Basic coverage on construction projects leaves a lot exposed
For many commercial projects, basic coverage leaves a lot of exposure
When something goes wrong on a construction site it can be a mess, literally and figuratively. Take a 2007 oil leak in Burnaby, B.C— actually, “leak” is a gross understatement. Over the lunch hour on a Tuesday in late July, a construction crew excavating for a sewer line alongside the Barnett Highway hit an oil pipeline, resulting in a 30-metrehigh geyser of gushing oil. Some 234,000 litres of crude leaked, about 70,000 of which eventually seeped into Burrard Inlet, requiring a $15-million cleanup operation. Eleven nearby homes were sprayed with oil, 250 residents were evacuated, and a section of the highway was shut down for several days.
The list of potential risks and exposures on a large construction project is as broad as your imagination. Unfortunately, realworld examples abound, ranging from a 32-year-old Montreal schoolteacher who was crushed to death by a one-tonne steel plate that fell on him as he walked past a site, to a spate of multi-million dollar lawsuits that arose after leaky condos were built in British Columbia in the 1980s and 1990s.
On a commercial construction project, the general contractor will typically have an annual Commercial General Liability policy in place to cover third-party liability. Then either the owner or GC will purchase project-specific “builder’s risk” (also often referred to as “course of construction”) and “wrap-up” insurance policies, which cover anyone involved in working on the project. (More on builder’s risk and wrap-up policies further on.) But these basic plans usually have a number of exclusions that could leave your clients exposed to a wide array of costly risks.
“Contractors think everything’s covered,” says Brian Cane, the Ottawa-based vice-president of construction and Environmental Insurance for the ENCON Group Inc. “Obviously, it isn’t.”
The broker’s job is to tell their clients where they are exposed,” adds John Donovan, national practice leader for construction with BFL Canada Insurance Services. So it’s well worth looking at some of the most common exclusions and suggestions for how to ensure your clients are covered.
Ideally, your client will come to you at the RFP stage so you can help them determine what insurance they might be responsible for. Barring that, if the contract between the owner and GC is already in place, get a copy of it to determine who’s responsible for insurance and to ferret out potential gaps in coverage, even if the project owner is assuming the cost of providing insurance.
“The risks on an owner’s radar are different from the risks on a GC’s radar,” says Donovan. He points out that not all contracts make sense, and “a significant amount of work goes into reviewing the contract for language that’s repetitive or contradictory.”
For example, the project owner might ask sub-trades to have insurance for risk that’s already covered by the GC’s policies, or vice versa. In these cases, contractors could deduct these costs from their estimate and lower their bid price. Remind them of that now so they’ll be in touch with you before submitting their next bid.
Asbestos for the rest of us
Google the words “asbestos” and “lawsuit” and you’ll have enough reading material to keep you busy until cancer or some other ailment puts an end to your time on Earth (plus you’ll have a handy list of virtually all the personal injury lawyers on the planet). What may surprise you is that some companies still deliver asbestos-laced building materials to job sites, ranging from roofing and siding to concrete water and sewer pipes.
So despite all the bad press—and the emergence of an entire industry for safely removing the carcinogenic material from existing buildings—the construction projects you’re insuring today may well have asbestos in the mix. The Globe and Mail reported last year that a Quebec-based company, Logard, imports pipes containing asbestos and supplies contractors into Ontario, Quebec and sometimes the Maritimes; Toronto is a big market for them.
The list of potential victims of exposure to asbestos ranges from the contractors who first install the material and tradespeople who disturb it during subsequent maintenance or renovation work, to the employees in the building facing longterm exposure. With the latency period for associated cancers often stretching into decades, today’s construction project could well land on the desks of lawyers who aren’t even born yet.
“Luckily, stupidity and negligence are insurable.”
The first layer of project-specific coverage is what’s called a builder’s risk or course of construction policy, which provides property insurance to all parties involved in the project—owners, contractors, architects and engineers—while work is underway. Sounds good. But there are a number of exemptions in these contracts that need to be looked at closely on a case-by-case basis.
A standard builder’s risk policy (IBC Form 4042) expires as soon as any part or section of a project is occupied. So a blanket policy covering a multi-tower office complex with staggered completion dates would terminate as soon as the first tenant moved into the first completed building. Likewise, if an owner allows tenants or other parties to use the parking garage of a building while it’s still under construction, it nullifies the policy. To avoid exposure, clients in these situations can get occupancy coverage.
Other common exclusions in a builder’s risk policy include the contractor’s tools and equipment; faulty materials, workmanship or design; and building materials being transported by sea. In the latter case, if key components are coming from overseas, the GC might want to consider obtaining a marine cargo insurance policy, particularly if the contract has penalties built in for missing deadlines.
Another piece of the puzzle is a wrap-up liability policy. While the name suggests this comes into play at the end of a project, wrap-up endorsements serve to “wrap up” all contractors, sub-trades, and consultants working on a project under one policy umbrella. These policies provide liability coverage to everyone involved in the project during construction and for a set period of time beyond completion. Since all parties are under the same policy, you avoid the finger pointing and having multiple adjusters involved trying to sort out who’s responsible for what in the event of a claim.
There are standard policies but as with builder’s risk insurance, the scope of work may warrant a modification to the wording or exclusions. Wrap-up policies, for example, typically have a clause excluding “damage to pre-existing structures.” But the project may involve an addition to a pre-existing building that may or may not be operational while the work is going on.
And while the various sub-trades hired by a GC would be considered unnamed insureds under a wrap-up policy, there may be substantial variances in the deductibles, necessitating a “difference in deductibles” endorsement on the sub-contractor’s CGL.
A contractor’s CGL policy will also have a number of gaps and exclusions. One of the most notable is for environmental damage. While the Insurance Bureau of Canada considers oil and gas leaks from a contractor’s equipment to be covered by a CGL policy, major environmental damage such as the Burnaby spill mentioned at the top would likely not be covered. If, for example, the contractor’s policy contains “total pollution exclusion,” only the damage to the pipeline itself would be insured.
“People don’t intentionally try to screw up,” says David Miachkia, a partner in Borden Ladner Gervais LLP’s Vancouver office. “It just happens. Luckily, stupidity and negligence are insurable.”
CGL policies may provide some coverage for “sudden and accidental” pollution, but there are tight timelines on how quickly the leaks must be detected and reported to the insurer, typically within 120 hours. (That’s five days, in case you’re counting.) But what if there’s a leak behind a finished wall that isn’t detected until after that timeframe?
This is where an environmental liability policy comes in, providing coverage for both gradual and sudden leaks. But more than that, it also takes care of two other environmental hot button items: mould and asbestos.
And while many might scoff, with so many contractors handling most of their paperwork electronically, often via laptops stowed in their pickup truck with the rest of their tools, it’s easy to envision a cyber security breach. Miachkia thinks cybersecurity insurance for construction projects is coming big time. “Everybody gets all their info and bids on projects online.”
Architects and engineers involved in the design will also, of course, need their own Errors and Omissions policies.
Brokers should also conduct site visits of projects before, during and after completion. “I like being on the ground to get a sense of the topography and what the neighbouring risks are,” says Donovan. “If I notice that the site is next to the Scotia Tower [in Toronto] that houses two-thirds of the country’s law firms, I’d say, ‘Hey, guys, what’s our liability coverage…?’” And he’s only half-joking.
First, make sure the work being done actually matches what’s described in the policy. If a five-storey building is suddenly 10 stories, you’ve got a tall problem. The site should be well lit and have sturdy perimeter fences with locks on the gates, plus a security patrol at night.
“I can’t stress enough the importance of site cleanliness,” says Brian Cane. It’s about more than simply protecting workers from potential injuries. Cane recalls one inspection where the project submission mentioned there would be a fire hydrant on site. “We couldn’t see it anywhere and asked where it was. It turned out it was completely covered in a pile of debris.”
A site visit can also uncover unexpected added value for the client. At one recent site visit, Donovan noticed the project moving at a faster pace than expected. He was able to let his client know they needed to trigger coverage earlier than planned.
One final piece of advice to pass along to your GC clients: keep copies of all their different policies on file. Throughout a GC’s career, they’ll typically switch CGL providers—and their level of coverage— multiple times as their business expands or winds down. If something does go wrong with a project they were involved in years earlier, they’ll want ready access to the policies in place at the time to clarify their coverage.
A couple of fairly recent court rulings have clarified the language in construction insurance contracts by limiting the scope of standard exclusions.
While noting the irony of calling a leaky condo legal battle a “watershed,” David Miachkia says the 2010 case of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, “changed the way construction insurance is interpreted in Canada.” A complicated case (ain’t they all), it basically comes down to the fact that in the past, insurers argued any property damage arising from bad design or work wasn’t covered. But construction policies do cover accidents, and in Progressive, the Supreme Court disagreed “with Lombard’s view that faulty workmanship is never an accident.” The insurer was ordered to pay up. “It’s narrowed the scope of the exclusions [related to defects] and, since 2010, the courts have been much more favourable to the insured,” says Miachika. “If there’s any ambiguity in the language, it’s covered.”
Another case, Acciona Infrastructure Canada Inc. v. Allianz Global Risks U.S. Insurance Company was precedent setting for being the first case in the world where a court interpreted a common exclusion in builder’s risk policies for defective design/workmanship, known as LEG2/96.
This case revolved around the construction of a hospital. Upon completion, the concrete floors weren’t level as required and had developed cracks. Extensive remediation work was required to repair the floors and make them level. The insurer denied the claim, arguing that the floors were defective, but not damaged.
In August 2014, the British Columbia Supreme Court ruled that the defective work did in fact result in damage to the finished project, and ordered the insurer to cover the costs of repairs. An appeal of that ruling is being heard at the B.C. Court of Appeal this month, but a ruling isn’t expected for several months.
Copyright 2015 Rogers Publishing Ltd. This article first appeared in the May 2015 edition of Canadian Insurance Top Broker magazine