Sizing and recovering impact costs from insurance
By David Bowcott
Risk Management Aon impact costs insurance risk
The prime contractor is like the conductor of an orchestra, ensuring all musicians know their role. If one player misses their cue, the entire orchestra is disrupted, and the performance fails.
Insurance plays a key role in preventing and mitigating failure. When an event occurs that puts a project in jeopardy, insurance funnels much needed capital to that project to ensure it is still completed on time and on budget. This event-triggered capital covers the direct costs, and perhaps more importantly, can cover the knock-on costs associated with the event occurring. It is these knock-on costs, or impact costs, that I want to discuss.
Virtually all of the insurance policies used in an effectively risk-managed construction project include coverage for impact costs. The following are a few policies you should pay close attention to when designing and sizing the policy terms associated with impact costs:
Builders Risk/Course of Construction Property Insurance – This policy covers direct costs associated with a property event, costs due to the delay in start-up of the project, as well as soft costs and extra expenses that are the result of the property event.
Professional Liability Insurance – This covers the errors and omissions of the delivery of professional services, most often design, for the project. A design error could result in impact costs, thus the policy limit should consider these potential costs.
Environmental Liability Insurance – This covers costs associated with an environmental event. Once again, these events can create significant delays to the project and proper care should be taken to assess likely impact costs of environmental exposures facing the project.
Subcontractor Default Insurance – Whether it is a blanket policy or project specific (dedicated), the impact costs sub limit for subcontractor default insurance should be adequately sized (under the policy this limit is known as the Indirect Limit). Most often the limit is maintained at the standard $5 million level, however, there is potential that this limit can be increased in order to properly manage impact costs associated with key subcontractors.
Surety Bonds – Whether it is subcontractor bonds or prime contractor bonds all stakeholders should ensure there are no clauses in the bond wordings that could eliminate or reduce coverage for impact costs.
The above represent the bulk of the project specific covers that you should pay attention to in order to ensure the coverage is adequately sized for your project.
Once the policies are adequately sized, the next step is to put a solid plan in place to ensure fulsome and prompt recovery for impact costs associated with each policy. Recovering the direct costs from an insurance claim on these policies is relatively easy. It is the impact costs that are often the most difficult to prove for insurance carriers. Here are some sound steps you can take in order to build a strong impact cost recovery strategy:
React Quickly – As soon as you see any sign of an event on the project that could lead to a delay, immediately perform an assessment. The assessment should determine what the root cause of the event is and which project-specific insurance covers could be triggered as a result.
Documentation – Tied to the above point on reacting quickly, your team needs to ensure the root cause of the event is properly documented, and, of equal importance, the impact costs are clearly captured. Further you need to ensure clear documentation that links the impact costs to the root cause of the event.
Insurance Carrier Notice – Make sure you are familiar with the notification requirements under all of your policies. Often there is a reluctance to advise the carrier that there may be a claim in the making. You should discuss the potential claim with your risk advisor and determine the most effective way to notify the carrier to ensure optimal recovery.
Claims Preparation and Valuation Strategy – This isn’t just the claims advocacy services offered by your broker, rather these are forensic accountants and engineers that have expertise preparing and valuing claims, in particular impact cost claims. Ensure you have a list of such service providers handy in order to retain their services so you can put together a clear proof of loss for the insurance carriers. It should be noted that most quality insurance policy wordings will allow the costs associated with such services to be recovered from the policy limit.
The above tips will help you to effectively size the coverage under your various insurance policies to ensure adequate cover for impact cost. In addition, pay particular attention to designing a recovery strategy for coverage associated with impact costs. It is time well spent.
