For those organizations that have cash or can get credit, now is a great time to initiate a construction project. With evaporating backlogs, most contractors are really feeling the effects of the recession. In a desperate attempt to get enough work and cash flow to cover overhead, some are presenting bids that are far below costs.

While such a buyer's market presents the potential for reduced costs, it is accompanied by substantial risks for bargain-hunting owners. Today's great deal will become a hole in the ground into which you are pouring money if the contractor goes under. Also, these contractors will be very tempted to cut corners on quality.

Great care should be taken in choosing a contractor and making certain the project management team is capable of assuring that quality is not shortchanged. It is also wise to consider using surety bonds to help manage the risk if you don't normally require them.

Sureties perform an invaluable contractor prequalification service far beyond the ability of most project owners. Also, the surety will be there to pick up the pieces if the contractor does default. For this reason, it may be prudent to invest some of the cost savings inherent in the current competitive construction market into a contract bond for the project.

In some cases, surety bonds will not meet all of the needs of the new construction marketplace. For example, under the public-private partnership (P3) model, lenders provide a significant portion of the project's capital costs (upward of 90 percent). They are focused on ensuring that the project gets delivered in a manner that will meet the financial model's assumptions and generate the revenue necessary to repay the debt obligations. As a result, the focus shifts from simply performance to timely performance, a risk that surety bonds don't really address. We are beginning to see the emergence of innovative finance, contractual, and other treatments for this risk.

What is your view? Should private owners be requiring surety bonds from general contractors in this market? What other steps should owners take to manage the risk? And what about contractors—should they bond subcontractors or purchase contractor default insurance? Must general contractors be just as careful in prequalifying owners before bidding on projects? [See reader responses].

Several workshops at the 29th IRMI Construction Risk Conference in November will address different aspects of this topic. See the conference agenda and speakers, find out what is new this year, review the benefits of attending, and register on IRMI.com. I look forward to seeing you on the Potomac in November.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
International Risk Management Institute, Inc.

IRMI Educational Event

What's New at the IRMI Conference

See "What's New" at the 29th IRMI Construction Risk Conference, November 1-5. View testimonials to learn why many of your peers attend this premier educational and networking event. You can choose from 21 new workshops. Plan to fulfill your annual insurance CE requirement at one fantastic industry event. Reserve your spot today.

Risk Tip

Modify the Designated Premises or Project Endorsement

Increasingly, insurers are placing the restrictive endorsement "Limitation of Coverage to Designated Premises or Project" (CG 21 44 07 98) on CGL policies. This endorsement severely restricts coverage for offsite operations and newly acquired premises. It states that coverage only applies to the scheduled project or to the ownership, maintenance, or use of the scheduled premises and the operations incidental to it.

If a property management company is hosting an offsite fundraiser for a local charity, does an injury at that offsite fundraiser arise out of the ownership, maintenance, or use of the scheduled premises? Is the fundraiser an operation which is necessary or incidental to those premises? Maybe not. Courts have been split on those cases.

Every effort should be made to have this endorsement removed from the policy, but if that is not possible, a compromise may be the solution. Underwriters want to guard against insuring unknown risks. Insureds want coverage for exposures that are necessary and incidental to the premises and operations which are disclosed on the application but which could be excluded by the endorsement. To attempt to accomplish both objectives, the endorsement can be completed with the following wording. It should be noted that this wording still does not provide coverage for new operations that are not disclosed in the application.

Premises: All premises disclosed in the application for coverage on file with the company. All newly acquired premises for a period of 90 days from the date of acquisition.

Project: All operations of the named insured disclosed in the application for coverage on file with the company and all activities that are necessary or incidental to such operations.

It is not a perfect solution, but it is a step in the right direction if the underwriter insists on this endorsement.

By: Brent Winans, CPCU, ARM
VP—Risk Management Services
Plastridge Agency
Delray Beach, FL
bwinans@plastridgeinsurance.com

GET PUBLISHED IN IRMI UPDATE: 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 acknowledge your contribution as we did for Brent.
Submit an IRMI Update risk tip.

What's New in Your IRMI Library

Accountant's Professional Liability: How Does Your Policy Add Up?

Professional liability insurance policies are quite complex, and accountant's professional liability policies are no exception. Senior Research Analyst Bob Bregman, CPCU, RPLU, MLIS, just spent the last few months studying and comparing the major accountant's professional forms and writing up his conclusions about the important similarities and variations for the IRMI Professional Liability Insurance reference manual. If you underwrite this type of insurance, his work will save you hours of time comparing your policy to your competitors' policies. If you sell or buy accountant's professional insurance (or would like to), his analysis will bring you up to speed on important issues to address with your client or underwriter. Subscribers to Professional Liability Insurance will find Bob's analysis in the platform to which they subscribe:

For summaries of other new and updated information in your IRMI library, go to What's New on IRMI Online or What's New in SilverPlume.

New Expert Commentary

There are over 1,100 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

New EEOC Guidance on Waivers of Discrimination Claims—Paul Siegel outlines the key points for individual and group layoffs.
Recent Trends in Valuation of P&C Insurers—Current market volatility causes much speculation about the future of the industry, per Jeff Balcombe.
Do Captives Earn Profits?—The answer is in the eye of the beholder, according to Don Riggin.
An Update on Cut-Through Clauses—Recent caselaw, provided by Larry Schiffer, suggests provisions must be precisely tailored to be effective.
Finding the Right Intern—Think it's too early to worry about your 2010 summer intern? Dr. Brenda Wells says think again.
An Insurance Czar? I Don't Think So!—A new federal Office of National Insurance will only bring us more blues, according to Pete Polstein.

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WC Complexity Can Be Costly

Get the guidance you need to effectively control costs in IRMI Workers Comp: A Complete Guide to Coverage, Laws, and Cost Containment. This 1,500-page reference will help you analyze exposures, determine which policy forms are necessary, interpret each state's act, and place the appropriate coverage. See a detailed table of contents and list of benefits of subscribing.

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