Liabilities are a risk and if there’s one thing people in the construction business hate, it’s risk.
Prudent planning alone, however, isn’t enough. Nor is having the best talent with the finest skill sets on the team with the latest technology in hand.
The most obvious way to mitigate risk is through insurance and this is where it gets tricky. There are multiple lines of construction insurance policies, some are usually mandatory, some are optional. Knowing which policies work best for which projects is best discussed with a broker, but there are some basics everyone in the construction sector should know, says Mark Rolfe, executive underwriter in the corporate underwriting department of Northbridge Insurance, a construction sector insurance carrier.
“The first level is General Contractor Liability and from the contractor standpoint GCL is the Canada IBC 2100 standard and most insurance companies follow it closely so there’s not a lot of product differentiation,” he says. “In the United States it’s been litigated back and forth and in Canada it really hasn’t changed much, maybe a word here and there, but for the contractors it’s a first line of defence. It covers bodily injury and property damage, also known as PI and PD.”
It generally also covers advertising damage, Rolfe says, which is similar to libel.
More commonly, he says, it’s called into play when there’s a contractor blasting bedrock for an excavation and it causes damage to an adjoining property or flying debris hits someone.
Like consumer insurance for drivers, the premium for each policy varies according to the track record of the contractor and their experience, what the contractor is doing, the size of the project and what limits there are in the policy.
“It’s all a case by case basis,” he says.
Another form of risk mitigation is Error and Omissions insurance which covers the contractor for mistakes.
“If the HVAC contractor recommends a five tonne air conditioning unit and it turns out after installation that they needed a 10 tonne unit, that’s where the policy would kick in,” he says, though it’s not an Insurance Bureau of Canada form so it’s not standard and the wording may vary.
He says to determine what insurance a contractor must have either before they bid or after they win the contract, they have to read their contract.
“In some cases they will have an obligation to have certain coverages,” he says. “And the contracts will stipulate minimums and limits.”
One of the areas where new coverage is coming to the forefront is cyber-insurance, Rolfe says.
“Construction has long been moving away from blueprint and into digital files and BIM,” he says. “And we’ve seen municipalities get hacked and held to ransom.”
For example, he says, earlier this year the town of Wasaga Beach found its computer systems frozen by a hacker who then demanded ransom to restore their access.
While the insurance won’t cover a ransom, it will cover the costs of experts to advise next steps and limit damage and the cost of a negotiator.
He says the risk is not that the files will be stolen, it’s that they can be held hostage for ransom and that entails delay, which becomes costly. The weakest link usually isn’t at the owner or general contractor level but at a subcontractor level where they may unwittingly introduce a bot into the network as they connect to get files.
Many insurance policies are migrating to standard Canadian Construction Association forms as defined by the Canadian Construction Documents Committee (CCDC), which is making things a lot less complicated, Rolfe explains.
However, since not all coverages are mandatory, there are no standards yet for cyber-insurance, he says. The U.S. however is moving to make cyber-insurance mandatory and there are discussions at the CCDC around following that lead.
“That doesn’t mean a client wouldn’t be smart to go out and buy it anyway,” says Rolfe.
Another area of construction insurance is vehicle insurance.
“In the event a front end loader gets stolen or burns, for example, they want to make sure the contractor has insurance and can finish the job,” he says.
Most other coverages are standard for contracts, such as their own offices, equipment or an installation cover, which means anything they install at a project such as wiring or kitchen cabinets are insured until they get paid, because up to the point of being paid they still own all that, he says.
Pollution perils are often covered separately he says and that might be anything from contaminated run-off from a site or diesel spills.
“The GCL policy has exclusions for pollution and limitation and it’s very hard to read,” he says, noting a separate pollution policy is often tabled to cover those exclusions.
Project insurance is on a project by project basis, based on what the value of the project is worth.
“Generally under CCDC they are contractually obligated to buy 1.1 times the value,” he says. “And that’s because if it all burns to the ground the day before it is turned over, there’s money in there for inflation and the cost of demolition and debris removal.”
There are also a variety of other policies under discussion, some moving more into mainstream, albeit slowly, he says. Delay is one and contractor Extra Expense is another.
“Extra Expense really benefits the contractor because when something happens the property insurance, known as Builder’s Risk, helps cover the direct loss but any additional costs are picked up by the Extra Expense policy,” he says.
“And when you do get behind schedule, the delayed opening comes into play as a policy and is of benefit to the project owner who was anticipating revenues on completion. There’s also a third one, Soft Costs, which cover new building permits and financing charges if they all have to be redone.”
Builder’s Risk is project specific. On top of that the contractor also has to decide to buy flood and earthquake insurance.
“With the way the climate is changing it also makes sense,” he says.
The last type of policy is equipment failure, he says, which used to be known as boiler insurance. While many may think it’s just for pressure vessels that might blow up, it also covers any kind of equipment failure such as an HVAC compressor failure.