2011 IRMI Construction Risk Conference insights provide risk management best practices.

Navigating all the issues that can put you and your company at risk is no doubt the most complicated challenge contractors face. Many subcontractors and smaller GCs experienced losses in 2011 that put them out of business. Fortunately, once a year, the International Risk Management Institute (IRMI), brings together contractors, brokers, agents, risk managers and attorneys to examine the most pressing insurance and surety-related issues contractors face. CBO attended IRMI to report on what the industry is buzzing about. 

In addition to shedding light on emerging issues, the IRMI conference helps contractors learn how to make better decisions on commonplace questions they encounter every day. For instance, the Building a Better Builder’s Risk Program explored who should obtain builder’s risk insurance—the owner or contractor. Arguments were made for both sides, but consider this: Many owners argue they should procure this policy because it will be the only way to acquire delay in start-up insurance (DSU), but this is actually a myth. Contractors should seriously consider controlling their builder’s risk insurance. After all, they bear the financial consequences for loss or damage. As Susan Staff, director of risk management for Zachry Holdings, Inc., put it, “If you are jumping out of an airplane, you want to pack your own parachute.” She also points out that the contractor has more information to provide underwriters, often leading to reduced premiums. 

When you allow the owner to purchase the insurance—due to commercial pressure, insistence from lenders, level of risk management expertise or other factors—be sure that both parties agree to a deductible or retained amount for the risk of loss. Also, the language should include a “waiver of subrogation” on the policy, and a change order provision should be included for the contractor’s cost to rectify damage, among other concerns.


Emerging Issues


One of the biggest benefits of the IRMI conference was having a front row seat as experts discussed new problems the industry will face in 2012. Much of the discussion focused on the recent legal quibbling over the scope of coverage provided by general liability insurance in state courts. The debate centers around whether a construction defect claim actually qualifies as “an occurrence” under a general liability policy (To gain a better understanding about this issue, read this month’s “Insurance Matters” column on page 16). “2011 was marked by a continuation of insurers’ defensive measures to deal with legislative, legal and economic conditions,” says Michael Anderson, U.S. construction practice leader for Marsh, Inc. He says that some of these measures include increasing attachment points for excess carriers in response to third-party-over claims enabled by the New York labor law and continued wrap-up exclusions, among others.

Measuring risk is not a novel problem, but it has become a growing concern. “Quantifying risk, particularly on long-term projects, has always been a challenge, but today’s insurance market has certainly ‘moved the contractor’s cheese.’ Additional insured endorsements, case law on construction defect, underwriting restrictions in certain states and collateral requirements will test the construction industry’s ability to quantify and manage risk,” says Steven Davis, senior vice president and director of construction risk services for McGriff, Seibels & Williams, Inc. 

Another topic of discussion at IRMI was the challenge that integrated project delivery (IPD) presents for the legal and insurance community. According to Stephen A. Hilger, CEO of Hilger Hammond, PC, “IPD is an attempt at solving the age-old problem of picking the right players who can function as a team to deliver a quality construction project.” He acknowledges that while increased use of BIM (building information modeling) has served as a catalyst for IPD, it currently does not have a foothold in the marketplace the way the design-build approach does. However, this delivery method seems to be gaining momentum. While different levels of IPD exist, the purest form involves shared risk and reward among all parties—contractors, architects and engineers—and collaboration requires a multi-party contract, in which it is cumbersome to define risks. 

This requires a big paradigm shift, and it makes many professionals skittish. “These technologies and processes do not enjoy substantial precedence or an established standard of care, causing the line between design versus means and methods to be blurred.  This creates uncertainty with regard to the application of the CGL policy to disputes that arise, dramatically increasing the need of contractors to seek professional liability coverage,” Anderson says. Hilger points out that without proper contract language, GCs put themselves at risk for exposure with devastating consequences.


The Solution


Contractors must increase their communication about risk within their teams and with their risk advisers and underwriters, Anderson says. “Contractors can only try to mitigate these unknowns and the associated surprises through the use of advisors with a broad range of experience with expectations and the resulting outcomes,” he adds.


Davis recommends a return-to-basics approach for gaining a competitive edge in a nasty market cycle. “Those who are prepared and able to demonstrate/communicate their implementation of best practices will win the cycle battle once again. Put simply: Be prepared, look outside the box, focus on quality insurance partners, and remain diligent in claims and safety,” he says.


Looking Ahead


The upcoming year and 2013 could be a difficult time from a rate standpoint as many insurers increase rates, mostly in the single digit range. “Contractors who have unfavorable historical losses could find themselves fighting back double-digit rate increases desired by insurers. This upward rate pressure is driven by several factors: investment returns for insurers are anemic; workers’ compensation losses have outpaced rates; and 2011 likely could be the worst year for global catastrophic losses on record, impacting reinsurers significantly,” Davis says. According to the “Global Mega-Catastrophe” report by the Insurance Information Institute, 2011 is already the highest global catastrophe loss year on record as of June 30, 2011, with $260 billion in economic losses and $55 billion in insured losses.