Course of Construction/Completed Operations Liability
Large-scale construction projects tend to have dedicated limits of liability insurance for venture partners and, occasionally, for subcontractors employed onsite. There are conflicting views on the value of insuring all subcontractors under the same policy versus making the venture and project owner the policy's main beneficiaries, especially when considering control of claim or single source of recovery. Both are common in the marketplace.
Limits of Liability, Policy Term, and Treatment of Defense
When placing project-specific limits of liability, keep in mind:
- General liability limits/premises liability limits should reinstate annually.
- The policy term should parallel both the period of construction and completed operations until the statute of limitations.
- The treatment of defense should be consistent by layer of coverage. For each layer, either defense erodes the retention and is in addition to the limit of insurance, or it erodes both the retention and the limit.
Insurability of Punitive Damages
About half of the states in the US either don't allow an insurance contract to provide coverage for punitive or exemplary damages or are unclear as to their insurability. This means if you have a catastrophic loss and don't have a clear understanding of your coverage in that venue, a sizeable component of that claim may be excluded or your insurer may respond under a "reservation of rights." Translated, you now have a portion of a catastrophic liability claim that lacks a clear insurance recoverable and mandates you set up a separate reserve on your project balance sheet to potentially fund a percentage of the loss.
Risk treatment for punitive damages on large construction projects is all too often ignored and unaddressed. Yet, the solutions are relatively simple:
- Some insurers will provide a "choice of venue" to submit your claims and, ideally, one of those venues will allow insurance to respond in the affirmative to a punitive damages claim. Swiss Re Corporate Solutions falls into this category.
- You can also purchase punitive damages coverage "offshore," which is separate and distinct from your on-shore placement. The reality is this approach is not as cost-effective as embedding in your project liability placement and may be awkward to actually collect a payment in an offshore venue.
Linkage between Insurance Coverage in a Complex Claims Scenario
Although "bad things" happen infrequently on large construction projects, when they do, it's complicated. As it's often difficult to ascertain who or what is to blame – bad design, bad construction, failure of materials, owner interface, force majeure events, or all of the above – many parties and types of insurance are often linked to the loss.
Suggestions to improve the responsiveness of insurers and your ability to "monetize" a claim to your project:
- Where coverage can overlap – such as project liability and project E&O insurance – try to use a common insurer or panel of insurers. Construction claims tend to complex and involve multiple causalities. Common insurers on key lines can reduce the key variables in securing a recoverable.
- Choose insurers that have a broad portfolio of construction offerings, are committed to the industry long-term, and have established relationships with you across multiple product lines. Relationships matter, especially in the event of catastrophic loss.
- Representations before the fact are important. Insurance can play a critical role in winning the competitive infrastructure bidding process. Conversely, providing an accurate view of exposures with detailed supporting data before the loss improves your chances of securing a recoverable that's reflective of the actual loss sustained.
- Use net capacity players – they provide additional clarity in the event of a large loss. Net capacity players are the decision makers; they don't need to seek a reinsurance recoverable to pay a loss. A good broker will know who deploys their own capacity rather than relying heavily on the reinsurance market. It's worth asking during negotiations.
Insurance products underwritten by Westport Insurance Corporation, First Specialty Insurance Corporation, North American Capacity Insurance Company, North American Specialty Insurance Company, North American Elite Insurance Company, Washington International Insurance Company, or Swiss Re International S.E. All subsidiary insurance companies are subject to a common S&P rating of AA- and AM Best Rating of A+ Class 15. Nonadmitted insurance products are available only through licensed surplus lines brokers and may not be available in all states.