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By Duane Craig
July 3, 2016
The old saying goes, “insurance covers everything except what happens.” It’s a tongue-in-cheek way to express the frustration policyholders often feel when they find out insurance won’t cover their recent loss. However, in many instances the policyholder doesn’t make an accurate assessment of risks. This leads to some risks not getting covered at the expense of others. On the bright side, forecasters say that contractors with good loss profiles should easily find affordable policies in 2016 because competition is strong among insurers.
There are a few trouble spots though with insurers reporting some lines as challenging. Topping the list of risks with rising claims is the automobile line for contractors. Distracted driving, higher medical care costs for treatment, and auto repair costs are the main pain points for insurers. The fire risk for wood frame construction is another issue for insurers, as is the increased litigation related to defect claims.
Over the past few years courtroom decisions have added uncertainty to coverages provided by commercial general liability policies. Because all stakeholders on a project are usually named in lawsuits over defects, an increasingly contradictory legal landscape across jurisdictions is making it difficult for policyholders to assess their risks.
The primary issue boils down to the meaning of a single word: occurrence. The term, occurrence, as used in general liability policies is an ambiguous term leading to different interpretations by courts in various jurisdictions. General liability policies were written to fit in many different industries, but certain parts of them don’t fit well within construction.
When a loss occurs, there must be property damage that comes from an “occurrence” as defined in the policy. But, various courts are interpreting the definition of the word “occurrence” differently when it comes to construction defects.
To deal with the issues, some construction companies are seeking out insurers offering endorsements that provide coverage for the defect under the laws of the state most favorable for the policyholder. Since the endorsement doesn’t depend on a specific jurisdiction, it offers construction companies some consistency in coverage for construction defects. One problem, however, is that pricing is inconsistent. It is often linked to the relationship the insurer has with the policyholder, the policyholder’s company size, and whether or not the policyholder takes retention. State legislatures are now getting into the act and are passing legislation to take the issue out of the courts’ hands.
Building with modular units is on the rise because of its potential to reduce variables, increase construction speed, and lower-cost. However, the advantages don’t come without risk.
According to Zürich Insider, hidden gaps where modular components go together can invite water intrusion, which yields high losses. Water damage is also possible when modular units are connected to dissimilar materials, or their surrounding materials weather at different rates. Delays can ultimately mount when modular components must be removed because of defects. Contractors who lack experience with modular construction will also face increased risks.
There is also the possibility of hidden damage that poses additional risk. Since components usually arrive completely assembled, quality issues inside the walls, floors, and ceilings might not be apparent until after installation.
Emerging technologies that are coming into play on construction sites bring along their fair share of insurance coverage issues. Drones pose risks from their use and misuse. Operator error can send the unit on a collision course with property or people, and flights over private property can lead to liability and privacy challenges from nearby property owners. Autonomous machines pose the possibility of malfunctioning and damaging property, or worse, people.
More than ever, contractors today need to have a good understanding of what risks they can insure and what risks they can’t. Contractors can also consider matching their insurance coverage to the project delivery method. For example, integrated project delivery and design build make it difficult to assign risks according to stakeholders. This makes it more necessary for contractors to ensure they’re covered in the gray areas.
The best situation for a contractor is to avoid loss and mitigate risk. When risk is well-managed, you can get better terms and conditions from insurers. It’s always much better to rely on prevention than insurance settlements.
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