IRMI Update
Risk Management & Insurance
Commentary, Tips, and Tactics
September 9, 2009 | Issue 213 | ISSN: 1530-7948
In This Issue
Colleague,
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
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.
Recent Articles on IRMI.com
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.
IRMI Featured Publication
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.