipment

14 Insuring IPD Application of key policy provisions Policy Professional Liability Commercial General Liability Builders Risk (first party coverage) Coverage Damages due to a Wrongful Act Bodily Injury or Property Damage due to negligence Direct physical damage to building, materials, equipment Standard of Care Reasonably prudent professional firm Reasonably prudent contractor Reasonable precautions to protect property Conditions Report claims/conditions Report claims/conditions Protect property from (further) damage Don t compromise insurer s defense Don t compromise insurer s defense Timely/complete notice of loss Defense Erodes policy limit In addition to limit n/a

15 Insuring IPD Challenges What constitutes an insured loss? Insured risk vs. business risk Professional cover under GL Difference in forms/mechanism Property vs. Casualty forms Deductible (pay on behalf) vs. Self-Insured Retention (SIR) Occurrence vs. claims made Defense in addition to limits Right of recovery Subrogation

16 Insuring IPD Practical Advice Know your business partners (Owner, Constructor, Designer, Trades) Maintain traditional project roles through collaborative process Define collaborative process and responsibilities in contract documents Don t assume liability / guarantee performance beyond norms Assess your exposure to professional liability Determine necessary amounts / types of coverage and which party is in the best position to purchase each policy

17 Insuring IPD Practical Advice (cont.) Meet with insurer underwriting and claims departments to assure understanding and buy-in Review policies carefully, including limits, conditions, endorsements

18 New Policies and Programs Protecting the Project and the Parties How can the insurance industry offer new products and services for IPD to pay losses, reduce uncertainty, and provide risk management and claims services addressing: Third-Party Claims bodily injury, property damage or economic loss, including injury to construction workers Project Outcome Risk cost and schedule Project Performance Risk design or construction defects in completed work

19 New Policies and Programs Initial Market Reaction IPD Insurance! Insurance Agent Underwriter

20 New Policies and Programs Understanding the Insurance Industry s Point of View Insurance companies are for-profit businesses that wish to earn a fair return on equity for the risk they take Traditional insurance coverages are supported by years of precedence Insurance rates are supported by years of data Denying a claim can be as expensive as paying it Insurance company financial ratings are affected by the amount of capital backing insurance policies they write Insurance is a heavily regulated industry

21 New Policies and Programs Visualizing IPD Insurance for the Project and Team Last $ Insurance Bonus Insurance Bonus Profit Contingency Profit Contingency Insurance Target Price Construction Construction Construction First $ GC Fee GC Fee GC Fee Arch. Fee Arch. Fee Arch. Fee Construction Industry View Insurance Industry View Optimal View Based on KlingStubbins IPD Budget Graphic

22 New Policies and Programs Insurance Revisited Insurance Mechanism Many independent insureds Homogeneous exposure to loss Definitive loss Calculable Accidental (from the standpoint of the insured) Insurance Contract Aleatory Contract Contract Uberrimae Fide (of Utmost Good Faith) Contract of Indemnification / Actual Loss Sustained Contract of Adhesion Policy Conditions Right of Subrogation

23 New Policies and Programs Group Captive Insurance Companies Member A Member B Member C Member D Fronting Insurer(s) Captive Insurance Company Reinsurer(s) Actuarial Legal Loss Control Claims

24 New Policies and Programs Finite Risk Captive with Reinsurance Participation Pre-Loss Funded Finite Risk Structure $1mm XS $5mm payment in the event of $6mm+ loss Low claims bonus amount = Premium + Inv Income Expenses - Claims Loss Event $5mm premium ceded Challenges Must entail true risk transfer Homogeneity of risk among projects/members Definitive, calculable loss Cookie jar syndrome Based on Christopher L. Culp, University of Chicago, and J.B. Heaton, Bartlit Veck Herman Palenchar & Scott LLP, The Uses and Abuses of Finite Risk Insurance

25 New Policies and Programs Who Will Lead the Way? Sophisticated institutional owners with a large, ongoing capex budget Groups of homogeneous, like-minded entities who pool resources Hospitals Universities Government Experienced teams who will work together on multiple future projects Contractors Design Firms

26 Insuring Collaboration Key Points Collaboration affects insurance Contract language affects insurance Understand policy conditions at time of loss/claim Communicate with your underwriter and claims rep Maintain traditional roles / coverages where practicable New policies and programs will be led by projects/teams who manage and assume risk and represent sustained business to the industry

27 Questions? Michael Hastings, Marsh Inc. Gregg Bundschuh, Esq., Greyling LLC // Nov 3, 2011

BIM Legal and Insurance Issues

BIM Legal and Insurance Issues Fall BIMForum Orlando, FL Disney's Yacht Club Resort October 20-21, 2015 Michael D. Hastings, Marsh US Construction Practice Brian P. Clifford, Faegre Baker Daniels LLP #BIMForumED