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Contracts for Construction Insurance

By March 16, 2021March 18th, 2021Charlie's Corner

Have you been looking to buff up on your construction insurance knowledge? In this episode of Charlie’s Corner, Iroquois’ Charlie Venus speaks to good friend and litigation attorney Tim Hughes. Tim has been in construction and real estate law for many years now. He has represented all sides in creating and understanding the contracts that drive that business. Charlie and Tim cover the difference between hold harmless and indemnity provisions. As well as how to understand the scope of both. Most importantly they remind us of how complicated this industry can be. Remember to always read your contracts.

Knowing the scope of your risk becomes even more important in the construction insurance world with multiple subcontractors etc.

Edwin K. Morris (4s):
Welcome to the trusted advisor podcast brought to you by Iroquois group. Iroquois is your trusted advisor in all things insurance. This week, you’re listening to the special segment of Charlie’s corner hosted by our very own Charlie Venus. This podcast will involve general discussion of legal issues and concepts, and is for informational purposes only and does not contain or convey legal advice and does not create an attorney, client relationship. Your facts and circumstances may vary. To determine your specific situation. You should consult your own legal counsel.

Tim Hughes (40s):
So welcome to our podcast today. Everyone. We have a great guest, a buddy of mine, Tim Hughes. Tim is the managing shareholder of Bean Kenny and Corman and Arlington Virginia law firm. He’s charged with managing the strategy, talent and finances of the firm. Tim’s practice started in litigation and alternative dispute resolution focused on clients in the construction and real estate industries. In addition to his management responsibilities, Tim continues to represent real estate and construction clients in both litigation and transactional matters, which include business and corporate counsel and sophisticated contract negotiation matters.

Tim Hughes (1m 24s):
Welcome Tim. Thanks for having me. It’s good to see Charlie. Good to see you. So Tim, first off, tell us about some of what you see as typical contract law issues and real estate and construction. I would describe the entire real estate and construction field as being completely driven by contracts. So you’ve got a very complex series of undertakings. You’ve got lots of different people in lots of different parties, even on a simple construction project. And by its nature, the parties have to come up with a way to allocate their risks and to assign responsibilities to each other. And the way that we do that is through contract agreements between the parties.

Tim Hughes (2m 4s):
So construction and real estate deals are inherently rife with contract issues on every single project. Can you give us some examples of the, of some of the issues that you’ve dealt with in the past? You know, whether it’s, and you know, it could be just general liability issues, property, damage issues, even product liability issues. So I’ve been blessed in my practice to set it every seat at the table in construction litigation, represented design professionals, I’ve represented contractors, GCs, I’ve represented subs, and now I’ve represented owners as well. And from having been at each of those different seats, you gain an understanding of the interest and concerns of each of those types of parties.

Tim Hughes (2m 48s):
When I started out, my work was mostly defending architects and engineers when they got sued for malpractice. So it was mostly insurance defense work, and it was basically questions verus and emissions by design. And that was architects engineers of all stripes, land surveyors and at different technical disciplines. Over time, I left that firm that I was with and I set up my own shop, spend a number of years developing my own practice. And at that point I was still represented design firms, but also started to pick up general contractors and some subs and suppliers along the way. And then I joined the current firm that I’m with Bean Kenney in January of 2009 and our current firm, in addition to keeping on some of the clients there, the design professions and the contractors and subs, the current shop does a lot of just run run of the mill when do use in real estate work.

Tim Hughes (3m 42s):
So that’s kind of put me more onto the owner side of the equation. So our clients will look at a piece of property, they’ll decide what they want to do with it. They’ll figure out what kind of business structure and tax issues are involved, figure out the financing, figure out the land use, and then I’ll tend to come in when we’re dealing with construction agreements and design agreements. And then obviously during the implementation phase, that can go well, or it can go poorly. And that can wait till a whole host of issues. The kind of cases that I’ve handled have been relatively diverse. Most of them are more fights about money as opposed to personal injury or property damage. So it’s usually, there’s some quality issue. There’s some delivery issue.

Tim Hughes (4m 22s):
There’s a problem in terms of timing of the job. So there’s been a lot of that type of work, but there’s also been some personal injury property damage style cases as well. And then most notably the appointed to the products liability. It seems like every few years, the construction industry has the latest products liability flavor of the month that comes up in years past. I’ve been involved in the East cases, which is extruded insulation finishing systems that were being put on the sides of houses that look like stucco and supposedly trap moisture up and involved in fire retardant plywood cases where the plywood was disintegrating. I’ve been involved in PVC piping claims. Again, where plumbing piping when exposed to flooring would start to deteriorate over time.

Tim Hughes (5m 6s):
And then I’ve written a lot about Chinese drywall that came up as a big problem back in the mid two thousands. So every once in a while, these big products that just come up in construction as well,

Charlie Venus (5m 15s):
You know, you’ve told me before that, you know, contract negotiations are like an exercise in SWOT analysis for all those business majors out there, you know, in risk allocation. So can you give me a little bit flavor about what you mean by that?

Tim Hughes (5m 30s):
Every time that you’re thinking about undertaking a job, if you’re an owner or if you’re a GC and you’re bidding on a project there’s opportunity in terms of income that you can generate from that project, but there’s risk as well. And especially if you’re on the owner side, the payoff at the end of the day, if the project goes well, it’s fantastic, but the downsides can be pretty tremendous as well. And I think a lot of times people don’t see that when they’re evaluating what they would call quote unquote FatCat developers, don’t see the downside that these folks face. When I get involved in a project, ideally it’s helping a client and being involved in their business interests longer terms that I understand what their strategy is, what kinds of projects that they succeed at, what their potential struggles are and how we can help mitigate some of that during the contract negotiation process, where appropriate, there’s certain kinds of terms that come up as, you know, risk allocation and shifting provisions in every deal.

Tim Hughes (6m 29s):
So questions about identification, questions about exactly what insurance coverage is going to be required on the job. Who’s got primary coverage. Those, those things come up in pretty much every single contract negotiate.

Charlie Venus (6m 40s):
Oh, on that topic because insurance is used in the risk management from a contract standpoint, whether you’re representing the owner, the general contractor or the subcontractor, can you give us an explanation in terms of the difference between indemnity and hold harmless provisions and additional insured statuses that that are required in some contrast?

Tim Hughes (7m 5s):
Sure. So each of these terms is slightly different in terms of what they mean. When I signed a hold harmless, it basically says, if anything goes wrong with this particular topic, you can’t look to me for a remedy. So if I’m the owner and I have a hold harmless with the contractor, and it says, you’re the contractor responsible for this work? And if there’s anything that comes out of this work due to your negligence, you’re not going to look to me for a remedy. That would be a whole harmless. Indemnification is a little different in that it takes the next step. And it says, not only are you holding me harmless, but if I get sued for it, or if I suffered damage as a result of that act of negligence, you’re actually going to take that liability from me.

Tim Hughes (7m 46s):
So you have the contractor. If you’re negligent, you cause personal injury and property damage. For example, and I, as the owner gets sued, I can come to you and say, you have to pick this defense up. You have to step into this case and you have to make sure that I’m not held liable for damages. You’re actually going to be the one to take that liability. So it actually shifts the liability by contract onto the other party. There’s also legal concepts of implied indemnity. The that’s where it common law, the law presumes that there should be a shifting of responsibility where that usually comes up as where a, party’s been held responsible just by the position that they occupy. So for example, I own a Domino’s.

Tim Hughes (8m 28s):
I have a driver, my driver goes out and commits negligence while he’s driving his car. And he hurts somebody behind the wheel. I, as the employer can be held liable under the theory of vicarious liability or respondeat superior for my employee’s actions, cause I’m responsible for their torts. But the only reason I’m getting sued is because my employees screwed up. Can I in turn, then pass that downstream to that employee through implied indemnification. It usually doesn’t come up with employees quite so much because most of the time you’ve got general liability insurance and that covers against personal interest and property damage. And the GL policy actually extends to employees as well. So that, that type of context, you usually don’t see any implied indemnity claims, but it does come up with GCs and subs in particular.

Tim Hughes (9m 15s):
The last point that you asked about was additional insured status. You know, when you’ve got the insurance that’s been issued, you can actually get a party that’s added as an insured. And that’s pretty typical and construction projects where owners, for example, will ask to be added as additional insured on all of the general liability policies with contractor that in its first instance doesn’t necessarily completely shift liability, but it does potentially provide a defense if it’s covered occurrence under that policy. So that they’d be able to avail themselves coverage from the other party’s policy.

Charlie Venus (9m 49s):
When I was on the, on the agency side, one of the things that I saw with a lot of the counsel that I dealt with is that they would be signing contracts. And that would be indemnity agreements on those contracts that I thought were shifting insurable risk to the other party. But in a lot of cases, I thought there were things in the contract that weren’t really transferable by insurance, that these clients of ours were picking up and they weren’t having their legal counsel review all these contracts. Do you see that as a problem, that there is transfer of risk that isn’t insured? You know, that’s not going to be covered under the general liability policy.

Tim Hughes (10m 31s):
I would describe it as a problem of two layers. The first point would be. And I think you raise a very good question about something that happens a lot. People will just sign stuff. I mean, it amazes me sometimes when I get into a case and in particular, if it’s a litigation case for a client that I don’t represent day to day, so I haven’t reviewed the contract and they have not had the opportunity of working with me in the past to get a sense of what they shouldn’t be signing. Especially subcontractors will pretty much sign anything that gets put in front of them. And in particular with indemnification clauses, that could be incredibly dangerous. So let’s start from a standard form of indemnification.

Tim Hughes (11m 13s):
The American Institute of architects form contract provides that you indemnify against personal injury or property damage caused by your negligence. That’s pretty garden variety. That’s highly unlikely to be objectionable. You’re only taking on responsibility for your own screw ups. And most importantly, that claim is covered under most circumstances by general liability policies so that you can hedge your risk with insurance. What you often see though, is you get contracts from owners or general contractors that broaden that scope of indemnity very dramatically. The scope of the parties that you’re protecting can get wildly inflated and even more risky.

Tim Hughes (11m 54s):
You can beyond personal injury and property damage to also pick up contract liability for damages. And then we’re really gets dangerous is where you expand what the triggering event of is for indemnity. So am Indemnifying you against my negligence, am I indemnifying, you against anything that arises out of the contract? You know, am I indemnifying it against anything that arises out of, or relates to my work? Each of those steps that you take that expands the scope of indemnity dramatically increases the potential number of claims and damages that you’ve bought on. So you’ve signed a subcontract, you’re doing a little bit of work and all of a sudden you’ve bought all of the risk related to anything that’s kind of related to your work with the you screwed up or not.

Tim Hughes (12m 37s):
I don’t think a lot of subs understand that sometimes that’s exactly what they’re signing on to. And the last point that I would say is it goes back to what you said about the insurance coverage. You know, when you start with that narrow scope of indemnity and you’ve got the insurance protection, that’s great. You basically bought a risk that you already owned when you expand into these other areas. Oftentimes you’re right, there’s no insurance coverage against, you know, your own defective work. There’s no insurance coverage against delays on the job that may or may not have been caused by you, but that’s related to your work. So not only have you bought this expanded universe of liability, but arguably have bought a completely uncovered claim.

Tim Hughes (13m 17s):
And you know, ultimately you’ve got a check that’s going to be hard to cash and that you might bounce at the end of the job.

Charlie Venus (13m 22s):
I saw that quite frequently that people were assuming all this liability and they had no idea that they were doing so, and thinking that their general liability coverage is going to pick up on this. Now on the additional insured side, that’s typically in all the contracts that you see that on the building construction side, what do you see as some of the downsides of people thinking they’re protected because they’ve been named as an additional insured?

Tim Hughes (13m 50s):
I would say there’s not really any downside to being an additional insured, right? You’ve at least got some argument that you’ve got protection under somebody else’s insurance policy, but that doesn’t necessarily mean the carrier’s going to pay. And I think as you and I discussed, we’re talking about the run-up to this podcast insurance companies don’t make money by just throwing money out the door. They make money by properly pricing risk and taking bets and being able to issue enough policies and manage them in a way that’s efficient for them, but that’s still profitable. So they’re not just going to throw money at people just because they’re an additional insured. The other thing that I’ve seen come up quite a bit is that when you’re talking about additional insured status, do you have control over the defense?

Tim Hughes (14m 36s):
Are you the tail wagging the dog or somebody else’s claim that they’re controlling and until the same coverage problems, just like you would as a named insured. So, you know, if it’s not an occurrence under the policy, you still don’t have coverage. So even though you’re an additional insured, might not even turn out to be an insured risk.

Charlie Venus (14m 54s):
Well, always read that contract,

Tim Hughes (14m 58s):
The fine print, but look, I’ve been practicing law since 1991 and I don’t do a ton of insurance coverage litigation, but I’ve looked at those policies a lot. And every time I look at one, I just, my head spins because they cross-reference to themselves five or 10 different times. And this is covered except to the extent that it’s excluded, but then this exclusion plies back over here, and then there’s an exception to the exclusion. And it starts to become a very Byzantine agreement to read a lot of ways. They’re attempting to document that they don’t have to pay, right. So when, when you get down to it, figuring out whether a claim is covered or not, could be exceedingly difficult, even for somebody in the insurance industry or the legal industry.

Charlie Venus (15m 42s):
Yeah. Well, what I always tried to tell the clients I had, I said, look, it comes down to this simple fact, you know, you’re buying insurance and your carrier is going to pay for your negligence and they’re going to do everything that they can to narrow that language. That even if there’s an indemnity agreement, that they’re still only paying for costs that were caused by your negligence, not by somebody else’s negligence. And so that’s gone, that’s going to always be the case with some of the insurance contracts there’s caused by language, arising out of language, relating to, can you touch on those things, some of those phrases and what you’re, those are more broadly construed from a coverage standpoint,

Tim Hughes (16m 31s):
You’re going to see the same type of role apply in an insurance context that you would, that we talked about before with indemnity. So if I’m covered for events that are caused by my negligence, that is a more narrow form of coverage than things that are arising out of or relating to my negligence, which is more narrow than things that are arising from a relating to my work. So each of those definitions is more or less elastic and the more or less diversity that you’ve got for the definition of what’s an occurrence under the policy, the better that your standing as an insurer to demand that the insurance company pick up a loss in my experience, because most of the fights are really about money.

Tim Hughes (17m 16s):
They’re not about personal injury and property damage so much. Most of the time, people are trying to find ways to fit into cracks in the exclusions and to be able to find a way to argue coverage. And a lot of times the fights, not even ultimately trying to get the carrier to pay the loss, it’s more to get the carrier to say, all right, we’re not just going to deny coverage here, but instead, we’re going to issue a reservation of rights and provide a defense. And then at that point, at least the policy has afforded legal counsel and some level of defense coverage. If you will, even though they might not end up paying the loss. And where this really comes up in, in particular are areas where one subs work is damaged another.

Tim Hughes (17m 58s):
And we know if you’re a GC, you know, you don’t get GL coverage for negligently performed work. You know, if your work is screwed up, it’s a breach of contract. That’s not an insurable general liability loss where it gets exceedingly complicated is a lot of times one subs work will be a problem that may lead to a problem with another’s work. So for example, you’ve got a brick Mason, that’s out there, they don’t install the flashing correctly, that leads to leakage inside a building. The leakage caused drywall damage inside the building. So as to the general, you know, one subs work is another subs.

Tim Hughes (18m 38s):
You know, damage you’re not necessarily covered as the GC, but are you covered as the sub it’s damaged to somebody else’s work. So it starts to become a definitional question state-by-state as to whether that that claim would actually be covered in their bid defense provided some States say yes, some States say, no, some States don’t say anything at all yet, which means there’s always a big question mark, about if there’s big coverage case, would that kind of claim be covered or not? So you see a lot of maneuvering in these cases to, to try to set up the situation where you could at least argue that there’s covered event so that there would be a defense provided. And there’s a lot of tug of war.

Charlie Venus (19m 18s):
That’s an interesting point because there are some carriers out there when you get to completed operations type claims like that, where, and this is after the job’s completed, that they don’t cover the completed operations of their subs. Those policies don’t, unless the subs have particular risk management controls in place. So when you’re dealing with those subcontractors or with the, or even with the general contractor, what’s your advice to them in terms of when they’re putting their insurance coverage together, to make sure that they’re protected from those exposures.

Tim Hughes (19m 55s):
I think the point of what you just raised there really points to being proactive and understanding the context of your individual carrier. What are their risk management requirements? What are they going to require subs? And then actually putting together a package where your subs are aware of what they need to do to be able to check all those boxes. One thing that’s been an interesting change say probably in the last 15 years that we’ve seen a lot more of historically almost all insurance policies were issued across the board to a business, but we started to see more and more project specific type of insurance policies that are just cover one specific project.

Tim Hughes (20m 35s):
And those types of regimes where it’s a project specific policy tend to involve more of a cookbook of, okay, these are all things that have to happen. These are all the boxes that need to be checked. You know, the subs know upfront that’s part of bidding documents that they need to comply with. In particular, this comes up around safety concerns and safety plans, but also protection of the work and ensuring that there’s not property damage as well. That points towards a future where there’s more communication and more of a teamwork approach to shared risk. And I think that tends to work better, works better with contracts as well. If you’re working with people that you work with regularly and know, and trust that tends to go better than if it’s just an aggressive, low bid environment with somebody that’s just happened to have the lowest price, but that’s a work in process that we’re watching over time.

Charlie Venus (21m 25s):
One of the benefits of those, those wrap-up type programs too, is that for the subs, a typical subcontractor, the general contractor is always pushing as much exposure as much risk as they possibly can down to the sub, at least on the rap projects like that. There’s, you know, it’s all covered by one insurance policy.

Tim Hughes (21m 46s):
That’s exactly right. You’re not trying to push it off onto another carrier because the same carrier for everybody. And it’s somewhat the same philosophy of a builder’s risk policy, where there’s one policy that covers the fire damage to the project, for example, and if there is a fire loss that causes damage that you need to rebuild the project that those funds serve to the benefit of everybody, we’ve seen some other developments in the construction industry that have pointed towards that more collective sharing of information and risk in particular building information modeling where people are sharing their shop drawings and their as belts and everything’s in a unified environment and everyone can see everything.

Tim Hughes (22m 27s):
So it’s much easier to, for example, figure out if there’s conflicts between the plumbing and electrical above ceiling so that you don’t have a bunch of delays during the job. There’s definitely some changes in contract delivery methods where we’ve gone from the owner, hires the contractor, the owner hires the architect, and then that triangular relationship can lead to a lot of finger pointing. But now we’re seeing more, you know, engineer procure construct contracts. We’re seeing a lot more design build contracts, and those are becoming more favorite business models over time. Each of them has their pluses and minuses in terms of risk management. But I think anything that kind of forces everyone more into teamwork oriented approach, where the alignment of shared risks and also shared opportunities and gains are aligned in the same direction for everybody that tends to be an environment that more people are kind of more regularly succeeded as opposed to fail and face litigation.

Charlie Venus (23m 22s):
Well, thanks Tim. We couldn’t fit it all in this time. So join us next Tuesday with Tim Hughes to discuss leases and pandemic.

Edwin K. Morris (23m 31s):
Thanks for listening to this edition of Charlie’s corner brought to you by Iroquois group. I am Edwin K. Morris, and I invite you to join us for the next edition of the trusted advisor podcast.