By KATIE KUEHNER-HEBERT, a freelance veteran business journalist based in San Diego.
SAN DIEGO -- When is it advantageous for the owner of a construction project to control the overall insurance program, and when is it better for contractors to handle the program themselves?
Experts from both sides of the table outlined their perspectives at the International Risk Management Institute Inc. (IRMI) Construction Risk Conference in San Diego earlier this month.
Representatives from the lending, insurance brokerage and underwriting segments were also on hand to discuss how risk managers can build a better insurance program.
Tony Rastall, a partner at insurance broker JLT Specialty Ltd., said that owners can often secure insurance at lower premiums because owners tend to have more comprehensive relationships with insurers, which also enables owners to choose insurers that will follow through on claims.
"If I'm in a long-term relationship, I can choose the insurers most likely to pay my claims," Rastall said. "The time you really need your insurer to step up to the plate is during the claims process."
It's particularly convenient and helpful when owners use the same insurer to cover both the construction of the project and the permanent operation of completed facilities, as claims from both areas get settled more quickly.
Owner-controlled insurance also minimizes disputes between multiple insurers, and the owner can retain control of the claims and settlement procedures, Rascal said. Claims monies can be "rightfully" paid directly to the owner -- "which gives the owner a little more muscle" when resolving other kinds of disputes with contractors during the life of the project, he said.
Susan Staff, director of risk management at Zachry Holdings Inc., an engineering, construction and maintenance company serving the energy sector, said the party who is bearing the risk of the loss, or the financial consequences of the risk, should be able to retrain control of that risk and of the mitigation and transfer of that risk.
"That's the basis of why contractors should control the insurance," Staff said. "If you jump out of an airplane, you ought to be able to have your own parachute."
Contractors rather than owners have better opportunities to get premiums reduced because contractors have better knowledge of the potential risks of a project, and contractors can better explain to underwriters the mitigation policies they have in place for those risks, Staff said.
While she admits that Rastall makes a valid point about owners having better interfacing between construction and operational covers, Staff said that issues surrounding transfer of risk can actually be handled more effectively contractually. Both parties can include language in the contract that clearly spells out which party holds the risk during and after the project is completed.
Staff also said that if contractors are expected to handle the risk of a construction project, they should be able to choose the deductible. Moreover, claims monies are paid directly to party bearing financial responsibility -- the contractor.
"The owner wants to withhold the monies to have leverage over other disputes, but that's what retainers are for," she said. "The money from the insurers is there to pay to replace and repair on the project, not for the owner to hold as leverage for other issues."
Sometimes it's better for the other party to take control of the insurance program, said Staff and Rastall.
"There are some large contractors that are very successful in telling owners, 'If you're going to give us the risk, then we want control of insurance,' " Rastall said. "It's a very compelling argument because they allegedly can walk off a job if the owner doesn't agree."
If owners allow contractors to control the insurance program, they should make sure the contractor is in compliance with credit agreements and that the lender's interests are protected, he said.
The insurance procurement would be reassigned to the owner in the event the contractor fails to procure or should the coverage fail to comply with requirements.
Contractors should consider an owner-controlled insurance program if the owner has more risk management staff and expertise, Staff said; if the project's contractual structure is very complicated; and perhaps most importantly, if the owner is willing to assume the risk of loss.
To protect themselves, contractors should include in the contract language that limits or eliminates their risk; a change order provision for contractor's costs to rectify damage; insured status on policy; waiver of subrogation on policy; contractual relief for "soft costs"; and schedule relief for any delays related to failure of insurer to pay claim or approve the repair or rectification.
Charles Moore, managing director at the consulting firm Moore-McNeill LLC, said from a lender's perspective, "the key element is collaboration."
"It's important that the interests of all parties be aligned, so get all of the issues on the table and be very candid," Moore said.
John A. Tutera, senior vice president at Hiscox Specialty, said that owners, developers, contractors and lenders have more influence on the insurance market than they think. The better the underwriting information and the better the sustained relationship with the insurer, the better the deal, he said.
Frank Catalano, executive vice president at AmWINS Brokerage of Illinois, said insurers will provide better coverage if they have certain information about the project at the outset.
That would include an accurate breakdown of soft costs, and complete description of the project; a construction time line; a geo-tech summary report to determine the soundness of the ground underneath; flood zone determination materials and elevation of ground floor, which can reduce storm surge costs.
"If an underwriter is going to put down their assets and give you the best coverage," Catalano said, "they need to know all the risks."
November 16, 2011
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