IRMI Update—Issue #82
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
February 10, 2004
In This Issue
Colleague,
Last week, we reached a milestone with IRMI.com when we added the five hundredth
article to the site. You would be hard-pressed to find a more extensive compendium
of reliable risk management and insurance information anywhere on the Web—much
less in a site that costs absolutely nothing to access. I guess that is why
Google ranks IRMI.com as the top site under the search term "risk management."
Providing this service has been possible through the support of our readers,
sponsors, and Expert Commentators, and we thank you for your support.
If you work for or represent design firms, contractors, or companies that
have large construction projects under way, you know that the increasingly complex
project delivery methods being used today have altered and magnified the design
responsibilities and corresponding liabilities of design and construction teams,
dramatically increasing the potential for disputes and claims. That's why we've
asked two of our best Construction Risk Conference speakers to put together
an intensive and focused seminar on this topic for architects, engineers, project
owners, contractors, and the insurance and legal professionals who serve them.
Mike Loulakis and Kent Holland will team up to present "Proactively Managing
Design and Construction Risks and Claims" in three locations across the country
in March and April, and I hope you can attend one of them. You can view an agenda
and their biographies, as well as register in the seminar section of IRMI.com.
Of course we are filing this new design and construction seminar for insurance
continuing education (CE) credit in most states. It has already been approved
by the AIA for 10.75 H,S,W Learning Units for architects, and CPAs can receive
CPE credit as well.
If you hurry, there is also still time to sign up for one of our seminars
on controlling California workers compensation costs. You'll find the agenda,
locations, and registration materials in the seminar section.
The California workers comp seminar has been approved for 8 hours of insurance
CE credit in California, Arizona, Nevada, and Oregon. California lawyers and
CPAs can also receive CLE or CPE credit for attending.
Again, thank you for your confidence and support.
All the best,
Jack
Jack P. Gibson
President
IRMI
Request Advance Payment of Property Claims—Insurance
covering physical damage to property (buildings, contents, and inventory) will
indemnify you for the costs incurred in repairing or replacing damaged or destroyed
property. Usually, insurance companies wait until the property has been repaired
or replaced and then reimburse the insured for the costs incurred. However,
following a major loss you can ask the insurance company to provide an advance
payment. Most reputable insurance companies provide an advance of 75 to 80 percent
of the expected loss. These funds are then available for you to use in repairing
or replacing the property, and the insured, rather than the insurer, will benefit
from investment income on the funds during the period of restoration or repair.
Source: Derived from recommendation #62 from
101 Ways To Cut Business
Insurance Costs
Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send
us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. We'll
give you credit for your contribution.
There are now 501 articles on IRMI.com, and many more are in production.
Below you'll find summaries of some recent additions with links to the articles.
-
D&O Litigation Trends
in 2004—John Black Jr. and David Burrowes see no end to rising
federal and private prosecutions of directors and officers, ever increasing
settlement costs, and close judicial scrutiny of board decisions.
-
Commercial P/C Rates
Suggest Price Competition Is Returning—The Council of Insurance
Agents & Brokers has released its fourth quarter data showing competitive
pricing returning for property/casualty accounts with recent premiums holding
steady or dropping.
-
The Evolution of Litigation
Management: Establishing a Legal PPO—In response to rising lawsuits,
litigation costs, and punitive damage awards, everyone is busy pointing
fingers. Michael Boutot says the focus should be on finding a solution through
partnership.
-
Adjusting Liability
Claims—Barry Zalma details the claims adjuster's job: an investigator,
an insurance contract expert, and a person of empathy who fulfills the policy
promises to defend and indemnify the insured.
-
Innovating in the
Face of Internal Control Regulations—Matthew Leitch discusses
the most common ways that standards and regulations can stifle good innovations
and suggests ways to uncover the hidden flexibility in official documents.
-
ERISA Preemption
and Claims for Employee Benefits—While prevailing California
case law still holds that ERISA preempts an employee benefit trust fund
action against a payment bond surety, this trend is waning. Marilyn Klinger
explains.
-
Some Common Coverage
Misconceptions of the CGL Policy—The duty to defend, punitive
damages, coverage for your work, completed operations, and an additional
insured's sole negligence are some of the areas discussed by Craig Stanovich.
-
Will Adoption of the
International Building Code Reduce Seismic Risk?—Nathan Gould
explains the new seismic provisions and the more stringent nonstructural
elements of the proposed International Building Code, including a comparative
example.
Are All EIFS Contractors
Created Equal?—There is an ongoing debate in the industry whether
EIFS liability exposures can be underwritten or should simply be excluded. IRMI
analyst Ann Hickman provides some insights into how an underwriter might evaluate
the risks faced by a contractor from exterior insulation and finish systems.
What's New—We
have recently updated IRMI Online to include the latest issues of our newsletters, The Risk Report, Captive Insurance Company Reports, and Financing Risk & Reinsurance, as well as
supplements to a number of the reference manuals. Please go directly to a summary of the new issues and information with direct links into the publications.
Take Control
of California WC Costs—"Reducing California Workers Compensation
Premiums: Expert Techniques" is a new IRMI seminar designed for anyone who buys
or sells workers compensation (WC) insurance in California. Earn eight hours
of CE credit when you attend this workshop, and walk away with vital information
on employee classifications, negotiation strategies, self-insurance and multiemployer
pooling options, claims handling/audits, and new developments in the market.
This 1-day seminar is jam-packed with proven techniques guaranteed to save you
premium dollars. Mark your calendar: Pasadena—February 17; Anaheim—February
19; San Diego—March 2; and Oakland—March 4. For exact locations, speaker biographies,
and more details see the Seminars section.
Texas CE Requirements
Have Changed—Many Texas agents are still unaware of the continuing
education (CE) requirement changes made last year. Texas agents are now required
to have 15 hours of CE in a classroom or as classroom equivalent. The remaining
15 can be self-study. IRMI offers a 3-hour classroom equivalent homeowners course
that has been approved by the state for this specific requirement. Prices for
these and other courses are hard to beat at $45 for 15 hours of classroom equivalent.
See the Training & CE section of IRMI.com
for more information.
In IRMI Update 81, Jack Gibson asked readers
for their opinions regarding the new additional insured endorsements promulgated
by Insurance Service Offices, Inc. (ISO). We received many responses, some of
which are reproduced below, edited for length.
- Additional insureds with broad coverage for their own negligence have
insufficient financial incentives to prevent losses that result in claims,
because the resulting premium increases are borne by the named insured.
In the terminology of economic analysis, broad coverage for additional insureds
results in a "morale hazard problem." The American Subcontractors Association
hopes that ISO's revision of the CG 20 10, to exclude claims caused by the
"sole negligence" of the additional insured, will increase financial incentives
for the upper-tiers to avoid third-party losses which result in claims,
spurring improvements in both safety and quality that will reduce premiums.
It remains to be seen how the revised endorsement will be interpreted in
the courts. In the meantime, ASA will continue to push for contractual,
legislative, and judicial adoption of a comparative negligence standard
for coverage of worker injury and construction defect claims, in order to
reduce premiums for subcontractors and reduce costs for the entire construction
industry and society.
—Brian W. Cubbage, Construction Law & Contracts Counsel,
American Subcontractors Association, Inc.
- In part, the insurance industry is to blame for opening the door to
the broad contractual risk transfer over the years. Like so many other seemingly
simple broadening of coverage burgeons into a major problem. Has any insurer
tried to determine how much the blanket additional insured endorsements
are really costing in premiums? What about the ever-increasing legal costs
among the parties associated just with litigating contractual risk transfer
and insurance provisions after a claim has occurred?
What about the time and expense for all contractors and their brokers
in negotiating favorable hold harmless, indemnity and insurance provisions
in construction contracts? Wouldn't contractors want to spend their time
negotiating the scope, quality, and price of the project or work?
I believe that the proposed ISO changes are fair. However subcontractors
will have an even more difficult time being compliant with contractual risk
and insurance requirements. This means some contractors will lose an ability
to do work because their insurers will not or cannot offer the required
coverage specified in the construction contract. We seem to be close to
a point where the contractor who has the correct insurance gets the job,
not the contractor that is the most qualified for the type of work or who
offers the best price.
Owners, contractor's associations, insurance associations, and the legal
industry need to work together to find reasonable solutions.
—Greg Birkemeyer, CPCU, AIC, Acordia, Dayton, OH
- Just last week one of our insureds, a concrete subcontractor, lost a
project due to the "sole negligence" wording on the additional insured endorsement
issued to the prospective general contractor. The insurance company would
not modify the AI endorsement and the general would not budge based on the
advice of their attorney. Although the form was acceptable to the general's
insurance carrier, the attorney advised him not to accept it.
Every day we run into a problem with the "ongoing operations" additional
insured forms, which most insurers are utilizing today. In some instances,
we are able to convince the general or owner to accept this form, but not
always! ...
As the "construction department" for our agency, we handle these situations
on a daily basis. The time consumed is staggering!
—Billie Selvidge, ARM, Account Executive, Armstrong-Robitaille
Business and Insurance Services
- As a subcontractor, I have attempted to limit my "additional insured"
coverage to that of the contract's indemnification clause. ... Though I
have been successful in potentially limiting the transfer of risk to an
extent, revising a general contractor's standard subcontract form always
leads to confrontation. Though it is part of my job to handle confrontation,
it has always struck me that a higher authority ought to get into this battle,
e.g., insurance companies, ISO, IRMI, (anybody!), to shed the burden of
unreasonable risk transfer (and the extensive confrontation that goes along
with it) from risk managers and contract administrators, and ultimately
the transferee company whose finances might be on the line.
I will be glad to see another ISO form that limits additional insurance
coverage that EXCLUDES sole negligence of the transferor. If a general contractor
or owner simply asks to be named as an additional insured, without specifying
the form, I will gladly provide them with the new form, rather than the
CG 20 10 11 85 or CG 20 10 10 93 form.
I heartily endorse proposed changes that eliminate mechanisms that effectively
circumvent (what I believe is) the intent of the law. The intent has been
to disallow broad form indemnity, because, as I put it, broad form indemnity
gives the transferor the "license to kill." Therefore, I approve of the
proposed ISO changes.
—Ross Buchanan, Risk Manager, Redwood Painting Co., Inc.
- As insurance agent, broker, or consultant, I would be remiss if I did
not counsel my contractor clients to avoid this new language. As long as
the contracts into which they enter require them to assume the negligence
of the owner or general, it would be irresponsible not to insure that exposure.
Some insurer(s) will gain the competitive advantage of offering coverage
without the new language. Every responsible insurance buyer will have to
seek out that (those) insurer(s).
—Robert E. Schlegel, CPCU, JD, NSB Insurance, Carmel,
IN
- In my view, the additional insured requirement in
contracts should allow for insuring the sole negligence of another party.
Insurance companies are by definition allowed to insure the sole negligence
of another party—the insured. Why should construction contracts be treated
differently than insurance contracts (or other nonconstruction contracts,
for that matter)? Insurance by its nature (limits, exclusions, limitations,
etc.) puts a "box" around the covered exposures and allows a price to be
generated for the exposures transferred to the insurance company. The party
required to provide the additional insured protection can determine from
his insurer the cost for such coverage and include it in his bid. There
is no need for the government to intervene in the negotiation of this element
of the contract. Of course, there is need for the insurance industry to
pay attention to the shifting of exposure that occurs within additional
insured endorsements and price coverages accordingly. If the industry is
attentive to the issue of pricing additional insured exposures there should
be no problem.
A collateral advantage is that by allowing additional insured status
claims can be addressed more efficiently. By prohibiting insurance of sole
negligence, you introduce another attorney and insurer into the matrix who
want to argue over the issue of who was or was not solely responsible. While
they squabble over who is responsible for the claim, the claimant's issues
go unattended and often the claim can spin out of control. If only one insurer
is responsible, the focus can be on the claimant and mitigating his claim.
—Larry C. Boyd, ARM, CPCU, Executive Director, Surplus
Line Association of Oregon, Portland
- It is not necessarily us, as brokers, nor our contractor customers,
who insist on utilizing the CG 20 10 (11/85) version. It is the cities and
other public entities that push this responsibility onto generals and to
subcontractors. Few city risk managers or attorneys will waive this requirement
as long as the form is available "anywhere" in the marketplace, no matter
what the cost to the insured. Until public officials are convinced the broader
additional insured forms are truly unavailable or unaffordable, our customers
will continue to ask for what they need to successfully bid public projects.
—Cynthia Retter, Senior Vice President, The Rule Company,
Pasadena, CA
- Here are some of my concerns that I believe need to be addressed before
additional insured changes are implemented (or forced upon) in the marketplace:
First, restrictions in additional insured wording may violate existing
contractual requirements named insureds have in effect. ...
Second, most ISO additional insured endorsements do restrict additional
insured status—the liability of the additional insured usually requires
some connection with the job or premises.
Third, as well documented by Joseph Postel of Liberty Mutual in his IRMI
article of July 2002, the issue of illusory coverage will continue to be
raised if insurers are allowed to using additional insured wording that
excludes coverage for the negligence of the additional insured. ...
Finally, the statement that allowing an additional insured to receive
protection for that additional insured's sole negligence circumvents anti-indemnity
laws is curious since the very purpose of insurance is to provide coverage
for the sole negligence of an insured. ...
—Craig F. Stanovich, CPCU, CIC, AU, Principal & Consultant,
Austin & Stanovich Risk Managers LLC, Douglas, MA
- My experience has indicated that regardless of the form made available
by the insurance company, the Owner/Architect/Engineer will insist on the
verbiage or form included in the contract. This is typically after the job
has started and their leverage is payment to the contractor.
—Laura Barker, Commercial Marketing Manager, Lundstrom
Insurance, Elgin, IL
- Having been a risk manager for both a large general contractor (GC)
and for a national subcontractor and having practiced law, I have experienced
many sides of this dilemma. Yes, it seems not fair to impose liability on
a subcontractor for a GC's negligence. Yet, it is also unfair to the GC
to have millions of dollars in verdicts because they allegedly had "control"
of the job site. Let's be realistic, the GC does not control every intricacy
of the jobsite. For example, if a mason removes guardrails on a scaffold
because the GC's schedule required work at that particular location, why
should the GC pay if an employee of the mason or even another subcontractor
falls off the scaffold?
There has to be a fair allocation but in the present legal system, that
is impossible. ... The verdicts against GCs are inordinately high when you
look at their actual involvement in the root cause of the occurrence. The
construction insurance carriers have to work with their clients, not impose
impossible restrictions. Most carriers write both GCs and subcontractors,
and this anomaly is not lost on contractors. There is not a single methodology
that will resolve this dichotomy and dilemma. Everyone has to approach it
with reality and not adversity.
—Frank Keres, Construction Risk Associates, Inc., Brookfield,
WI
- My customer is a subcontractor and has subcontractors, so they are interested
on both sides of the question. The problem at this point is, my customer's
contracts require them to hold the GC/owner harmless, indemnify them every
which way to Sunday. In California, they still require the CG 20 10 (11/85)
form which includes completed operations. In order to get the work, my customer
has to sign these contracts and we have to get them covered, which we are
still able to do. How to we get the GC/owners to stop asking for this?
—Cathy L. James, CPCU, ARM, ARe, Vice President, Porter
& Curtis, LLC
- Our construction department insures both general contractors (which
can be transferees and/or transferors) and specific trade contractors (usually
transferors). Another change makes for another wide variation in forms as
some companies will adopt, some won't and others will come up with their
own form. Agents will spend time trying to explain the change and try to
cover the insurance gap (along with their behinds!). If coverage isn't offered,
another agent will offer and point out the weakness of the insurance program.
It will also make difficult to change companies within an agency due to
pricing, other coverage or concerns if the company you want to move to has
not adopted the same coverage change. Add this to this growing list of concerns,
including recently, stop gap, pollution, terrorism, mold, CG 22 94, UM.
—Jeanne Z. Moscarillo, CPCU, AAI, Account Manager, Britton-Gallagher
& Associates, Inc., Cleveland, OH
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