Construction Risk Experts Outline Looming Changes
Insurance reps, contractor risk managers and attorneys highlighted looming new risks at the Insurance Risk Management Institute's construction conference, held in Orlando, Fla., from Nov. 12 to Nov. 15, that could spell new bottom-line impacts and a need for more vigilance.
William B. Noonan, risk-management vice president for contractor StructureTone, noted the importance of having builders' risk policies "during construction" as well as blanket wrap-up coverages offered by owners or contractors. But Vincent Zegers, a construction specialist at Marsh USA, said there is still confusion as to whether subcontractors and suppliers should be "named" or just "additional" parties to the builder's risk coverage and how that status difference affects damage liability. Noonan emphasized that such policies also are being purchased too late in a project's progress, while Zegers noted continuing uncertainty among insurers and states over when and why policies can be cancelled.
Speakers also noted that subcontractor defaults remain a concern, even as markets show some signs of recovery. Luke J. Nolan Jr., a director in the Southwest at insurer Aon, said he was "worried about one-third of subs who are on thin ice." Attorney Steven Charney said the cost of a default may be underestimated by a factor of three. "You have to factor in the cost applicable to redoing defective work in addition to the work not yet done," he said. Charney said the average default claim is now one to 1.5 times the amount of the original subcontract. He urged general contractors to ensure they have "black and white" proof of the financial impacts of defaults,but also noted that many "are not capable financially of performing work they sub out."
Cost changes in workers' compensation, which will go into effect next year, also will add to bottom-line risks. Sonja J. Guenther, senior vice president of insurer Willis, reiterated the planned changes by the National Council on Compensation Insurance, which administers workers' comp in 38 states, in how critical "experience modification rates" will be calculated for injury losses (ENR 9/24 p. 42). Guenther said that while some states will allow petitions to block the increase, the new rates may hurt firms that have cut payrolls and spur more not to report their true injury rates.
Orlando-based attorney Brian Wagner noted risk impacts from recent legal decisions. In one case, a Texas state court ruled last June that a contractor's obligation to perform work in a "workman-like manner" constituted an assumption of liability, triggering an exclusion in its insurance contract. However, two months later, the court withdrew its ruling, and the case is now before the Texas Supreme Court. Wagner also noted impacts from a $8.9-million settlement by Jacobs Engineering Group in the 2007 collapse of Minnesota's I-35 bridge. The pact resulted from the Legislature's altering the state statute of repose, a move which "breathed life into liabilities that had been dead for 26 years," Wagner said.
Another Texas lawsuit involving "no damages for delay" terms is pending. In its suit against the Port of Houston over delays on a wharf project, Zachry Construction won a $20-million award, but an appellate court reversed that verdict in August, contending that "an extension of time" was the firm's only recourse.