RISK MANAGEMENT AND INSURANCE

Construction Managers Association of America (CMAA) -

Winter Forum
Contract Law for Construction Managers (CM)
Seattle, Washington
February 19, 2003
PRESENTED BY:
Donald A. Waddell
Director of Consulting Services
WRISC, Inc.
PO Box 7946
Eugene, OR 97401-0037
800-449-7472
don@wrapupservices.com
RISK MANAGEMENT DEFINED

Risk Management (RM) is inherent in any business enterprise including those of the Owner and CM. Although the A-Series CMAA Standard Forms of Agreement only imply a nominal RM role for the CM, administration of contracts, which contain insurance requirements, waivers, bonds, liquidated damages, claims and indemnity provisions are the subject of RM.

As is the case with Safety Management, the Owner's reliance on the CM for RM services varies greatly.

The RM process includes five steps:

1. Identification of risks. Insurance companies, agents/brokers and consultants, to assist in the detection of risks, have prepared elaborate survey and audit forms. There is a significant difference in risks between public and private facilities, between roads and dams, hospitals and libraries, chemical plants and airports. Completion and evaluation of these forms requires trained personnel.
   
   
2. Risk analysis. Each risk is evaluated to quantify its frequency (how often), severity (how high is the cost), variation (how statistically valid) and impact (how does it affect operations/profitability).
   
   
3. Treatment of risk. -Reduce risk (disaster plans, safety and loss control) -Treatment of risk to eliminate (don't use, don't do or loss prevention), -Absorb risks by funding internally as an affordable and predictable business expense (self-insure). -Transfer risk (hold-harmless agreements, sub-contract the activity to others, FEMA or buy insurance)
   
   
4. Implementation of the appropriate treatments.
5. Monitoring and control of treatments for effectiveness. Management of risks is most efficient when coordinated from the top by the Owner or the CM for themselves and all consultants and contractors.
   
   

ROLE OF THE CM
Ideally, the RM process will begin before the location of the project is selected or the design team is retained. Typically, the Owner will have made decisions with RM implications, before the CM is involved in the project. These early decisions can have a significant RM impact.

• Know yours and the Owner's capabilities. A careful review by the Owner and the CM of their respective RM capabilities will allow for understanding of their optimum roles which must be articulated clearly in the CM contract scope. As is the case with safety, the CM should be familiar with all of the legal implications and responsibilities of providing RM services. If neither party possesses the required skill set, an outside RM consultant with construction expertise can be retained.
  
  
• CM Staffing. Smaller projects can support less RM activity generally whereas a very large program can support its own RM staff.
  
  Many projects do not have enough size to warrant the expenditure of resources that would be required to support a full risk management effort. Unless a Wrap-Up insurance program is to be implemented, neither the Owner nor the CM has the power to manage much of the risk that springs from the conduct of the consultants and contractors. The exception is the ability to make contractual requirements and enforce them at some practical level.
• Role of contractors.
  
  
• Role of risk or insurance consultants. Because large capital improvement programs often present the CM team with the need to supplement or replace certain of the Owner's staff, a review with the Owner of their available RM staff will clarify the need for any additional support to manage this function. CM firms with the specialized construction RM staff may fill this need. When appropriate, the CM or Owner may retain a qualified outside consultant. This is particularly important if a Wrap-Up Insurance Program will be considered.
  
  Although the Risk Manager cannot be expected to be aware of all of the RM issues on any given project, or have all of the answers to every RM problem or opportunity, the person(s) performing this function should have the specific experience in construction. Their experience should reasonably allow them to identify problems, find solutions and have the skill to coordinate RM activities. The recommendations of the Risk Manger will often have to be subverted to other imperatives such as budget restrictions or fixed locations of work. Nevertheless, each recommendation must receive its due consideration. Much is at stake.
  
  If the RM consultant is an agent or a broker, they should not be allowed to provide advice on insurance, which they will supply.
• Contract clarity.

CONSTRUCTION CONTRACT COMPONENTS

• Surety Bonds. (Presentation by James Nagle) There are various types of Surety bonds. Only one group, Contract Bonds, typically relate to the work of the CM. Contract Bonds guarantee the performance of duty that has been assumed by the contractor. There are four types of bonds to consider.
  -Bid Bonds
  -Performance Bonds
  -Payment Bonds
  -Maintenance Bonds
  
  There are several other approaches to providing security in lieu of bonds and these include: -Letters of Credit
  -Certificates of Deposit
  -Assignment of a Financial Instrument
  
  
• Safety (Refer to CMAA: CM Standards of Practice, 7.0 Safety Management.) Owner commitment is critical if a Wrap-Up is to be used and contract must provide specific requirements and enforcement provisions.
  
  Written safety plan is required from each contractor that conforms to a project wide safety program. The CM reviews for compliance but does not approve.
  
  Pre-qualification of contractors to confirm safety record and capabilities is valuable where allowed.
  
  Enforcement & Compliance. The CM or the Owner must have contractual authority to assure safety standards are met.
  
  Safety procedures, committees, training, audits, meetings and incentives should be specified clearly in the contracts if they are to be enforced.
  
  
• Indemnity.
  These contract provisions require one party, the indemnitor, to assume the obligation of the other party, the indemnitee, and to hold them harmless from damages and liability associated with the subject of the agreement, regardless of which party was actually at fault. Also known as old harmless agreements they can be classified into three groups. In each case, the determining factor is the degree to which the indemnified party is relieved of responsibility for their own acts.
  -Limited
  This provision only obligates the indemnitor to assume defense of the indemnitee for the negligence of the indemnitor. This version is sometimes known as a "comparative fault" agreement. It is most commonly used in professional services contracts. -Intermediate
  In this agreement, the indemnitor assumes responsibility for all but the sole negligence of the indemnitee. This is the standard for construction contracts. -Broad
  Here, the Indemnitor is responsible for the sole negligence of the indemnitee. These agreements are often illegal and unenforceable in construction contracts.
  
  
• Insurance Mandatory Coverage
  -Workers' Compensation & Employers Liability
  -Commercial General Liability
  -Automobile Liability
  
  Examples of Optional Coverage
  -Builders Risk
  
  • Terrorism, Earthquake & Flood perils
  • Testing - Boiler & Machinery
    
  • Extra Expense/Expediting Expense
    
  • Loss of Income
    
  -Delay in Completion
  -Professional Liability
  -Pollution Liability
  -Force Majeure
  -Railroad Protective Liability
  -Watercraft Liability
  -Aircraft Liability
  -Federal Workers' Compensation
  • U.S.L.& H.
  • Jones Act
  Depending on individual circumstances, other coverages may be required.
  
  
• Considerations that will affect insurance requirements -Cost, Availability & Insurance market conditions
  -DBE/small & local contractors
  -Project size & packaging
  -Delivery method
  -Public vs. private work
  -Project type
  -Project physical conditions
  -Means & Methods
  
• Contract Insurance Provisions. -Workers' Compensation waiver in favor of Owner & CM
  -Insurance Company Financial Requirements
  -Certificates of Insurance
  -Written advance notice of cancellation, non-renewal, and material reduction.
  -Additional Insured requirements
  -Contractors policies are primary
  
• Wrap-Up Insurance Programs.
  
  During the Design phase, consideration should be given to the feasibility of using a Wrap-Up insurance program for some of the insurance, which will be required. Typically projects with construction costs over $100 million in value should be considered for a Wrap-Up.
  
  In a Wrap-Up, certain policies covering the Owner, CM, and contractors of all tiers are provided in one insurance program. Coverage typically includes Workers' Compensation & Employers Liability, Commercial General Liability, Excess (High Limit) Liability and Builders Risk Insurance. Certain other coverages may also be provided.
  
  There are several approaches to this insurance technique that are generally known as Owner Controlled Insurance Programs (OCIP) or Contractor Controlled Insurance Programs (CCIP), depending upon whether the Owner or the contractor sponsors the program. There are also CM and PM sponsored Wrap-Ups.
  
  Program wide, seamless Design Professional Errors & Omissions Liability insurance (E&O) and Builders Risk Policies can be implemented independently of a formal Wrap-Up insurance program.
  
  The advantages of a Wrap-Up include:
  -Lower controlled insurance costs for the project
  -Broader insurance coverage
  -Ease of insurance certificate administration
  -Reduced litigation
  -Safer project
  -Seamless control of uniform insurance coverage
  -Higher insurance limits and dedicated limits
  -Less duplication of coverage
  -Improved claims and public relations management
  Disadvantages of a Wrap-Up: -Difficult to determine exact amount of savings
  -More responsibility assumed by the Owner (sponsor)
  -Owner and CM must be seriously committed to safety
  -Termination of the Wrap-Up may require several years after the project is complete.
  -Larger contractors resist participation in Wrap-Ups unless they are the sponsors.
  
  
  Most large projects in the U.S. are insured under Wrap-Up type insurance programs. Current difficult insurance market conditions favor the use of these programs. State insurance regulations place some restrictions on the use of this risk management technique and they tend not to be as effective in states such as Washington that have monopolistic state funds for Workers' Compensation.
  
  CONCLUSION
  1. Grow where you are planted (Use what you have and find what you need.)
  2. You don't get what you expect (You get what you inspect and enforce.)
  
  
  
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