1 / 40

Construction Insurance 101 or: What You Don’t Know Can Hurt You

Construction Insurance 101 or: What You Don’t Know Can Hurt You. Illinois Association of School Business Officials 57 th Annual Conference May 15, 2008. Agenda. The Goals of Risk Management Three Options for Managing Risk The Transfer of Risk Insurance Bonds

oprah-cook
Download Presentation

Construction Insurance 101 or: What You Don’t Know Can Hurt You

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Construction Insurance 101 or:What You Don’t Know Can Hurt You Illinois Association of School Business Officials 57th Annual Conference May 15, 2008

  2. Agenda The Goals of Risk Management • Three Options for Managing Risk The Transfer of Risk • Insurance • Bonds • Other Ways to Transfer Risk

  3. Defining Risk Management Planning for the negative consequences of any decision process or action by using whatever means feasible to control the chance of financial loss. Public Sector Risk Management Manual

  4. Basically, RM Involves: • Trying to stop losses from happening • (through avoidance, risk control, • loss control or loss prevention) • Paying for the losses that do occur • (through reduction, insurance or • risk transfer)

  5. R I S K AVOID CONTROL FINANCE TRANSFER Fund Sub- Contract Contracts Exit People Insurance Plant ABSORB Risk Management Toolkit

  6. Insurance A contractual relationship that exists when one party (the insurer) for a consideration (premium) agrees to reimburse another party (the insured) for loss to a specified subject (the risk) caused by designated contingencies (hazards or perils).

  7. Why would we do that??

  8. What Will the Policy Pay? • Attachment point = When will the policy begin to pay? • Policy limits = the maximum amount the policy will pay (per occurrence or in the aggregate) • What are the terms of payment? (When, to whom, conditions) • Pay attention to proper notice (notification of potential claim)

  9. AFewImportant Insurance Terms Indemnification • To indemnify = to make whole • Waiver of Subrogation • Waive (release) all rights • Subrogation – to recover from a third party (e.g., auto salvage)

  10. Subrogation • A common law principle inherent in insurance and other indemnification transactions • It is the right of an insurer to assume the rights of the insured to seek remedy against a responsible party • Most insurance contracts require the insured’s full cooperation in this endeavor

  11. Lines of Coverage • Builders Risk • Bonds

  12. Builders Risk • A Property insurance policy that provides direct damage coverage on buildings or structures while they are under construction. Also covers: • Foundations • Fixtures • Machinery & Equipment • Materials & Supplies

  13. Builders Risk Coverage may be written on the following forms: • Complete Value (100% Coinsurance)-RECOMMENDED • Reporting Form (Values Reported as Completed)

  14. Builders Risk • Completed value should include all permanent fixtures and decorations that will be a permanent part of the building • CONTRACT PRICE DOES NOT NECESSARILY EQUAL THE FULL VALUE AT COMPLETION

  15. Now That Insurance Is Perfectly Clear…

  16. Bonds • A form of insurance, but there are three parties • Not an aleatory contract • Insurance: premium $$ protects against defined risks • Bond: premium $$ guarantees a performance, completion or protection • The surety does not expect losses

  17. Definition of (not James) Bond • A written instrument guaranteeing the performance, compliance, integrity and honesty of the principal by the surety for the benefit of the obligee. The instrument binds itself to the terms of an underlying contract or obligation consisting of a formal agreement, a fiduciary relationship or an official duty

  18. Key Definitions • Obligee – The entity protected against loss and guaranteed adequate completion of the underlying obligation • Surety – The one promising to answer for the debt, default or miscarriage of another • Principal – The person whose debt or obligation is secured or guaranteed by the bond

  19. Bonds • A surety bond is a written contract like insurance • Suretyship = means one party “answers” for the faults of another • Surety guarantees to an obligee on behalf of a principal • Unlike insurance it guarantees in the event of a “failure” to perform

  20. Other Types of Bonds • Bid Bond = Difference in Bid Amounts • Performance Bond = Failure to do the work • Payment Bond = Guarantee all bills get paid • Maintenance Bond = Warranty • Supply Contract Bond = Difference in Cost

  21. Other Ways to Transfer Risk • Contracts • Additional Insured & Named Insured

  22. Contractual Risk Transfer is NOT Rocket Science… …but it is important to understand the “moving parts”

  23. Offer Acceptance Consideration Legal Intent Agreeable Form A Valid Contract “A promise recognized by the law as amounting to a duty, the breach of which may trigger a legal remedy”

  24. Insurance Provisions • Define Insurance Requirements • Coverage types, terms, formats • Timeframes for maintaining coverage • Limits, per occurrence and aggregate • Deductibles and SIR’s • Financial stability of insurer • Additional insured status, endorsements and certificates • Put Requirements in the RFP

  25. Recommended Insurance Requirements • For purposes of establishing insurance requirements, hazard levels are broken down into three categories: LOW HAZARD MEDIUM HAZARD HIGH HAZARD

  26. Low Hazard “Low Hazard”-Artisan type contractors such as carpenters, plumbers (no digging or trenching), painters, small repair type contractors • Minimum recommended insurance limits of $1,000,000 occ/agg for GL, AL, WC/EL

  27. Medium Hazard • “Medium Hazard”-Roofers, plumbing with minor digging, cement contractors, grading of land, landscapers, cleaning contractors, brick layers • Minimum recommended insurance limits of $1,000,000 occ/$2,000,000 agg for GL, AL, WC/EL, Prof. Liab.

  28. High Hazard • “High Hazard”-Excavation, underground contractors, road contractors, erection, welding projects, and all major building construction and renovation • Minimum recommended insurance limits of $1,000,000 occ/$3,000,000 agg for GL, AL, WC/EL, Prof. Liab.

  29. Using Certificates of Insurance • Shows evidence that coverage exists (proof of workers’ compensation, professional liability coverage, etc.) • Verifies coverage details • It does not guarantee coverage for you – the endorsement does that

  30. Certificates & Endorsements How do I review the certificate? Check limits, company, date, name The A.M. Best Rating Guide • Hard copy is available from A.M. Best • Computer website:www.Ambest.com • Grades A – D denotes the financial performance of the insurer • Size category I – XV denotes the financial size of the insurer

  31. Reading an ACORD Form * Endorsement Example Back of Certificate Certificate of Liability Insurance ACORD Form

  32. Insurance Certificate Certificate Review The “Big” Picture Additional Insured Policy may be modified or cancelled mid-term Policy may not be obtained Insurer not acceptable Limits not adequate

  33. Additional Insured • It’s when “Who is an Insured?” (in an insurance policy) is amended to include: The School as an insured party on a contractor’s or vendor’s insurance policy when the School and the contractor or vendor have entered into a written contract or agreement for the performance or operation of some service or task. This is done through an endorsement to the policy.

  34. Why be an Additional Insured? • Reinforces risk transfer accomplished via contract • Effectively waives insurer’s ability to subrogate against you • Provides direct right of action against insurer

  35. Caution Additional insured status does not automatically extend to your employees, officers, directors, etc. This is accomplished only via contract language

  36. Drafting Contract Insurance Requirements • Keep both contracting parties in mind; make it realistic and fair • “Boilerplate” language is a guide, not a rule – exceptions will be necessary • Specify minimum financial rating standards • Make your expectations clear up front

  37. Best Practices Contractual Risk Transfer • Put insurance requirements in bids • Request & review certificates – be specific and exact • Require proof before work begins • Know when to ask for help!

  38. Conclusion MOST COMMOM MISTAKES MADE SCHOOLS: • Not notifying insurance agent/broker of project • Not insuring to completed value • Not obtaining certificate of insurance from architect, construction manager, and contractors • Not being named as an additional insured by the above • Not forwarding above certificate to agent/broker for review • SIGNING A WAIVER OF SUBROGATION UNDER STANDARD AIA CONTRACT

  39. Speaker Information Ryan Isaacs-Area Vice President Public Entity & Scholastic Division Arthur J. Gallagher Risk Mgmt Services (630)694-5279 Ryan_Isaacs@ajg.com

More Related