Empower Results. Make a Difference. Building Better Construction Contracts 2014 Insurance and Risk Allocation

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Building Better Construction Contracts 2014 Insurance and Risk Allocation Salvatore J. Perrucci Executive Vice President Managing Director Aon Global Construction and Infrastructure Group Make a Difference
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Building Better Construction Contracts 2014 Insurance and Risk Allocation Salvatore J. Perrucci Executive Vice President Managing Director Aon Global Construction and Infrastructure Group Make a Difference Empower Results Practising Law Institute, New York 25 June L.A. LIVE Los Angeles, California, United States Key Message 2 Discussion Points Foundation to build better contracts Different stakeholder interests Product changes that impact insurance requirements Certificates of insurance 3 Sound Foundation Naberezhnaya Office Towers Moscow, Russian Federation 4 Foundation To Build Better Contracts Step 1 Commerciality Step 2 Clarity and Brevity Incorporate specifications that reflect what s available and customary in the marketplace Avoid wish list provisions that will create a noncompliant situation Clear articulation of the operative clauses Brevity is essential It is my ambition to say in ten sentences what others say in a whole book. Friedrich Nietzsche Step 3 Up-To-Date Specify contemporary insurance coverage forms and endorsements Shed obsolete terminology that does not correspond with current products and provisions Step 4 Interrelationship Evaluate impact of other contractual risk allocation provisions (e.g. indemnity, limitation of liability) Eliminate overreaching conditions that go beyond the intended scope of coverage Step 5 Knowledge Risk tools continue to evolve and new solutions are being introduced Know when to ask for help. Early involvement of knowledgeable advisors is critical to success 5 5 Commerciality and Interrelationship Illustration Contractual Liability, Indemnity Provision and Scope of Coverage Clause Typical Insurance Requirement How Coverage Actually Applies Contractual Liability Clause Insurance provisions often specify that contractual liability under the policy must cover the full scope of the liability assumed under the indemnity provision of the contract. The scope of coverage is always subject to the policy insuring agreements, definitions, conditions, exclusions and endorsements. The extent of contractual liability is not as broad as the indemnity provision. 6 Stakeholder Interests Shanghai Changzheng Hospital Pudong Shanghai, China 7 Construction Contract Stakeholders Contractual Interests Illustration Owner Construction Agreement Prime Contractor (GC / CM) Trade Subcontract Agreement Subcontractor Prime Contractor Insurance Additional Insured Endorsement Subcontractor Insurance 8 Impact of Change L.A. LIVE Los Angeles, California, United States 9 Additional Insured Coverage 2013 ISO Changes to General Liability Insurance Conformity With Law Add language, in response to the growing amount of states enacting anti indemnification laws , to provide that the insurance afforded to an additional insured only applies to the extent permitted by law; Conformity With Contract Limits No More Than Contract Requires Provide that if coverage provided to the additional insured is required by contract or agreement, the insurance afforded to the additional insured will not be broader than that which the named insured is required by the contract or agreement to provide for the additional insured; and Provide that if coverage provided to the additional insured is required by contract or agreement, the most the insurer will pay on behalf of the additional insured is the amount of insurance required by the contract or agreement or the amount of insurance available under the applicable Limits of Insurance shown in the Declarations, whichever is less. The provision also provides that the endorsement will not increase the applicable Limits of Insurance shown in the Declarations. 10 Additional Insured Coverage Impact of ISO Changes To General Liability Insurance When these endorsements are attached to a policy, if coverage provided to the additional insured is required by contract or agreement, coverage to the additional insured will be afforded to the extent permissible by law and to the extent the named insured is required by the contract or agreement to provide insurance for the additional insured. Additionally, if coverage provided to the additional insured is required by contract or agreement, the limits of insurance of the named insured's policy that are available to an additional insured will be limited to the extent required by the contract or agreement or the amount of insurance available under the applicable Limits of Insurance shown in the Declarations, whichever is less. 11 Additional Insured Coverage Conformity with Law 10 states in some way extended anti-indemnity statutes scope to restrict Additional Insured in construction setting +/- unenforceable Additional Insured requirement broader than permitted by states anti-indemnity law 12 Additional Insured Coverage Limits No More Than Contract Requires Policy Limits Contract Requirements PROBLEM! $10 Million $5 Million $1 Million GAP $1 Million $2 Million 13 Additional Insured Coverage Solutions to ISO Changes to General Liability Insurance Coverage Impact New ISO Form New Contract Scope Of Coverage Limits No More Than Contract Requires The insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured. Those required by contract, or those proscribed on the Declarations page, whichever is less. The insurance afforded to the additional insureds shall be at least as broad as that afforded to the first named insured $1 Million per occurrence, or the full per occurrence limits of the policy, whichever is greater. 14 Horizontal Exhaustion Who Pays First? Owner s Corporate Excess Insurance Contractor s Excess Insurance (Owner s AI Excess Insurance) Owner s Corporate Primary Insurance Contractor s Primary Insurance (Owner s AI Primary Insurance) Owner Promise to Indemnify Promise to Procure Insurance Contractor 15 Solutions to Address Horizontal Exhaustion Require greater primary limits for Additional Insured in contract Use of Project-Specific / Wrap-up insurance Excess endorsements 16 16 Naberezhnaya Office Towers Moscow, Russian Federation Insurance Evidence 17 Certificates of Insurance Impact of 2011 Changes to ACORD Form Certificate of Insurance Notice of Cancellation or Nonrenewal Amendment of Coverage Notes: A Certificate of Insurance is merely evidence of the policies issued and in force at the time the Certificate of Insurance is issued. It does not provide assurance that the certificate holder will be notified if the policy is modified, expires, is extended or cancels. As governed by insurance law in all states, a Certificate of Insurance cannot extend or alter coverage provided in an insurance policy in any way. Certificates of Insurance can be viewed as a summarized, informational reflection of an insurance policy(s) and it conveys no rights or privileges. It is a snapshot in time. When naming an additional insured simply because the certificate holder requests it or it is contractually required, the certificate itself is meaningless without the actual policy containing appropriate additional insured language 18 18 Shanghai Changzheng Hospital Pudong Shanghai, China Closing Comments 19 Contact and Profile Contact Information Sal Perrucci EVP and Managing Director Aon Risk Solutions 501 Corporate Centre Drive Suite 300 Franklin, TN USA t m Profile Sal Perrucci is Executive Vice President and Managing Director of Aon Construction and Infrastructure Services Group where he leads the Integrated Capital Risk, Enterprise Risk Management and Infrastructure Solutions / Alternative Project Delivery business strategies. Mr. Perrucci has pioneered global, public-private initiatives to provide integrated capital and insurance finance solutions for Owners, Sponsors, Lenders, Developers, Designers, Builders and Operators. He has extensive experience in assisting many of the A-E-C industry s top companies in managing some of the most challenging risk exposures. Mr. Perrucci is an internationally recognized specialist in integrated capital risks; professional & environmental risks; enterprise risk management; financial contingency risks; credit enhancement vehicles; captive insurance companies; alternative funding & transfer mechanisms; and complex project insurance & risk management programs. He advises leading clients with advanced risk capital solutions and is a frequent speaker on public & private sector financial risk management strategies. 20 21 About Aon Aon: Industry leader focused on risk and people Total 2013 Revenue $11.8 billion #1 Advisor on Risk Solutions #1 Primary Insurance Brokerage #1 Reinsurance Brokerage Leader in Affinity Programs HR Solutions 34% Risk Solutions 66% #1 Advisor on HR Solutions #1 Benefits Administration #1 HR Business Process Outsourcing Leader in HR Consulting Employee Benefits Retirement Investment Management Compensation 22 Largest global network of resources and capabilities Revenue by Geography APAC 10% EMEA 20% U.S. 47% U.K. 13% Americas (excl. U.S.) 10% Aon presence in over 120 countries with more than 500 offices Risk Solutions HR Solutions Place more than USD 78 billion of premium flow Unparalleled market insight and data Strongest technology platform Deepest analytic expertise Integrated capital markets solutions World-class brand recognition Substantial relationships across large corporate and middle market Serve half of the Fortune 500 Administer benefits for more than 23 million participants around the globe 23 Aon Construction Services Group: Capabilities in Five Core Functions Aon Service Offering Insurance Surety Description Aon is the leading provider of risk management and insurance solutions to large, global contractors, regional trade firms, and specialty contractors We provide brokerage services to more than 40% of the ENR 100; but more than 80% of our client base is in the middle market. We write bonds for 20% of the ENR Top 400 Contractors, as well as mid-size domestic firms and large organizations with multinational operations. We placed more than $375 million in surety premium in 2013 Project Solutions Health & Benefits Advisory Services Aon is the leading provider of wrap-up insurance placement and administrative services nationally, managing an estimated 30% of all program volume nationally Over the last 15 years, the 120 colleagues on this team have managed more than 10,700 projects and place coverage for more than $80 billion of work in progress Our experts help clients drive engagement, promote accountability and sustained behavior change, manage health risks, reduce absenteeism and break away from the health care cost trend Aon provides individualized support to our construction industry clients, recognizing the challenges that increased health care costs place on margin pressure Our mission is to lower Total Cost of Risk for our clients through carefully managed initiatives to make them more competitive We further support their businesses through key strategic capabilities such as our distinctive Aon Infrastructure Solutions team, which provides risk consulting related to public-private partnerships 24 25 25 Empower Results
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