Perspectives on Insurance Coverage for … on Insurance Coverage for Construction Projects: ... of insurance costs and timing ... Joint Task Force report found bowing of upper brick

Perspectives on Insurance Coverage for

Construction Projects:

Lessons Learned from Real Coverage

Disputes

Outline of Presentation

Introductions of Panel

Topics for Discussion

I. Placement of Insurance for Construction Projects

II. General Liability Insurance

III.

IV. Ocean Marine Cargo Insurance

V. Professional Liability Insurance

Q&A & Closing Remarks

Moderator: Jim Malloy Partner, DFL Legal

Panel: Joe Luciana Partner, DFL Legal

Walter Bacsik Risk Manager, Dragados USA, Inc.

Jim Tedjeske Vice President, Legal, Kvaerner

Americas Holding, Inc.

Jim Bly Managing Director, Alliant

Construction Services Group

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


Owner Controlled Insurance Programs

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.

Advantages : Broader coverage, coordinated claims procedure, and reduced

coverage/subrogation disputes between contractor and owner

Drawbacks

difference in conditions coverage, additional reporting/administrative burdens


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


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?

II. General Liability Insurance

Case Study : Coke Oven Battery Property Damage

Coverage Issue -

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

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


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

Ultimately resolved by PA Supreme Court 908 A.2d 888 (Pa. 2006)

Held: claim for faulty workmanship is not an occurrence under CGL policy


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


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


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

III.

Why Builders Risk ?

Advantages:

Protects works

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?

III.

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

III.

Insuring Agreement

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

Government Order Exclusion -

incurred or sustained by or imposed on any Insured at order of any

government agency, court or other authority arising from any cause

III.

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

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

-shipment survey

IV. Ocean Marine Cargo Insurance (cont.)

Consequential loss coverage by endorsement

reduction in production (delay-in-startup)

increase in cost to avoid reduction in production

-

shipment survey warranty

Endorsement added project to the facility for delay-in-start-up

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-

Insurance Co., 348 U.S. 310 (1955)).

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 e-mail exchanges and deposition

transcripts in an effort to discern whether the parties might really have intended

V. Professional Liability Insurance

Case Study : GC Contract with CM Responsibilities

Owner/contractor agreement is for general contractor but

-

performance, 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

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.

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

Q&A & Closing Remarks

Questions for Panel?

Thank you!

Documents

Perspectives on Insurance Coverage for … on Insurance Coverage for Construction Projects: ... of insurance costs and timing ... Joint Task Force report found bowing of upper brick