Risky Business

Here is another great article found in the May/June 2010 edition of Constructor Magazine. This really drives home some great points about how contractors can save themselves some steps in today's economic times.

Be sure to visit the website of Constructor Magazine and the AGC of America. http://constructor.agc.org/ Lots of great articles, info and resources!

Risky Business
Contractors must take steps to protect themselves from owner insolvency during tough economic times
By Jennifer Seward
May/June 2010

Contractors try to avoid dicey partnerships as a matter of course, but in today’s economy, smart business practices are not just encouraged, they’re crucial.

“There is a new risk for contractors on the horizon,” says attorney Robert Burns, partner with Stinson Morrison Hecker LLP of Wichita, AGC of Kansas.

Burns says that while contractors used to lose sleep about getting work, being the low bidder or maintaining a repeat-business relationship, within the past 18 months, the new risk has become whether the owner will actually pay them for the job once the work is complete.

Thus, contractors are researching the owner’s project financing, making sure the bank involved is sound and looking carefully at underwriting. But as competition for work increases, even the terms and conditions of contract documents have become more perilous.

Show Me the Money

“Contractors must be vigilant in their contract administration,” says Brian Perl-berg, AGC senior counsel for construction law and contracts. “Once you sign the contract, it’s important to stay on top of applications for payments and to have a rough balance of how much work is in place in proportion to the payments you are receiving.”

Burns advises contractors to make sure their contracts contain provisions that allow them to ask the owner to provide reasonable evidence of financial resources to satisfy the owner’s payment obligations on the project.

“Such provisions need to permit the contractor to make inquiries both prior to commencement of the work and at any time during the course of the project, without condition,” Burns says.

"The credit worthiness of owners and lenders is key."
— Ed LittletonVP of Risk ManagementBalfour Beatty Construction

He says the contractor must also exercise his or her right to request reasonable evidence of financial resources before starting the job, at regular intervals during the course of the work and at any time events arise, such as a major change order, failure to certify or pay, or other unusual circumstances.

Many documents allow the contractor to ask about only the owner’s resources before starting work. After that, there has to be a good reason to ask. Burns advises contractors to modify most standard documents by writing into the contract that they have the right to ask about the owner’s resources at any time.

“Don’t just accept words,” Burns says. “Insist on reasonably certifiable or documentable proof: bank statements, escrow account, a letter from lender and so on.”

Evaluating Risk

“The credit worthiness of owners and lenders is key,” adds Ed Littleton, vice president of risk management for Balfour Beatty Construction, Dallas, a member of multiple AGC chapters.
“As a construction manager, the sureties prefer we avoid getting into a contractual relationship unless we’re sure the owner has the funding. However, owners still are negotiating the funding early on, so it’s not realistic to expect 100% of the funds to be sitting in escrow up front,” Littleton says.

Littleton’s message for contractors is to evaluate the magnitude of a potential risk. Once the contractor has done all the due diligence, he says, “it’s a matter of probabilities. Which job has a higher probability of being successful? You determine the maximum amount of potential exposure, including demobilizing costs.”

Contractors are accepting more contractual risk than ever before, Littleton says. The perfect storm of risk may include savvy owners in a buyer’s market, the potential risks involved with contractors not monitoring their subcontractor market, diving in with new owners or taking contract terms that wouldn’t have been considered before. “It’s the aggregation of these that add to your risk potential,” he says.

What if a contractor’s due diligence still doesn’t prevent disaster from striking? “Make sure your contract contains provisions to allow you to stop work and/or terminate the contract if you are not provided with reasonable evidence of financial resources and/or are not paid for work properly performed,” Burn says.

Littleton says that, before signing on the dotted line, contractors should obtain as much information as possible about the owner’s previous construction projects, including claims, disputes and payment history with other contractors.

Working for Uncle Sam

Government projects tend to be attractive because they are a safe bet for receiving payment, Perlberg says. But with regulatory changes and new requirements related to stimulus payments, contractors new to this arena will need to get up to speed.

“Contractors doing federal work face their own set of risks, with unique contractual requirements,” says Thomas J. Kelleher Jr., senior partner with Smith, Currie & Hancock LLP of Atlanta, AGC of Georgia. He urges contractors to study and understand the agency with which they are working.

“There are great differences between how the agencies operate,” Kelleher says. While many of the contract terms are the same, there is no consistency, he adds. One problem is in downloading contract terms from an agency’s website; some terms may be difficult to find, as many of the critical clauses are listed only by either number or name or description and date.

“Not many folks read all those clauses before bidding these jobs,” Kelleher says. “It can be a daunting task, but it is critical they understand the contract they are getting into.”

In this construction sector, the concern is not that the contractor won’t get paid, but rather the potential risk involved in not doing due diligence at the front end, Kelleher warns.

In the recently released book “Smith, Currie & Hancock’s Federal Government Construction Contracts: A Practical Guide for the Industry Professional,” which is in its second edition, Kelleher shares 16 checklists regarding how to qualify for a federal project. The checklists cover site investigations, building information modeling, safety, contractor quality control and more.
An example of a contract item specific to federal work is the clause used in Dept. of Defense contracts stating that a contracting officer’s representative has no right to make changes in the contract. Yet, this is the person with whom the contractor will be working on a daily basis.

This short but clear paragraph appears at the end of many pages of provisions and is a crucial piece of information. Kelleher says the clause means that if a contracting officer’s representative requests or directs a change on the project, it is the contractor’s responsibility to notify the contracting officer of that action and request that the officer confirm it in some manner.
This procedure not only adds a layer of bureaucracy, it can adversely affect payment and the outcome of a project if a contractor does not understand the process.

Another area unique to federal contracting has to do with a contractor’s business ethics and compliance. Any contractor doing work over $5 million must be prepared to undertake a fairly robust ethics program. While it is expensive to do this, if the contractor does not comply, it may create long-term problems for the firm when trying to compete for new work, Kelleher says.
“These are not insurmountable tasks, but if you are new to it, you really have to do the homework and be sure the expense is covered before you get into [the business of federal contracting],” he says.

Kelleher suggests a contractor new to this sector might consider a joint venture with a firm experienced in government work.

Contractor Vigilance Strategies

In today’s economic environment, here’s what contractors should do:

• 
  Make sure your contract allows you to request that the owner provide reasonable evidence of adequate financial resources before starting work and during the project, without condition. Exercise that contractual right.
• 
  Make sure your contract allows you to stop work and/or terminate the contract if you are not provided with reasonable evidence of financial resources and/or are not paid for work properly performed.
• 
  Obtain as much information as you can about the owner’s previous construction projects, including claims, disputes and payment history with other contractors.
• 
  Make sure you understand where the owner is getting the money to pay for your project. Ask for a copy of the owner’s loan documents or commitment. Obtain a credit report, a financial statement or a Dun & Bradstreet report on the owner.
• 
  Learn who owns the project real estate. Is that the same entity with whom you have a contract? If not, inquire about the relationship between the fee owner and the contracting party and determine how that may affect your right to payment.
• 
  Understand the mechanic’s lien laws in the project’s jurisdiction and strictly comply with all notice requirements.
  
• Understand the role of the architect/engineer on the project as it relates to the payment process. Ask for a copy of the agreement between the owner and the A/E.
  
• If you are not providing the builder’s risk insurance, ask for a copy of the policy that covers the project.
  

— Robert Burns, Partner, Stinson Morrison Hecker LLP

Consensus DOCS
Visit the AGC website at agc.org for more information or to download the ConsensusDOCS forms. For help with contract language for requesting financial information, see ConsensusDOCS 200 Section 2.2.1 and ConsensusDOCS 290.1, a model questionnaire. The AGC “Guide to Construction Financing,” second edition, is also available for free on the AGC website.

February 2010 construction at $846.2 billion annual rate

The U.S. Census Bureau News release their report earlier this month. They announced that construction spending during February 2010 was estimated at a seasonally adjusted annual rate of $846.2 billion, 1.3 percent (±1.3%)* below the revised January estimate of $857.8 billion. The February figure is 12.8 percent (±1.3%) below the February 2009 estimate of $970.4 billion.

All of the data stated in the article is very interesting and worth a view.

You can view and print the article by clicking here.

Building a fleet safety program

One of the great associations we are a member of is asse. You can visit their website by going to www.asse.org

We found two great articles that we would like to share with you.

The first article is on building a fleet safety program, originally written by Peter Van Dyne. This article covers everything from driver selection to expectations to performance monitoring and even overall fleet risk management.

To view and print the article, click here.

About the article author:

Peter Van Dyne is Technical Director of Transportation for Liberty Mutual’s Business Market
Unit in Brookfield, WI. For more information, e-mail Van Dyne at
peter.vandyne@libertymutual.com.


The second article is on managing construction risk through preoperatoinal planning. Written by Peter G. Furst, Architect, MBA, CSP, ARM, REA, CSI. This article covers the reasons why pre-planning is so important.

To view and print the article, click here.

About the article author:

Peter G. Furst is the Technical Director of Contracting Services for Liberty Mutual, overseeing
consulting services west of the Rockies. He has been instrumental in implementing strategic
organizational solutions resulting in operational efficiencies and substantial reductions in the
cost of risk.
He has over 20 years of construction experience with a multinational general contractor
serving as estimator, superintendent and project manager on many projects varying in size up
to $500 million, involving hundreds of craftsmen and subcontractors. He has also worked as an
architect and has over ten years of design experience with various architecture firms.
Furst holds a master degree in business administration with emphasis in management and
bachelor of architecture and bachelor of science degrees in construction. He has taught
business and management as well as construction management and safety courses for over
25 years at UCLA, USC, many state universities and at UC-Berkeley since 1996. In 2005, he
was elected an Honored Instructor at UC Berkeley.

Insurance coverage for Chinese Drywall Claims

I receive numerous articles from many sources. This is one that I received from C. Clay Olson of Olson Good Attorneys at Law in South Carolina. www.olson-good.com. The good folks at Olson Good can provide some great insight and have a broad knowledge base when it comes to construction. You can view the original by clicking here

This is a great article on something that is becoming more and more popular.

A DISCUSSION ON INSURANCE COVERAGE FOR CHINESE DRYWALL CLAIMS
C. CLAY OLSON

Chinese Drywall is becoming a household name, referring to certain drywall products manufactured in China and imported into the US between 2004 and 2008. A relatively new trend in the construction defect sector of the law, consumer complaints begin surfacing during the years 2007 and 2008. The consumer complaints originated in Florida, causing many to speculate that the drywall might be the result of a deficit in availability of traditional product due to the millions of repairs elicited by the hurricane seasons which plagued the country in 2003, 2004, and 2005. As complaints poured in from Louisiana and Texas, the theory on the products origin became widely accepted.

From a property damage perspective, most consumers complained that strange, sulfur-like odors were coming from certain areas of the home. In addition, preliminarily studies suggest that the subject drywall emits a sulfur compound responsible for the corroding of electrical wiring, HVAC components, and certain household appliances in those structures that have been restored or rebuilt with Chinese-manufactured drywall. While the cause of these problems has yet to be fully determined, the drywall at issue appears to emit gases such as carbon disulfide, carbonyl sulfide, hydrogen sulfide, and diethyl sulfide. While certain physical maladies have been reported by some homeowners, this discussion will not focus on that aspect of the controversy.

Several lawsuits have been filed on behalf of consumers. The suits cite studies performed by ENVIRON, a consulting firm retained during initial litigation, as well as public health studies which have been produced at both state and federal levels. Litigation involving the use of Chinese drywall alleges that it is defective because it smells like “rotten egg” and emits a variety of harmful toxins that can corrode and damage metal components such as HVAC coils and doorknobs.

The construction and insurance industries have been on a collision course for years as a direct result of one common antagonist: the unhappy property owner. These owners come in all shapes and sizes, as some are single family residential homeowners, while others are corporate entities that rely on the contractors for the infrastructure within which they conduct their businesses. A common enemy does not always produce a united front, however, as evidenced by positions taken by insurers and their policyholders within the construction industry. At the heart of these disputes between insurance carriers are lawsuits against businesses in the building trades, including developers, contractors, and materials suppliers, which allege “occurrences” which cause tangible, physical damage to property.

The standard CGL defines the term “occurrence” as follows: “the continued or repeated exposure to substantially similar harmful conditions”. Many courts have interpreted occurrences to be “unexpected and unintended” by the contractor or subcontractor. Further analysis requires the unexpected damage to extend beyond the work or work product of the insured.

POLICY EXCLUSIONS AND LEGAL THEORIES APPLICABLE TO CHINESE DRYWALL

There are several standard CGL policy exclusions that may serve as a bar to coverage in Chinese drywall cases. Because the notion of defective drywall from China was not contemplated during the installation period(s), there is current speculation as to how “standard” and non-specific exclusions might seek to limit coverage. The situation is analogous to CGL policies which were underwritten in the 1990‟s, immediately prior to the synthetic stucco litigation which involved dozens of manufacturers, applicators, as well as general contractors that chose to install the product on the exterior of structures. While there is now a common “EIFS Exclusion” incorporated beyond the terms of the insuring agreement between builders and carriers, this was not the case until the product was declared to be defective.

POLUTION EXCLUSION

Specific jurisdictions have treated the pollution exclusion differently. Traditional environmental claims have seen the exclusion used successfully in most instances. The construction defect claims regarding Chinese drywall are, arguably, non-environmental in nature. Things are never black and white, however, and different jurisdictions have interpreted the exclusion to reach conflicting results.
Pollutants are defined in policies as “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” The 5th Circuit ruled in 2008 that a particular pollution exclusion clause applies whenever a pollutant causes harm by a physical mechanism enumerated in the policy, irrespective of where the injury took place or whether the pollutant was released into the environment.‖ Noble Energy, Inc. v. Bituminous Cas. Co., 529 F.3d 642 (5th Cir. 2008).

The definition of a pollutant can be determined by the actual substance being released, such as carbon monoxide. (Carbon Monoxide a pollutant and subject to the exclusion, see Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008). Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84 (Alaska 2008) involved a propane leak and the policyholder‟s contention that the substance (petroleum) was not, in and of itself, a pollutant. The court concluded in favor of the insurer‟s exclusion, reasoning that when “gasoline escapes or reaches a location where it is no longer a useful product, it is fairly considered a pollutant.”‖ Whittier Properties, 185 P.3d at 91.

MOLD OR FUNGI EXCLUSION

The “mold exclusion” excludes coverage for bodily injury or property damage relating to the inhalation, ingestion or exposure to fungi, mold or bacteria within a structure. Consider the following case from Florida, which involved a suit against a contractor alleging mold related damages. In Empire Indemnity Ins. Co. v. Winsett, 2009 WL 1178516 (C.A. 11 (Fla.)), the Eleventh Circuit Court of Appeals reviewed a factual pattern in which it appeared that the mold growth was a product of the builder„s failure to install a vapor barrier. The Court, applying Florida law, found that even if the mold growth was caused by a covered preceding event, the clear and unambiguous meaning of the language of the exclusion
nevertheless barred coverage for the claim. Thus, the moisture related damages to property as a result of negligent installation of the barrier would be deemed covered, although the production of harmful elements to the air were not a covered element of otherwise covered work. Current opinion regarding the scope of injuries attributable to Chinese Drywall will likely deem that these damages fall outside the mold exclusion. While there is some organic matter involved, it is not congruent with those elements covered by the mold and fungi exclusion.

THE YOUR WORK EXCLUSION

This exclusion bars coverage for damage to the policyholder‟s work. The definition of “Your Work” includes the integration of materials, parts or equipment furnished as part of the work. “Products-Completed Operation Hazard” is defined as “All bodily injury and property damage occurring away from premises…….. arising out of your product or your work except: 1) products that are still in your physical possession; and 2) work that has not yet been completed or abandoned.

An important exemption to this exclusion involves coverage for damage arising from work performed on behalf of the insured by a sub-contractor. So long as the property damage arises out of a lower-tier contractor„s work, materials, or design, the “your work” exclusion will not limit coverage for defects alleged against a general contractor. As such, there may be instances where a general contractor could be covered for damage to the building as a whole by virtue of the fact that the defective drywall was installed by a subcontractor. The subcontractor exclusion has been the subject of much litigation, and the national trend is currently favoring coverage for negligent work of a subcontractor. “Plainly, an interpretation of the policy which views the term “occurrence” categorically to preclude coverage for the simple negligence of a subcontractor subverts the plain language and purpose of the CGL part of these policies.” (Mississippi in Architex v. Scottsdale 2/10/2010 reversing a lower court ruling that a subcontractor exclusion allowed for coverage to be denied when the suit‟s pretext was faulty work of a subcontractor).

THE SISTERSHIP EXCLUSION (RECALL OF DEFECTIVE PRODUCTS)

This exclusion bars claims for expenses associated with the repair or replacement of a product when it has been withdrawn from the market. Thus, if the insured is a distributor of building materials, this exclusion is of particular importance. It should be noted, however, that the exclusion does not exclude coverage for the actual damage caused by the product itself. See. e.g. Centillium Communications, Inc. v. Atlantic Mutual Insurance Co., 528 F. Supp. 2d 940 (N.D. Cal. 2007).
In light of the resolution introduced in the U.S. Senate seeking to impose a recall of all Chinese drywall, this exclusion may serve to bar claims associated with such a recall. However, the Sistership exclusion will not function to bar claims relating to the repair, removal and/or replacement of defective drywall if there is no general recall.

ENDORSEMENTS WHICH MIGHT LIMIT COVERAGE
KNOWN OR CONTINUOUS INJURY

This endorsement prevents coverage for losses of which the insured is aware prior to the policy inception date. Again, the insured„s knowledge of the defective nature of the drywall is an issue. The
purpose of the exclusion is to prevent coverage for claims alleging damage to property that has not been physically injured arising out of a defect or dangerous condition in the named insured's product or work. In other words, if the drywall makes the building uninhabitable, this exclusion would prevent coverage for the claim against the named insured. This exclusion applies only if the building can be restored to use by the replacement or removal of the work product. This means that if the building can be again made habitable by the removal of the defective drywall, the exclusion will apply. But, if the building cannot be used again even after the drywall has been removed and replaced by non-defective drywall, the impaired property exclusion is not applicable.

This endorsement will be important in claims that may arise from construction occurring after a reasonable and prudent contractor should have known about the problems associated with Chinese Drywall. In sum, restrictions remain limited to known products which are deemed defective at the relevant coverage period. This doctrine is subject to the state of mind and knowledge of the contractor who has installed the product, specifically centering along knowledge of inherent dangers.

CONCLUSION AND LESSONS TO BE LEARNED

Insurance coverage is not understood by most lawyers or insurance agents. While contractors might be aware that some items are not covered under a policy, it is a truly impossible burden for a contractor to keep up with the day to day shifting of case law, public policy, and the other complications which make this such an unknown risk. Contractors that are involved in Southeastern projects should make certain that they buy products from suppliers that they trust. Further, contractors need to make sure that their agents are more than brokers of insurance products lacking independent knowledge of relevant construction issues. Chinese Drywall is like EIFS in that there is much uncertainty regarding the concentration of the problem. Risk transfer protocol such as requiring suppliers and subcontractors to sign contractual obligations which require indemnity and additional insured treatment are key in all building environments. Properly drafted contracts and administration of contract formalities can alleviate the construction professional from dealing with the headaches contained within a CGL policy of insurance.



C. Clay Olson
Olson & Good, PC
501 Bramson Ct., Suite 100
Mt. Pleasant, SC 29464
843-654-1022 (p)
843-884-3800 (f)
Direct Dial 843-224-6676

Managing Subcontractor Risk

"We understand construction, we just happen to sell insurance."

Russ Bell CIC, CRM, CRIS
VP - Commercial Insurance Advisor
Senn Dunn Insurance
336-346-1306
rbell@senndunn.com

I recently received the latest issue of IRMI's Construction Risk Manager newsletter (dated February 12, 2010 issue 6)

Inside was a great article that a lot of Construction Companies could find useful. Managing your risk isn't enough in today's economy, you also have to watch out for your subcontractor risk. Here are some tips from that IRMI newsletter. If you would like more tips or would like a copy feel free to contact me at 336-346-1306 or by e-mail at rbell@senndunn.com

Diligently Mange Subcontractor Default Risk - From IRMI Construction Risk Manager, Feb. 12, 2010, Issue 6

Reports of a spike in subcontractor defaults are already surfacing, and most industry observers expect the situation to worsen through 2010 and into 2011. With margins on projects already squeezed by competitive pressures, contractors must take steps now to manage their exposure to this risk. Some basic steps contractors can take include the following.

1. Pick the right people. Use subcontractors you know and with whom you have developed a good relationship. Good communication will be crucial in avoiding bad outcomes.

2. Prequalify all subcontractors at a higher level. Double the frequency at which you review their financial statements. Interview their sub-tiers, vendors, and employees to see if payments are being made on time (make sure you have the contractual right to do so). Ask a lot of questions.

3. Diversify. While it is important to use familiar subcontractors, don’t expose every project you have to the same risk, especially for major subcontractors.

4. Watch for signals of distress. Aging of receivables and payables may be signs of liquidity problems, and a bid that is drastically lower than those of other bidders may signal desperation. Failure to return phone calls or e-mails or to show up at regularly scheduled meetings is a red flag. Train project managers to report any early signs of distress.

5. React promptly. If appropriate, help the subcontractor over a short-term hurdle, but don’t throw good money after bad. Use a funds control service to make sure the funds you pay the subcontractor are being used to pay suppliers and sub-subs on your project. When a default occurs, take remedial steps quickly to avoid a domino effect on other aspects of the project.