It is apparent that lean and fit organizations represent a platform for long-term survival. With the challenges of the current economic times, contractors are leaving no stones unturned.
They have recognized the importance of imagination, vision and competitive information to survive and succeed in an uncertain world. In this respect, risk management has emerged as an important source of creativity and vision that is enhancing the competitive edge and, in some cases, the survival rate of many contractors. Managing risk has been transformed from a once-a-year insurance bidding frenzy to a serious management initiative that has the ability to boost returns, create equity, reduce costs and permanently change the way construction firms are managed.
The risk management technology available today has long passed the traditional construction risk insurance policy buyer in favor of sophisticated construction firms that are astute enough to put each and every risk dollar to work for the company, stabilizing and reducing cost while leveling out the losses. The following represents a few selected risk management technologies that contractors are embracing to weather the storm.
Contract Documents
Allocating risk on construction projects continues to be an often-overlooked area in analyzing risk profiles for contractors. The effective use of hold harmless and indemnification agreements can reduce, and oftentimes manage, specific types of losses (particularly "action-over" lawsuits) that would have been otherwise absorbed into the contractor's operations or insurance program. To capitalize on this technology:
- A standard subcontract document and purchase order should be reviewed for enforceability within the state venues of work and updated periodically to incorporate state laws. Whatever form is chosen, this agreement should serve as the basis for distributing risk within projects.
- This standard subcontract/purchase order should contain specific language with respect to types of policies/coverages required, minimum limits of liability and endorsements that protect the interest of the construction entity seeking indemnity. For example:
- Additional Insured -adding the name of the general contractor to a subcontractor's general liability policy as an additional insured. Due to the new proprietary forms being used by insurers, this is becoming a challenging issue with regard to completed operations, ongoing operations, residential restrictions and indemnity agreements. There are countless forms being used, with many having significant restrictions on additional insured benefits/status. To date, we have identified fifteen serious restrictions or exclusions contained in many of the forms with the intent to restrict or even withdraw additional insured benefits to the contractor.
- Insurance Considered Primary -the liability program of the subcontractor or sub-subcontractor shall be considered primary in the event of a loss.
- Cancellation Notice -usually as much as sixty days for cancellation and/or non-renewal is desired.
- Waiver of Subrogation -to avoid subrogation proceedings on losses by the subcontractor's insurer.
