Subcontractor

June 13, 2013

Constructing Professional Liability Insurance Requirements for Design-Build Projects

Source: http://www.irmi.com, Jume 2013
By: Jeff Slivka

As a project owner, it is extremely imperative to require evidence of professional liability (PL) insurance from the construction firm you hire to design and build your project. However, when you do this, what are you trying to accomplish?

Over the past year, I have seen an increasing request for contractors to evidence PL insurance. That is a good thing. In addition, many of those requirements required a dedicated PL program/limit of liability for the project. That makes a lot of sense. However, before you require any entity to provide evidence of PL insurance, you have to ask yourself, what do I want to insure against? This is a basic question, I know, but I think one that is often overlooked.

As an example, I have seen PL insurance specifications written for a design-builder to purchase PL insurance for the design team (not part of the design-build entity) and the design team subs/members. In this case, it would appear that the owner wants to insure only against design errors arising from the design services provided by the design team. Or does he? It’s clear to me that this owner doesn’t want to insure the project against PL risk, just design liability.

I have seen other instances where an owner has accepted a certificate of PL insurance from the engineering firm under contract with the construction firm, not even under direct contract with the owner. So, there is no contractual relationship between the owner and the engineering firm. Is this supposed to help owners sleep at night and protect against costly PL claims?…

January 30, 2013

Managing and Mitigating Subcontractor Default Risks: Qualification

Source: XL Group Insurance, Construction Insider, January 2013
By: Jason LaMonica, Vice President/Profit Center Head, Construction Performance Risk

One of the biggest inherent risks General Contractors and Construction Managers face as they build projects is the risk of a subcontractor default. A failure of a sub to perform can add cost, delay a job, and cause reputational damage for a contractor and owner. While not all defaults are preventable, sound prequalification and management practices can greatly reduce the risk of default and mitigate the severity of those that do happen.

First and foremost, selecting the right sub for the work gives you the best chance for success. Selection involves prescreening subcontractors across a wide variety of criteria. Here are some key areas to consider and address when selecting subcontractors:

Financial Review

Subcontractor Insolvency is far and away the biggest cause of default. Getting timely, audited financial statements from your subs and using standard objective metrics to evaluate them is the cornerstone of any subcontractor review process, especially in this challenged economy. Consider who does the evaluation at your firm; are they qualified? Is it done consistently across your organization? Is the data collected and evaluated in aggregate?

There are many areas of a subcontractor’s balance sheet that are important to review, such as Net Asset Value, Quick Ratio, Current Ratio and Return on Equity. All are important, but consider paying extra attention to Days of Cash. Available cash means a sub has enough reserve on hand to handle the unforeseen. Without adequate cash, one slow paying owner or general contractor on another job can cause your sub to become insolvent, regardless of that sub being treated fairly and paid appropriately on your job. CFMA (www.cfma.org) has some good resources on how to evaluate subcontractor financial statements that expand upon this subject.…

July 1, 2011

Sandblasting Contractor – Lead

Acknowledgement to Great American Environmental Division

A subcontractor working for a street and road contractor performed abrasive sandblasting on a bridge located near a residential area. Lead paint chips and dust from the sandblasting became airborne and migrated onto residential properties, requiring clean-up. The residents filed property damage claims against the street and road contractor and the subcontractor for the dust generated by the subcontractor.…

July 1, 2011

General Contractor – Mold

Acknowledgement to Great American Environmental Division

Two years after the completion of a new high school, it was determined that the window system used during construction was allowing water to infiltrate the building. Mold was discovered. Faulty installation was part of the issue. The cost to remediate the problem was shared by the General Contractor and the manufacturer of the windows. The sub-contractor who installed the windows was no longer in business.  The General Contractor did not have pollution coverage for Mold and paid over $900,000.…

December 27, 2010

Paying for Others’ Mistakes

A contractor was performing design, construction and construction management services for a five-story motel project. The masonry contractor placed hollow concrete blocks without proper rebar reinforcement as specified in the plans. The owner discovered the improper construction and demanded the structure, now at the second floor, be torn down and rebuilt according to the specs. The masonry subcontractor was not able to pay the $1 million reconstruction costs, leaving the general contractor/construction manager responsible to pay.

This is a claim scenario developed from a single claim or several claims and has been developed for illustrative purposes only.

December 23, 2010

Claims Settled in Delay and Disruption Damages Case

The design/build contractor on an expansion of a convention center subcontracted the design and construction work and served as the construction manager on the project. There was a six month delay in structural steel erection and inspection, impacting several subcontractors’ sequences which required schedule changes. Four of the subcontractors issued claims for delay and disruption damages. The claims were settled for over $6.5 million.

This is a claim scenario developed from a single claim or several claims and has been developed for illustrative purposes only.

September 21, 2010

Faulty Window Installation Leads to Mold

Acknowledgement to Great American

Two years after the completion of a new high school, it was determined that the window system used during construction was allowing water to infiltrate the building. Mold was discovered. Faulty installation was part of the issue. The cost to remediate the problem was shared by the General Contractor and the manufacturer of the windows. The sub-contractor who installed the windows was no longer in business. The General Contractor did not have pollution coverage for Mold and paid over $900,000.…

August 11, 2010

Survey Error at a Condominium Project

Acknowledgement to XL Environmental

THE CLAIM
A general contractor / construction manager (GC/CM), insured by XL, was hired to construct two condominium towers. The insured subcontracted the surveying work required for the two phases of the project. After the foundations and footings for Phase I were erected, it was discovered that the footprint encroached on Phase II by more than 5 feet. The project owner elected to redesign Phase I, shortening the footprint to allow Phase II to be built with the square footage as designed. It is undisputed that the insured’s land surveying firm made an error which necessitated the redesign and revision of Phase I of the project.

THE RESPONSE
Subcontractors demanded payment for additional work associated with the surveying error and resulting design changes. One small payment from the surveyor’s professional liability policy was made; however, the GC/CM status of additional insured on that policy was not acknowledged by the subcontractor’s insurance carrier. With the consent of XL’s environmental claims department, the insured paid the remaining subcontractors for the additional work to assure that the project progressed without disruption. The owner submitted a claim for delays, additional work, concessions to buyers of affected units in the form of credits, price reductions, and design errors.

THE SOLUTION
XL’s environmental claims attorney worked with the insured to issue payments to subcontractors to prevent future claims. The payments were made under the insured’s Professional and Contractor’s Pollution Legal Liability Policy in the amount of $1 million, ultimately reducing the potential for additional claim costs. The insured kept the project moving, the affected parties paid, and ultimately the owner client satisfied.…

August 11, 2010

Fuel Line Leak at Medical Center

Acknowledgement to XL Environmental

THE CLAIM
Our insured, a mechanical contractor, was retained as a subcontractor during the construction of a medical center. The insured subcontracted the underground storage tank (UST) installation, fuel line connections to the existing building, and associated engineering work to another contractor. Part of that subcontracted work included the removal of soil that was initially placed over the fuel line and replaced with a more protective concrete layer. After this work was complete, a leak in the fuel line was discovered. More than 1,500 gallons of fuel entered the fuel line trench and migrated under the adjacent building pad of the new medical center wing.

THE RESPONSE
XL’s environmental claims department provided an immediate response, uncovering evidence that the leak was caused when the soil was removed and replaced with concrete. Additional evidence showed that the leak detection system was not properly functioning so when the fuel was released, no alarm sounded and the pump did not automatically shut down. It was determined that if the leak detection system had operated properly, only 500 gallons of fuel would likely have been released.

THE SOLUTION
Our insured’s subcontractor was at fault because they hit the fuel line when removing soil and/or pouring concrete. In addition, the leak detection system design which they were responsible for did not function properly. This resulted in liability for our insured. XL paid approximately $700,000 under the insured’s Contractor’s Pollution and Professional Liability Policy to complete remediation and two years of on-site monitoring expenses, thus, keeping the project schedule on track and avoiding further liability associated with delays.…

July 20, 2010

XL Presents Fuel Leak Claim Example

XL Insurance’s insured, a mechanical contractor, was retained as a subcontractor during construction of a medical center.  The insured subcontracted the underground storage tank (UST) installation, fuel line connections to the existing building, and associated engineering work to another contractor.  Part of that subcontracted work included removal of soil that was initially placed over the fuel line and replaced with a more protective concrete layer.  After this work was complete, a leak in the fuel line was discovered.  More than 1,500 gallons of fuel entered the fuel line trench and migrated under the adjacent building pad of the new medical center wing.

XL’s environmental claims department provided immediate response, uncovering evidence that the leak was caused when the soil was removed and replaced with concrete.  Additional evidence showed that the leak detection system was not properly functioning so when the fuel was released no alarm sounded and the pump did not automatically shut down.  It was determined that if the leak detection system had operated properly, only 500 gallons of fuel would likely have been released.

XL’s insured’s subcontractor was at fault because they hit the fuel line when removing soil and/or pouring concrete. In addition, the leak detection system design, which they subcontractor was responsible for did not function properly, resulting in liability for the insured.  XL paid approximately $700,000 under the insured’s Contractor’s Pollution and Professional Liability Policy to complete remediation and two years of on-site monitoring expenses, thus, keeping the project schedule on track and avoiding further liability associated with delays.…