Construction Risk

Construction Risk, Wrap-ups,

and the challenges of the
current economy

Susan
Bryan,
AIC,
ARM
Ms. Bryan
currently acts
as the
Regional Underwriting Manager for all excess
construction liability coverage for the Western Region at AIG/American Home. This
Regional
Underwriting
Manager
includes underwriting
both wrap-up and
program coverages for a wide variety of
developers, contractors and trade subcontractors involved in all types of construction
Construction
Specialty
Excess
as well as the development
of new products
and coverages for those risks. Ms.
Bryan spent 13 years as an adjuster handling construction defect, complex coverage
and Excess
severe exposures
in the Construction Defect and Major Case Units at Aetna and
AIG
Casualty
Royal Insurance Companies. She also spent four years as an insurance broker
specializing in program design and placement construction risks including both
renewable programs and wraps, working with all size of accounts and routinely
consulting throughout the country. Ms. Bryan is routinely consulted for her expertise
in coverage issues and has testified as an expert in coverage litigation and spoken
at numerous seminars and conferences throughout the country.

Alan H. Packer
Newmeyer & Dillion LLP
Newmeyer & Dillion, LLP is a California-based law firm provides a full range of litigation and
transactional services to businesses and individuals, including home builders, real estate development
firms, and others.
Alan Packer is a partner in the firms expanding Northern California office. He has practiced law in
California for over 20 years, most of it representing parties involved in real estate, home building,
construction, and insurance matters.
Mr. Packer represents home builders, property owners, contractors, and business clients in a broad range
of legal matters, including risk management, insurance matters, wrap consultation and documentation,
efforts to coutner solicitation of homeowners, subcontract and prime contract documentation, as well as
complex litigation matters involving construction projects, product defect claims, construction defect
claims, cost recovery actions, additional insured coverage matters, and creative dispute resolution. He
also handles mechanics lien, stop notice, real estate, and payment and performance bond issues in
residential and commercial contexts.

Todays Topics

Topics for Today

Analysis of the types of risks particular to

the construction industry
&

associated legal and underwriting issues

OCIPs, CCIPS, ROCIPS

Brief overview of some of the impacts of
current economic conditions on
construction

Construction
Industry Risks

Construction Industry Catastrophic

Risks

Catastrophic injury potentials

Course

of construction / Jobsite injuries

Post Construction/Products Completed
Operations Exposures:
Bodily injury arising out of negligent construction
Construction defect Property Damage claims

Catastrophic
Risk

Catastrophic risk potential

Course of Construction Hazards

Sources of exposure

Moving parts and activity:

cranes,
heavy machinery,
height exposures,
failures of structural components
that can lead to collapse hazards

#1 Course of Construction Losses

Personal injury & wrongful death claims

Most commonly onsite construction workers are the injured

parties, although sometimes bystanders are also hurt
The construction industry has one of the highest mortality rates
of all industries in the US. Workers are in danger from:

Falls,
Electrocution,
Heat-related deaths
Pollutants (asbestos and others)
Lots of other causes

Other losses

Property damage
Business interruption
Delay damages
Multiple bond claims

Catastrophic Risk

Catastrophic Risk

Catastrophic Risk

#2 Post Construction Calamities

(big and small) create long tail
exposures
After Construction is completed, liability

exposure for injuries can continue for decades.

For instance,
Builder

sued in 2003 for asbestos exposure of a

janitor who worked in a high school in the 1950s that
the builder built in the 1920s. An 80 year tail!
Contractor sued 15 years after construction when
someone fell down a flight of stairs and claimed that
the stairs were not built to code.

Catastrophic Risk

Bridge collapses

Losses potentially
insured:

Personal injuries
Death
Property damage to bridge
Property damage to
vehicles
Business interruption
losses
Replacement costs
Multiple bond claims

Potentially liable parties

Inspectors
Retrofit contractors
Design professionals
Construction managers
Original construction (even
decades later)

Catastrophic Risk

Catastrophic Risk: pub with no beer*

* Australia (as if you had to think about it)

Station fire (fireworks/rock band)

Potentially covered losses

Injuries & deaths

Property damage
Business interruption
Rebuild
Band reputation

Potentially liable parties

Band
Promotors
Landlord
Pyrotechnics
Contractors who installed flammable
foam
Building contractors

Construction Defect
Exposures

Construction Defect Exposures

#1 issue in the hearts of carriers that causes fear

from residential exposures in California

Strict liability
Expansion of residential claims
Attorney solicitation
Continuing exposure issues (Montrose)
Efforts at liability reform (SB 800)
Inherently uneconomic litigation models prior to wraps
Impact of wraps

Potential liabilities

Strict liability, negligence, breach of contract = explained

Milstein

Kasdan

Shinnick
& Ryan

Sample
Complaint

Sample CrossComplaint

Sample CrossComplaint, p. 2

The Montrose Effect

3. The Montrose Effect (contd)

Occurrence typically
means an accident,
including continuous
or repeated exposure
to substantially the
same general
harmful conditions.

Wraps and OCIPs

What is a Wrap Anyway?

No, what is a Wrap, really?

CIP Controlled Insurance
Program
OCIP Owner CIP
CCIP Contractor CIP
Sponsor (owner or contractor) provides
insurance to all contractors and
subcontractors for the project for general
liability (sometimes w/c as well) for the
term of construction and beyond into
completed operations period

What is a wrap? (cont)

Owner or General Contractor will purchase insurance

and enroll subcontractors into program. All parties who
work on contruction will be covered under a single
program.
Owner or GC responsible for premium and SIR or
deductibles but will spread cost through contract
deducts and/or indemnity provisions for deductible
and/or SIR obligations
Single carrier for all claims will presumably enable ONE
lawyer to represent all parties for any claim avoiding the
count the lawyers game.

History of Wrap-Ups

1940s Introduced on the U.S. defense plants

1950s Applied to other projects (such as Lincoln Tunnel)
1990s Significant increase in popularity on commercial
and public works projects
Late 1990s Start of use on residential projects in
western United States

Benefits of Wraps

Covers all defined project risks under one policy.

In theory, limits the number of parties, attorneys,
and claims professionals on any given claim.
Reduces uncertainties arising from subcontractor
insolvencies
Reduces uncertainties arising from insurer
insolvencies
Reduces uncertainties arising from varying
subcontractor insurance (Montrose, residential
exclusions, prior work exclusions, etc.)

Wraps Underwriting
complications
Underwriting information on insureds
Setting premiums
Differing types of projects
Mixed use vs. conventional projects
Aggregates and limits
SIRs and deductibles
What happened to the loss history?????

Wraps Legal Considerations

All relevant documents need to be carefully

coordinated through legal counsel familiar with
wrap issues.

Subcontract indemnity provisions

SIR/deductible provisions
Warranty provisions
Subcontract insurance provisions
Non-wrap exposure insurance and indemnity provisions
Even the wrap policies themselves may require modification
based on the program involved. (Not all cookies are from the
same mold.)

New Wrap Disclosure Obligations

AB 2738

Also new SIR limitations

Defense Costs: Unified Defense is

Still a Myth
Many older residential wrap-up
programs are believed to potentially
have inadequate limits as a result of
both availability and cost

New Wrap Disasters

Example
Builder

buys $10,000,000 wrap-up policy covering

builder and all trades
Builder and trades build the project and sell it
A few years later, builder goes bankrupt (2008)
The policy has a $1.0 million SIR before any obligation
to the subcontractors, who have NO OTHER
INSURANCE because their practice policies exclude
any project on which a wrap-up policy exists.

Defense Costs: Unified Defense

is Still a Myth
EXAMPLE Actual wrap policy

Aggregate Limit: $25,000,000 for completed

operations
Coverage Territory: All projects in California
Defense Fees: INSIDE limits
Number of Homes Constructed in Coverage
Territory: Over 10,000 per year
Coverage per Unit Constructed (actual):
$1,750, including defense fees
Coverage per Unit Constructed (actual),
assuming 20% litigation: $8,753, including
defense fees

Covering the gaps in the wraps

Excess and DIC wraps

Current hot coverage enhancement
Provides excess wrap coverage to
contractors, occasionally without
additional premium

Various limitations in varying endorsements

Excess applies only for non-residential

projects
Applies only to projects with minimum limits

Looking Forward
Current Market Conditions

So how bad can it really be?

December 2008 statistics:

Sales of new homes dropped by their

biggest margin since 1994, falling
14.7%
New home sales (seasonally
adjusted rate, homes per year):
December 2008: 331,000
homes.
July 2005:
1.389 million
homes
Nationally, spending on home
construction fell 27.2% in 2008
In California CBIA forecasts that
only 63,400 units will be produced in
2009, down from 2008. (Comparison:
The low point of the homebuilding
recession in the early 1990s was
84,656.)

Impact in California alone

Some more of the Numbers

California builders sold 3,500 units in
November 08
California sales were .859% of national
sales; historically California made up
12.5% of National sales figures
Inventory: 374,000 new (11.4 Months)
competing with and extra 1.5M existing
and unoccupied units for sale (Nationally)

Foreclosure activity

Market driven losses - example

Market Driven Losses

Abandoned, incomplete structures

Safety concerns
Attractive nuisance issues
CalTrans example
Ownership & completion

Increased homeowner dissatisfaction

Who is responsible for what after

completion
Who retains responsibility during
recess? What about contractual
indemnity and AIs???

Translating into more homes in

litigation

New claims for advertising, sales

negligence, predatory lending, etc.

Impact on Builders & Trades

Bankruptcies on the rise

Impact on:

Many trade contractors have gone bankrupt or are on the edge of

the cliff
Some builders have gone under

SIR payments
Premium payments
Quality of ongoing warranty reponses and resulting impact on
claims

Automatic stay in bankruptcy.

Looking towards the future

Residential Market Coma: Projected to last at least another 1-2 years

Reduced ability to pay for appropriate levels of insurance (not buying
umbrellas/excess)
SIRs and ability to pay
Decreased staff for customer service leading to more claims
Evolving impact of legislative, policy, underwriting, and construction practice
changes
Potential for high volume of coverage litigation under wraps and recent, nonISO/manuscript policy forms
Shifting landscape of insolvencies among builders, subcontractors, insurers
Increased product defect litigation
Increased bankruptcies
Newer technologies
Commercial side

Credit markets keeping projects on hold

More competition squeezes profit margins
Residential contractors spreading their wings
Uptick in infrastructure from government stimulus

Impact of the Green Revolution

Solar paneling
Insulation
Tight buildings Title 24 and impacts
on construction
Potential dirty green technologies
Advertising claims
Definitional problems

New Building Products

One of the following products really did get

marketed:
Siding that disintegrates into cottage cheese-like
substance
Lightweight fake roof shingles with paper inside
Exterior stucco made mostly from styrofoam

New Building Products

New Products New Problems

Weve already seen:

EIFS
Hardboard siding
Shakertown siding
Centaur pipe
PEX pipes/Kitec fittings
Atlas Shingles

New ideas sometimes lead to great results.

Other times, just new kinds of claims.

Impacts from the economy

Impacts on construction defect litigation

Impacts of governmental economic stimulus projects

Foreclosures
Falling values
Bankruptcies of developers, trades
Huge public works dollars
Exposure on wraps vs. non-wrap; feasibility of wraps

Impacts on insurance market

Uncertainty as to construction volume/exposures

Return premiums or additional premiums
How many homes, roads, bridges are you going to build this year?

For some contractors, it depends on the market

The pork barrel problem

Questions?