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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 Risk Engineering 3/2/2010 2 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 Risk Engineering 3/2/2010 3 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 Risk Engineering 3/2/2010 4 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 Risk Engineering 3/2/2010 5 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 Risk Engineering 3/2/2010 6 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) Risk Engineering 3/2/2010 7 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 Risk Engineering 3/2/2010 8 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” Risk Engineering 3/2/2010 9 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. Risk Engineering 3/2/2010 10 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® Risk Engineering 3/2/2010 11 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 Risk Engineering 3/2/2010 12 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 Risk Engineering 3/2/2010 13 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% Risk Engineering 3/2/2010 14 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% Risk Engineering 3/2/2010 15 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 Risk Engineering 3/2/2010 16 © Zurich Services Corporation Risk Engineering 3/2/2010 17 © Zurich Services Corporation Risk Engineering 3/2/2010 18 © Zurich Services Corporation Risk Engineering 3/2/2010 19 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 Risk Engineering 3/2/2010 20 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/ Risk Engineering 3/2/2010 21 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 Risk Engineering 3/2/2010 22 © 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 Risk Engineering 3/2/2010 23 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 Risk Engineering 3/2/2010 24 © 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 Risk Engineering 3/2/2010 25