Download 2010-3-2 Andrews_Risk in a buyers Market

Dealing with Risk in a Buyer’s Market
Richard L. Andrews, P.E.
Sr. Construction Consultant
Zurich Services Corporation
Email: [email protected]
Telephone: 360.371.8750
Risk Engineering
Who is Zurich North America?
Zurich North America is the largest construction
insurance carrier in North America
Zurich North America is part of the Zurich Financial
Services Group (ZFSG) founded in 1872 headquartered
in Zurich, Switzerland
Zurich North America has approximately 10,000
employees and writes $10 Billion in annual premiums
© Zurich Services Corporation
ZFSG serves customers in 180 countries employing
60,000 people
In 2009, ZFSG had gross premiums of over $60 Billion
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Presentation outline
Risk Management 101
Insurance 101
Project Risk Mitigation in a Challenging Economy
Subguard – an Alternative to Surety
Consolidated Insurance Programs (CIP’s)
Leveraging Technology
© Zurich Services Corporation
Emerging Issues
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Risk Management 101 - Types of Risk
Everyone in this room is in “the Risk Business” since the
activities of life are inherently risky
Business Risk: involves the inherent chance for profit or loss
associated with any type of business --- these risks are not
insurable
Pure or Insurable Risk: exposure to the chance of injury or loss
due to uncertain danger, peril or hazard
Insurable risks involve only a chance for loss and no chance for profit
© Zurich Services Corporation
Risk Management is anticipating potential risks and taking steps
to avoid or mitigate them through advance planning
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Risk Management 101 (continued)
Risk management of small losses: manage and self-insure them
Risk management of larger losses: manage controllable risks by:
– Enhanced training
– Organizational accountability
– By transferring certain risks to others who can better manage and
control them by a combination of contract language and insurance
© Zurich Services Corporation
Risk management of catastrophic losses: by transferring or
limiting them by contract and insuring against them
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Risk Management 101 - Allocating Risk
by Contract
The basic principles of risk allocation are:
Which party can best foresee the risk?
Which party can best control the risk?
Which party can best bear the risk?
Which party benefits or suffers if the risk materializes?
The Owner holds the key to risk allocation through its approval of
contract language with the Contractor
There are 2 extremes:
All Risks on the Owner
© Zurich Services Corporation
– Owner pays low $’s, Contractor self-insures against the risks
All Risks on the Contractor
– Owner pays high $’s, Contractor acts as insurer of the Owner
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Insurance 101
Chapter 27 on Insurance from the Construction Financial
Management Association’s (CFMA) handbook called Financial
Management and Accounting for the Construction Industry is an
excellent starting point to understand construction insurance
Another excellence resource on construction insurance is the
International Risk Management Institute (IRMI)
URL: http://www.irmi.com/
4 Basic Policies:
Workers Compensation (WC)
Commercial General Liability (CGL)
© Zurich Services Corporation
Business Auto Policy (BAP)
Professional Liability (PL)
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Insurance 101 (continued)
© Zurich Services Corporation
WC
Covers bodily injury (BI) to your workers
Low severity; high frequency
Many tools/techniques in place to reduce or control exposures
CGL
Covers bodily injury (BI) and property damage (PD) to third parties
Low frequency; high severity
Construction defect claims are the number 1 cause of loss – 35% of each GL
premium dollar goes to pay these claims; surpasses ST&F. Together CD and
STF constitute 60% of GL losses.
New Zurich customers must have a written Quality Management Program.
BAP
Covers BI and PD to third parties
High frequency; high severity
Auto fatalities are the number 1 cause of workplace fatalities – 5,000 deaths last
year
New Zurich customers must have a written Fleet Safety Program
PL
Covers damages (BI, PD and economic) as a result of an error or omission in
the rendering of a professional service
Low frequency; high severity
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Project Risk Mitigation in a Challenging
Economy
See Powerpoint presentation by the same name
Discusses Owner and Project Risks
Discusses Subcontract and Operations Risk
Explores Mitigation Strategies
© Zurich Services Corporation
See Zurich Risktopic entitled “Strategies for managing the risk of
construction suspension or termination”
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Consolidated Insurance Programs (CIP’s)
These can be Owner-controlled Insurance Programs (OCIP’s) or
Contractor-controlled Insurance Programs (CCIP’s.) These are
sometimes referred to as “wrap-ups.”
Zurich prefers multi-year “rolling programs” versus single project
policies. Many of the largest construction projects use this type
of insurance program.
One advantage of this approach is that one carrier insures all
project participants. It eliminates multiple carriers arguing over
who should pay the claim.
Higher limits and better coverage can be procured using wrapups
Project participants still need to have “off-site” coverage’s
© Zurich Services Corporation
Wrap-up administration is critical to the success of CIP’s
A CIP, if designed and executed properly, is the most costeffective way to procure insurance for major projects.
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What is Subguard®?
The Risk – a subcontractor’s failure to perform their obligations
Traditionally, subcontract default risk was:
Bonded
Self-insured
Indemnified by Owner
Subguard® is an insurance policy written for a General Contractor
to protect it against defaults by subcontractors
The first Subguard® policy was written in 1996
There are over 175 Subguard® policies in effect today – 50 of the top
200 ENR General Contractors are customers
© Zurich Services Corporation
The Subguard® market consists of large General Contractors who
issue over $75M in subcontracts annually
In 2009, Zurich estimates that over $50B in subcontract values were
insured by Subguard®
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What is Subguard®? (continued)
Subguard® is a high deductible, loss sensitive insurance program
Zurich is the only carrier that provides this insurance, sometimes
called “Contractor Default Insurance”
Subcontractors have no standing under the policy. It is written to
protect the GC from a sub’s default.
Policy limits can be as high $50M per occurrence or $150M
aggregate
© Zurich Services Corporation
Policies can be written for one project or for “rolling programs” multiple projects in one year
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The Subguard® Advantage
Zurich is the 3rd largest surety in North America – Zurich
understands surety
What does Subguard® provide that bonds don’t?
Subguard® coverage lasts longer – it includes the full warranty phase
up to the statute of repose
Subguard® pays beyond the penal amount of a bond
Subguard® pays quicker/faster/easier than a bond does
Advantages for a project:
Provides extra protection to the GC thereby, benefiting the Owner
© Zurich Services Corporation
Increases the GC’s ability to deliver projects on-time if subcontractor
problems occur
Reduces the GC’s risk since underperforming subcontractors can be
defaulted and supplemented quickly and without Zurich’s direct
involvement in managing the loss
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Primary Causes of Subcontractor
Defaults
Warranty/Latent
Defect
18%
Financial
25%
Schedule
18%
© Zurich Services Corporation
Failure to
Execute
Subcontract
9%
Manpower
9%
Quality
21%
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Subguard Claims Trade Summary
Masonry
20%
Electrical/Mechanical
27%
Site Work
8%
Window s / Doors /
Thermal / Moisture
15%
Finishes
8%
© Zurich Services Corporation
Specialties
Concrete Metals 6%
6%
6%
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Leveraging Technology
Zurich / ClickSafety partnership
Web-based Safety Training – 270 courses with 40 titles in Spanish
Zurich customers receive a 25% discount
OSHA 10 and 30-hour, Hazwoper 9-hour refresher
Slips, Trips and Falls training is free to Zurich customers
Contractor / Subcontractor Training Portal
– Online company safety policy training with quizzes (100% score
–
–
© Zurich Services Corporation
–
–
–
required to pass)
Online “green” jobsite procedures with quizzes
Online custom site new hire safety orientation training for
employees and subcontractors with quizzes
Web-based OSHA specific training courses for supervisors
Employees can take the orientation remotely prior to showing up at
the jobsite
Passing the specific course is a prerequisite to obtaining a badge
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© Zurich Services Corporation
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© Zurich Services Corporation
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© Zurich Services Corporation
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Leveraging Technology (continued)
Zurich / DB02 partnership w/ preferred pricing
Zurich SafetyNet
– Safety observation system (manual or hand-held devices)
– Increases individual participation, competency and accountability
– Establishes metrics necessary for continuous process
improvement
– Generates real-time reports that compare safety performance by
region, subcontractor and type of construction project
– Establishes benchmarking of results against aggregate data from
other contractors
© Zurich Services Corporation
Zurich QualityNet
– Quality observations / inspections using a hand-held device
– Same reporting capability and benchmarking as SafetyNet
– Reduces rework and construction defect liability
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Leveraging Technology (continued)
Use of “Smart” Cameras
These cameras allow you to take the digital image and record a 20second voice memo label that is linked to the image
These cameras also allow you to take high quality video with sound
Price is about $180 – Nikon Coolpix S570
Some cameras allow you to email the image and voice memo to a
subcontractor
Other Quality Management Software Products
Some Zurich customers are testing new quality management software
products that leverage technology:
– Latista Technologies - http://www.latista.com/
– Vela Systems - http://www.velasystems.com/construction-field© Zurich Services Corporation
software-products/
– FreightTrain - http://www.freighttrain.com/
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Emerging Issues
Consensus Docs - http://consensusdocs.org/
Construction Documents Built by Consensus
Most fair and balanced contract forms available
3 Sample Agreements
Consensus Docs 200 – Standard Agreement and General Conditions between
Owner and Contractor
Consensus Docs 750 – Standard Form of Agreement between Contractor and
Subcontractor
Consensus Docs 300 – Standard Form of Tri-Party Agreement for
Collaborative Project Delivery
© Zurich Services Corporation
The Lean Construction Institute - http://www.leanconstruction.org/
Not to be confused with LEED
Takes Toyota’s Lean Production System to the construction industry
Lean projects are between 50% safer than non-lean projects
Lean projects have higher quality, get done faster and produce
enhanced profits for participants
Lots of great information about lean on their website
Individuals can join for $200 per year
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© Zurich Services Corporation
Electronic hand-outs - http://www.gpcp-portland.org/
This Powerpoint presentation
Insurance Chapter from CFMA Handbook
Sample Quality Management Manual for a GC
Sample Quality Management Manual for a Trade Subcontractor
Sample Fleet Management Program
A Powerpoint presentation entitled “Project risk mitigation in a
challenging economy”
Zurich Risktopic entitled “Strategies for managing the risk of
construction suspension or termination”
Subguard® Fact Sheet
Consolidated Insurance Programs Fact Sheet
Risk Management Solutions for Major Construction Owners
Fact Sheet
ClickSafety Fact Sheet
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Electronic hand-outs (continued)
ClickSafety Online Training Course Library
ClickSafety Contractor Training Portal Fact Sheet
ClickSafety Subcontractor Training Portal Fact Sheet
Zurich SafetyNet with DB02
Zurich QualityNet with DB02
© Zurich Services Corporation
Consensus Docs Contracts
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© Zurich Services Corporation
Thank you!
Zurich Services Corporation All rights reserved
The information in this publication and presentation was compiled by Zurich Services Corporation from sources believed to be reliable Further, all sample
policies and procedures herein should serve as a guideline which you can use to create your own policies and procedures We trust that you will customize these
samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor Any and all information contained
herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies We do not
guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and presentation and sample policies
and procedures, including any information, methods or safety suggestions contained herein Moreover, Zurich Services Corporation reminds you that this cannot
be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances The
subject matter of this publication and presentation is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage
under any insurance policy
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