Originally posted Wednesday, 13 April 2011
Written by John Hurley and John Sier
Integrated Project Delivery (IPD) has been extolled in many journals and presentations as enhancing collaboration and potentially improving the construction process. However, IPD does not eliminate all risks on a construction project, and it can introduce new complications for developing an insurance program. Owners are faced with the question of how to insure an IPD contract where that project delivery method does not have years of past experience, claims history, and financial performance. Coupled with the variations on the meaning and implementation of IPD, the underwriting questions get even more complicated.
When considering using IPD on a project, owners should investigate with their insurance providers the extent to which the IPD project delivery method will have an impact on existing coverages. The different relationships between the owner, designer, constructor, and even the trade contractors can have an effect on the way that an insurance carrier will evaluate the insurance policies in place. It is no surprise that when you combine an uncommon and emerging project delivery method with an already complicated intangible like insurance, you suddenly find yourself in a predicament. The good news is that there are solutions.
A first step toward getting the right insurance for IPD begins with the questions we all learned in grammar school: Who, What, How, Why, and Where. Answering these questions with the right insurer at the table will get you started:
- Who: the parties named in the contracts.
- What: the planning, actions, and activities of the work, as well as the outcome.
- How: the means, methods, schedule, and funding.
- Why: the underlying philosophy of the team, the culture, and the project goals.
- Where: the impact of the local site, laws, and governing environment.
Answering these questions and the dialogue that results from addressing them sets the foundation for building your IPD project risk solution.
Most professionals know that insurance underwriting is a traditional and conservative industry grounded in years of actuarial science, data, and risk engineering. But many do not know that it is also a very relationship- based industry started in English public houses (the Society of Lloyd’s of London began in Edward Lloyd’s coffee house around 1688). The industry can be creative given the right set of circumstances.
Insurers are continuously looking to provide competitive new products, and IPD is definitely on the under- writing “radar screen” of those who are highly specialized in writing design and construction industry risk. An Owner must be certain that he or she is sitting down at the right table with the right underwriter. Most likely, you will find yourself heading to the insurer’s home office in New York, Chicago, or Boston because there are only a few underwriting experts who have the depth of resources, broker relationships, and expertise to understand your project and craft the policies to cover the unique risks on your IPD project.
As an example, general liability and professional liability coverages are often intended to extend to defective work claims resulting from negligence. These coverages, however, must be precisely written to respond cohesively in an IPD contract and trigger coverage around a collaborative, risk-sharing agreement.
Trying to get anyone to understand the insurance dilemma can seem like a monumental task. Few construction and design industry professionals or Owners really have the opportunity to become familiar with insurance. The years of litigation in the construction industry have caused many to operate under the principle, “If my project goes badly, somebody is going to pay, and it isn’t going to be me.” However, that attitude is precisely contrary to IPD principles.
So how do we avoid the claims and obtain the appropriate insurance? We need to look to our team’s mutual needs and recognize that the intent of our project is not to litigate but to achieve a profitable outcome consistent with IPD principles. With your competent broker, demonstrate to the insurers the same planning, process, and requisite partnering elements of an IPD project. Start examining insurance solutions for the project’s risks with the key primary coverages:
- Property/Builders Risk
- General Liability, including Completed Operations
- Professional Liability for Design and Construction
Although IPD contracts may come in different varieties or degrees, from “partnering agreements” to “IPD-lite” to a full multi-party contract, one critical element of your insurer negotiations is the fact that no two IPD Owner projects and teams and contracts will be identical. Every Owner will have a different story to tell and different needs. Therefore, each project will need a customized approach. No underwriting process and resulting coverage design will be the same. This is why it is critical to intimately familiarize your underwriter with the essential questions—the unique aspects of the project goals—including financial objectives, the responsibilities of the project’s team members, the contract, budget, and schedule.
An underwriter will likely view each project as an individual, specialpurpose entity with specialized coverages that mesh to protect the people and work of the entity. Because the IPD risks of the project become intertwined throughout the project as each member’s work impacts that of another, it may become necessary to weave the coverages into one program with one insurer as much as possible.
Shopping or placing individual project coverages, such as the property/ builders risk with one insurer and then putting the general liability and/ or professional liability with another carrier will create silos that are noncollaborative in price, underwriting, and response to a loss or claim—a counterintuitive approach that does not further the IPD principles of collaboration and efficiency.
The teaming and cooperative relationship of IPD can be extended to the insurance solution. Working to eliminate the past traditions of tortuous and expensive claims among designer, constructor, and Owner improves the bottom line of the IPD project and consequently reduces the total cost and complexity of traditional project risk and insurance.
Achieving a Mutually Beneficial Economic Relationship
Unravel the insurance mystery by starting with the end of the story. The parties want the IPD project completed at or below a target cost, including insurance and claims associated with the project. An Owner, designer, or contractor will be satisfied with a project where insurance costs were low, surprises and claims were nearly nonexistent, and there were no fights among insureds and insurers. This is the same desired outcome of insurance in IPD: zero claims, no litigation, a sustainable insured/insurer relationship, and a little profit left over so both entities can reinvest in more IPD after paying bills. Favorable insurance can be achieved in each of the program’s core coverages:
• Builders Risk – The intent of this first-party coverage is to insure the property in its course of construction against an unforeseen physical loss or damage. An important element of planning and insuring an IPD Builders Risk is to properly insure the “time element” risk in the event physical loss puts financial strainon the ability to finish on schedule or on budget. The right policy can give you the capital you need to accelerate construction and avoid extra costs. The policy will even have coverage extensions called “extra expense” and “expediting expense.” Potential loss of profit due to delay in opening on time can also be insured, as long as it is triggered by an insured peril. Furthermore, coverage for resulting damage due to a design error should be included in the policy coverage rather than excluded in the typical builders risk policy. The IPD project policy will need to be designed with the collaboration of all financial stakeholders, so that everyone uniformly looks to the same builders risk policy for clear and exact protection of the property assets and budget.
• General Liability – One risk that cannot be avoided even with an IPD contract is the risk to a third party—someone outside the contract of construction. This could be a pedestrian, a neighboring property, a supplier, or some other hapless person or entity. These risks are common, and we face them every day and in every project. Preservation of good coverage and appropriate limits is important to protect against this risk. This may be an opportunity to customize retentions for a particular class of claims. It also points to the value of safety engineering and proactive loss control settings. What your insurer can bring to the team to help prevent losses should be a significant consideration as you build your program.
When there are different insurers for builders risk, general liability, and even professional liability, it is possible for one insurer to subrogate against another insurer to recover claims that it has paid if it can find another responsible party, such as a contractor’s negligence contributing to a property loss. Having one insurer cover both the first-party losses (property and workers compensation) and thirdparty claims (general liability) can ultimately erase the potential for one party litigating against another. Removing these contingencies from an insurer’s underwriting makes their premium more attractive and in-line with the IPD stakeholders’ objectives of eliminating litigation.
• Professional Liability – Perhaps the most interesting of IPD project coverage, professional liability is similar to general liability in that its trigger requires one party to claim they have been harmed by the negligence of another party. Protecting a project from third parties who bring general liability claims for bodily injury or property damage can be expected when the “third party” is outside the fence of your project. Yet when the cause of the loss is the negligence of one of the IPD team members, an insurer may not be willing to pay that sort of claim until all resources for fixing the “problem” have been exhausted. Some Owners and their legal counsel will be uncomfortable apparently relieving professionals of their liability. In IPD, the lines that formerly defined and separated professional services may not be so clear. With or without identifiable negligence, an Owner could be left to expect the IPD team to fix the problem or error.
If an Owner wants project-specific professional liability coverage, he will have to focus on the few insurers who can provide it. Insurance contract provisions must be clear as to when an Owner might be able to trigger the coverage. Traditional professional liability policies do not complement IPD risk-sharing. Ultimately, you may find that the coverage will necessarily be excess to a significant retention/deductible and/or a designated contingency. It is never the intent of an insurer to be a “bank” of funds for anything other than legitimate claims reported in a timely manner. It will take some time for an Owner to work with its insurer to study the exposures and define the insurable claims and triggers. If you continue to face a dilemma in the coverage choices, go back and start with a deconstructed policy.
For both general liability and professional liability policies, coverage will need to continue long after the project is complete—after the IPD team has dismantled, closed their contract, and moved on to other projects. In this case, an Owner can benefit from project policies that have a maximum available period of completed operations coverage, especially if any of the original team members dissolve their business or change ownership years after the project is complete.
What Determines Underwriting Success?
Experienced underwriters are quick to detect an inexperienced design and construction team or Owner, and they will price or decline coverage if they sense that the team is anything less than fully engaged and experienced in the process of designing and constructing the project. It will be necessary for an Owner to gather the best advisors to articulate a clear and purposeful IPD strategy and IPD contract to the insurers.
The drafters of the IPD project agreement are key members of the insurance team. Developing the insurance program requires particular attention to the objectives of the contract, limitations of liability, allocation of risk, indemnification, and financial responsibilities, as well as incentives and rewards. If an underwriter sees a transparent and collaborative contract among the IPD team, they will be able to justify costeffective coverage enhancements. A significant portion of insurance cost is budgeting for defense or claims expenses. Knowing there is a low probability of one IPD team member bringing suit against another will help the underwriter and broker design an efficient risk policy. The IPD agreement should also clearly define and budget shared retentions or deductibles for insurance as being inside or outside of the project contingency, because that budgeting will impact how an insurer structures the coverage in and around all the project contingencies.
Design It Before You Build It
Sometimes the best way to understand how or why something works is to take it apart, just like engineers dismantle their competitors’ cars or investigators recreate accident scenes. The same practice can help those unfamiliar with insurance policies better understand their intent. So when you begin to Experienced underwriters are quick to detect an inexperienced design and construction team or owner, and they will price or decline coverage if they sense that the “team” is anything less than fully engaged and experienced in the process of designing and constructing the project. design your program, start with all the well-written policies for non-IPD projects, and then dismantle them so you can re-build them into one master program. That is the best way to work around common exclusions that need modifying. There might be no better way to do this than with your IPD insurer and legal team at the table so you can all address your project exposures directly. It will be both educational and exciting for the team members.
Quality Control: One Safety Voice
To achieve a project without human error is a tough challenge, but if the insurer can co-visualize, implement, and execute a top-notch safety program hand-in-hand with its Owner insured, the underwriters can better justify the application of financial credit to the program through potentially lower premiums and low expected losses for workers compensation, third-party bodily injury, and property damage. An insurer who works with an Owner to protect all of the perils of the project—unforeseen accidents, negligence, property damage, and safety—will be able to justify credits across all of the insurance lines. This is another motivation to have one key insurer at the table who can deliver the primary insurance.
Crafting an IPD insurance contract is no different from the disciplined crafting of the IPD delivery contract. It should be lean and collaborative. It should reflect the study of nearly every risk that can go wrong, look to eliminate every element of waste, and then identify where it is insured through the project policies, or financed, or self-insured. The insurers will come away with the confidence that a collaborative contract and relationship is under construction. Including the insurer’s home office, safety, engineering claims, and policy form/coverage experts is invaluable to the process of obtaining the best insurance coverage available.
IPD presents the opportunity to eliminate wasted arguing by engaging one master insurer who, as part of the team, will help identify and control the risks of the project to reduce or eliminate claims, and who will give you the coverages you need in the event there is a claim or a lender who needs assurance that the project’s funding is protected.
Understand that insurers like risk that they can engineer or control. It is music to an underwriter’s ear to hear an Owner ask: “Would you be willing to help me eliminate risk from my project?” Note that I did not say “from my contract.” Bear in mind, a project is typically a series of coordinated relationships and actions completed by one or many individuals working to accomplish a task, and, as we know, a construction project involves a multitude of individuals led by a manager or group of managers.
Several prominent insurers who are heavily engaged in construction have engineers, analysts, underwriters, actuaries, claims experts, and lawyers who thrive on calculating the potential for loss and advocating the best means of avoiding losses (engineering out the risk of the project) so that they, the insurer, can collect a profit on the risk they will bear before, during, and after the project.
The first step to building the IPD coverage solution is engaging the appropriate insurer in getting a full understanding of the project risks. Selecting an insurer with a can-do attitude, instead of a reserve-our-rights attitude, will serve an Owner well. If an underwriter sees that the Owner, designer, and constructor have identified and agreed on significant steps to avoid claims or manage them without triggering coverage, there is everything right about aiming to hold them to the same objectives.
Work with the underwriters to dissect their policy language. As an IPD team member customizes the contract, so too must he customize his insurance policy. There is no single solution for every IPD contract, whether it is a partnering agreement, IPD-lite, or a high-level, full-blown, multi-party contract.
This brings us to a key solution: take the collaborative soul, culture, and energy of the IPD team, and involve the insurers to the same level. If the insurers fully understand the project and immerse themselves in carving out the risk, they may be comfortable charging a lean premium so they can achieve a lean-plus profit.
- Understand that project risks are governed by contract, budget, and scope.
- Exhibit the strength and continuity of fundamental roles and traditional design and construction expertise your team will perform—a familiar process to insurers no different than what they are accustomed to insuring.
- Identify the insurance success goals, and ask your team to articulate the process toward achievement of the goals.
- Consider the role of other project coverages, such as Subcontractor Default, Environmental Liability, and potentially Management Liability for Fiduciary Liability, Crime, and Employment Practices of the team.
- Focus on continuous involvement: don’t just walk away from the insurance after it is designed. Continue to manage the risk as a team to catch potential losses.
A passionate team will build a successful model that can manage risk or, better yet, remove the risk and waste for the benefit of the project and the IPD team members to generate a greater project reward for excellence in managing risk. Engaging the insurance brokers and carriers early as a part of the team can further the IPD principles and assist in achieving a successful outcome.
John Hurley is the Managing Director, Midwest Construction Practice Leader at Marsh.
John Sier is a Principal at Kitch, Drutchas, Wagner, Valitutti & Sherbrook, PC and Associate Counsel to Construction Owners Association of America.
This information is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Statements concerning tax, accounting, and/or legal matters are general observations based solely on our experience as insurance brokers and risk consultants and should not be relied on as legal, tax, or accounting advice. You should contact your legal, accounting, tax, and other advisors regarding specific coverage and other issues. The information contained in this publication is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. All insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk. Marsh makes no representations or warranties, expressed or implied, concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers.
Marsh is part of the family of Marsh & McLennan Companies, including Guy Carpenter, Mercer, and the Oliver Wyman Group (including Lippincott and NERA Economic Consulting).