October 2008

Construction is a high risk industry. Personal injuries and property damage occur frequently, and these events ultimately cost the contractor money. Many times such claims could be covered under a Contractor’s All Risk (CAR) policy.

CAR policies, commonly referred to as Course of Construction or Builder’s Risk policies, insure against physical loss or property damage to works, plant, equipment and materials during the course of construction. Such policies can be complicated so contractors should take care to ensure that any coverage adequately covers the risks of the construction project to be undertaken. Many contractors can be caught short by failing to evaluate their potential liability risks in relation to the policy they are considering.

Here are some important rules to evaluate CAR policies:

• Conduct an insurance audit with a risk manager or broker to determine potential liability and any risk not covered by your current policy.
• Consult with your broker because many insurers can customize the coverage to match the needs of the project. The insurer needs time to do this effectively, so don’t wait till the last minute.
• Take note of exclusions because while most are expressly stated, others can be implied and can radically limit your protection. One frequently implied exclusion is consequential loss relating to loss of profits and expenses as an indirect result of the cause of the claim. Naturally occurring events such as deterioration due to mildew, rust, or obsolescence may also be deemed as implied exclusions.
• Confirm there are no unusual limitations on the measure of damages. The method in which your insurance carrier determines damages can significantly affect your bottom line.
• Carefully consider the period of coverage as it normally only extends to when the contractor is on site and ceases when the client takes possession. Ensure there is extended coverage should problems develop later on.
• Technological changes using business information technology opens many contactors to new risks if they incorporate design management in the construction project. Additionally, construction companies which use BIM also have to consider potential losses due to hacking or data corruption that would not likely be covered under a CAR policy.
• Review the excesses and deductibles to be applied by your insurer to determine if they are reasonable.
• Fully document your damages with the aid of an experienced consultant, as CAR carriers will strive to reduce the cost of damages. Costs stemming from prolongation of the claim may be restricted to maximum excess limitations.
• Use a legal consultant especially when preparing a major claim. They can guide you through any potential red tape and aid in negotiating a proper settlement.

In December 2003, the American College of Occupational and Environmental Medicine (ACOEM) developed a set of medical protocols, backed by scientific findings, for the treatment of injured workers. Occupational medicine physicians and other specialists involved in the medical care of workers developed these guidelines to provide practitioners with:

• A step-by-step outline to assess the patient’s condition, and to educate the patient about that condition.
• Specific guidelines about what physical findings and/or test results are required to establish a diagnosis.
• A methodology for identifying the role psycho/social factors plays in a worker’s response to treatment.

The effectiveness of these guidelines was documented in a study titled Acceptance and Self-Reported Use of National Occupational Medicine Practice Guidelines, published in the April 2000 issue of Journal of Occupational & Environmental Medicine.

Ninety-five percent of those polled reported that the guidelines improved their practice in some manner. Fifty-two percent of physicians thought that guideline use decreased medical costs. Seventy-one percent reported that their care complied with the guidelines in 70% or more of their cases. The researchers concluded from their study that physicians’ attitudes toward the guidelines were positive and that reported compliance was high.

However, a 2006 study conducted by the National Commission of Compensation Insurance (NCCI) titled Workers Compensation vs. Group Health: A Comparison of Utilization, showed that compliance with ACOEM protocols had dropped considerably since 2000. In fact, the researchers uncovered significant growth in the number and mix of medical treatments practitioners provided compensation patients. The study, which compared 2001-2002 to 1996-1997, found that the number of treatments for all diagnoses increased 45%, except for injuries such as knee and leg sprains, which had increased as much as 80%.

But increased levels of treatment and unnecessary testing are just the tip of the iceberg. There are some other serious outcomes resulting from over utilization:

• The barrage of doctor’s visits, tests, prescriptions, therapy sessions, etc., convinces the employee that they are getting all of this treatment because they are seriously injured. The employee begins making emotional decisions, and overlooks their economic well being. This kind of response often results in lawsuits and the loss of a valuable employee.
• More narcotics are being prescribed as part of the treatment program, resulting in addiction among some employees.

Given these outcomes, it is incumbent upon employers to select a doctor who will follow evidence-based treatment protocols. The doctor should be in agreement with the ACOEM philosophy that it is important to return the injured employee to the workplace in the appropriate time, whether to their own job, or to a modified position.

The best way to find the right doctor is to talk to other local companies, asking if they use physicians who are specifically trained in occupational medicine. After you have found the right doctor, establish a line of communication. Be sure your doctor knows that their recommendations and restrictions will be respected. They should also be fully aware of the return-to-work possibilities that exist within your company so that they can make the appropriate decision for their patients.

A construction site is a dangerous place. Power tools, scrap wood and metal, heavy equipment — all of these can cause serious injury or property damage. Loss control efforts normally focus on prevention of accidents on job sites. However, the possibility of a loss that could drag a contractor into court does not end when the project is finished. The contractor’s work stays behind and can be the source of serious liability claims. Consider the following examples:

• Six months after a roofing contractor finishes work at a bank, melting snow enters through the roof and ruins several network servers.
• A railing installed by a metalworker collapses as a man leans against it. The man falls ten feet and suffers severe back injuries.
• An overhead door malfunctions and closes on top of a new pickup truck. The owner seeks recovery from the contractor who installed the door.

Loss prevention and proper insurance are just as important after the job is done as they are while work is in progress. Standard Liability insurance policies cover a contractor’s liability for injury or damage arising out of completed operations. The insurance company considers the contractor’s work to be complete when one of these first occurs:

• All the work required by the contract is complete;
• All the work to be done at a job site is complete (when the contract requires work at multiple job sites); or
• When the contractor’s work is put to its intended use by someone other than another contractor working on the same job site.

The company will provide the contractor with legal defense and pay for any settlement or judgment that results from accidents arising out of completed work. Of particular note, it will pay for the restoration, repair or replacement of any property made necessary because the contractor performed his work on it incorrectly. The company will not pay for such a loss while the job is still in progress, but it will pay after the work is completed.

For coverage to apply during a particular policy period, the injury or damage must first occur during that period. For example, assume that a siding contractor installed aluminum siding on a house. While making improvements several years later, the homeowner discovers extensive rotting of the plywood and joists inside the walls. A third party concludes that the interior damage resulted from faulty installation of the siding. Since the damage most likely began at the time of installation, the policy that was in effect at the time of the job will provide coverage. On the other hand, if a contractor builds a deck and it collapses 18 months later, injuring four people, the policy in effect at the time of the collapse will provide coverage, not the one in effect at the time of the job.

The insurance company will not pay for damage to the contractor’s own work if the damage arose out of the work. For example, if an electrical contractor’s faulty wiring fries a circuit board he installed, the insurance will not cover the damage. The insurance policy should not be confused with a warranty.

One important caveat is that a form covering a third party as an additional insured might not provide completed operations coverage for that party. The form most commonly used to add coverage for an additional insured no longer provides this coverage. A separate form has been created to address this gap in coverage. Since many construction contracts will require subcontractors to provide this coverage, subs should verify with their insurance agents that they have it.

By its nature, construction is dangerous work, and that danger continues to some extent long after the contractor has moved onto the next job. It is vital that contractors have appropriate completed operations insurance in place to protect them if something goes wrong.