What is Builders’ Risk and Why Do We Need It?

In negotiating construction contracts, the parties may ignore or give little attention to the project’s insurance requirements.  Insurance provisions are oftentimes left untouched on the standard industry forms.  One typically misunderstood type of project insurance is builders’ risk, also sometimes referred to as an “all risk” policy, or BRI.  Builders’ risk insurance is a property insurance that provides coverage during the construction phase of the project.  Coverage is dictated by the terms of the policy but typically extends to physical loss or damage to the insured’s property, including the “work” being performed.

An owner’s commercial property insurance policy often contains an exclusion for partially constructed or unfinished buildings or structures.  As such, BRI policies are tailored to provide coverage for active construction projects and coverage typically lapses upon substantial completion or occupancy by the owner; which is when coverage under the owner’s commercial property insurance would become effective.  Some insurers offer endorsements to an owner’s commercial property insurance providing coverage similar to a BRI policy, thereby avoiding the necessity of purchasing a separate policy.  However, these endorsements are usually only available for small renovation or maintenance projects.

Commercial property insurance and BRI policies are “first party” property insurance, meaning that they provide coverage to the insured who actually suffers the loss.  These policies are distinguishable from project liability insurance, such as a contractor’s commercial general liability policy or an architect’s professional liability policy, which provides third party coverage; coverage against liability for losses suffered by third parties.

Because BRI policies may include several different insureds (the contractor, subcontractors, owner, etc.) who are all participating in designing and building the project, these policies can indirectly provide coverage for third party claims.  For example, if the drywall subcontractor damages a fire sprinkler head while installing a ceiling and floods the building, short circuiting electrical or other equipment, the owner may have a claim against the contractor or subcontractor.  However, instead of pursuing that claim, the owner may be able to obtain coverage under the BRI policy for damage caused by the subcontractor.  Depending upon the terms of the policy and contract (and whether the policy contains an endorsement waiving subrogation rights), the BRI insurer may later assert a subrogation claim against the subcontractor; in which case the subcontractor’s commercial general liability policy may ultimately provide coverage for the loss.  But that’s another discussion for another day.

Builders risk coverage or other property insurance is a necessary part of every construction project’s risk management plan.  When negotiating a construction contract, the parties should meet with their risk management teams to vet several issues surrounding BRI. Which project participant is going to pay for and procure BRI?  Who will be insured under BRI? Who will be responsible for deductibles under the BRI policy?  In the context of these discussions the parties should also decide what coverages the BRI policy will actually provide – since there are many variations in policy forms and the scope of available coverages.  Project participants should take their contractual insurance requirements seriously and analyze and negotiate the requirements before signing their agreements and before starting work.

Amended Ordinance Expands Boston Residents Job Policy for Certain Projects in the City of Boston and Provides for Sanctions Against Non Complying Developers or Contractors — Effective January 25, 2017

In response to the third largest construction boom in Boston’s history, on November 28, 2016 Mayor Martin J. Walsh announced a proposal to increase employment standards for the Boston Residents Jobs Policy (“BRJP”) and Boston Employment Commission (“BEC”).[1] These proposed amendments are part of Mayor Walsh’s commitment to promote economic development for Boston residents, persons of color and women. The Mayor maintains that, “The success of Boston’s growing economy relies upon our ability to open the doors of opportunity to all residents, and remove barriers causing economic inequity throughout our city.”[2]

In response to the mid-eighties construction boom in Massachusetts[3], Chapter 30 of the Ordinance of 1983 established the BRJP. In 1985, Mayor Raymond L. Flynn issued an Executive Order entitled The Executive Order Extending the Boston Residents Jobs Policy, which set forth specific employment standards[4] on federally assisted, city sponsored and privately funded development projects within the City of Boston limits.[5] In 1985 and until January 24, 2017, the employment standards were as follows: Continue Reading

Contract Barred Recovery of Lost Productivity Damages Suffered by Contractor

Construction projects are no stranger to delays and the inevitable resulting disputes. To allocate such risks, parties frequently include no damage for delay causes in their contracts. These provisions commonly provide that in the event of a delay the contractor’s remedy is limited to an extension of time. Given that there are often multiple causes of delays and a variety of types of delay damages it is critical that at the onset of a construction project the parties consider and properly allocate the risk of such delays and the potential resulting costs in the contract documents.

A recent Massachusetts Superior Court decision offers further insight into the importance of the contract in allocating the risk of delay damages. In Cumberland Farms, Inc. v. Tenacity Constr., Inc. (Mass.Super, 2016), the court held that the terms of the contract precluded the contractor from recovering lost productivity and costs associated with work inefficiencies incurred while performing Winter work. The case arose from two distinct construction projects involving the plaintiff Cumberland Farms, Inc. (“CFI”) as the owner and Tenacity Construction, Inc.(“Tenacity”) as the contractor. Both projects suffered severe delays. As a result CFI granted Tenacity an extension of time and agreed to pay Tenacity time and materials for costs incurred while performing work during the Winter months. Prior to performing the work Tenacity claimed that reimbursement for time and materials would likely not fully compensate Tenacity for any lost productivity or inefficiency costs incurred during the Winter and that Tenacity may seek such costs at a later date. Although CFI did not deny this request it also did not agree to the request. A couple months after completing the Winter work, Tenacity sent CFI a letter claiming that it was entitled to an equitable adjustment of the contract price for lost productivity and inefficiency costs attributable to Winter conditions. In response CFI requested back-up information in support of Tenacity’s claim but ultimately denied the request. Continue Reading

Maryland Sheriff’s Office Recovers Stolen Construction Goods Through Drones

Last week, Maryland’s Cecil County Sheriff’s Office used an unmanned aerial vehicle (UAV) to recover nearly $400,000 worth of stolen construction equipment, which also led to the arrest of the culprit. The New Jersey State Police, Pennsylvania State Police and Delaware Fish and Wildlife Natural Resources Police were all investigating this case—the construction equipment had been stolen across all four states.

Sheriff Scott Adams, who has his Federal Aviation Administration (FAA) Part 107 drone pilot’s certification and license, deployed the UAV from Cecil County headquarters after obtaining a warrant to obtain aerial views of the properties in question. Sheriff Adams and his colleagues were able to spot 17 pieces of construction equipment at one property and three pieces at another. So far, $243,000 worth of construction equipment has been returned to its owners.

 

This post was authored by Kathryn Rattigan and is also being shared on our Data Privacy + Security Insider blog. If you’re interested in getting updates on developments affecting data privacy and security, we invite you to subscribe to the blog.

President Trump’s Inauguration Signals a Potential Increase in Infrastructure Projects

When then-candidate Donald J. Trump first began making public statements about what would become his infrastructure plan back in August of 2016, observers were uncertain as to what exactly they could expect. Just before that time, candidate Hillary Clinton put forth a $275 billion infrastructure plan, which Trump proposed to “at least double.” Pressed for specifics, campaign staff promised that details would come later in the summer of 2016. By November, the $500 billion proposal had grown to $1 trillion and evolved into a bullet-point list of criticisms and goals on his campaign website. The prospect of infrastructure investment, a long-recognized need, was welcomed by those across the political spectrum, even if the details were still murky.

Faced with cynicism, even within his own party, especially as to cost, Trump clarified that he intended to fund his infrastructure plan through a combination of tax credits and “innovative financing programs” that would provide a “10-to-1 return on investment.” This financing program was also met with criticism, however, in that, because the thought was that such a program relies on a tax credit, only revenue-generating projects with collectible user fees, such as toll roads and bridges, would be capable of being funded in this manner. Further criticism was aimed at the specter of increasing privatization of once-public assets and the invitation for tax fraud perpetrated on an under-funded IRS that the financing scheme might bring with it. A more specific articulation of the plan authored by investor Wilbur Ross and controversial economist Peter Navarro drew further attention to its potential gaps in reasoning and practical shortcomings.

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Tragedy at Construction Project Leads to New Safety Rules and Regulations in Boston

The city of Boston will soon require all companies and individuals planning to perform construction work in the city to provide their safety records prior to obtaining a permit. The new ordinance arose out of a tragedy that struck in October during a Boston construction project which resulted in the death of two workers. While working in a trench, a water main broke drowning the two workers in the flooded trench.

The investigation following  the tragic accident revealed that the company who employed the men had a long and troubled history of safety violations and unpaid OSHA fines. The violations included tens of thousands of unpaid fines for violations dating back to at least 2012. The 2012 violation included a nearly $74,000 fine for repeated safety infractions and one “willful” violation which is the most severe penalty imposed by OSHA. Despite this troubling history the Boston officials had no knowledge of the violations prior to the construction project that led to the death of the workers.

In an effort to protect construction workers engaged on Boston city projects and to hold those companies who commit safety violations accountable Boston Mayor Marty Walsh filed an ordinance proposal a month after the tragedy which would require any company or individual receiving work permits in Boston to provide their safety record, including current or unresolved safety issues and any OSHA violations. The Boston City Council approved the proposed ordinance the week of December 16th and the rule will become effective as soon as the Mayor signs the measure.

The hope is that this ordinance will bring a new era of construction to Boston, in which needless injuries and deaths to construction workers can be avoided by ensuring that companies and individuals who work in the city have a history of complying with safety rules and regulations. The ordinance will also have a significant impact on those companies who previously performed work in Boston and do not have a strong history of safety compliance.

Recipe for a Project Bankruptcy: Part 2
The Contractor in Bankruptcy Through the Lens of the Owner

My last article examined strategies for construction managers facing an owner bankruptcy. Now, looking through the lens of the owner, let’s examine best practices when it is the contractor who has filed for bankruptcy.

Throughout New England and the United States the construction industry continues to thrive with several new projects underway and on the horizon. Last month, Dodge Data & Analytics projected that total U.S. construction will increase in 2017 by five percent. Lenders and sureties continue to aggressively underwrite contractors and subcontractors allowing businesses to grow quickly. But growing too quickly can lead to cash flow and labor allocation issues both of which are ingredients for a project bankruptcy.

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District Court Preliminarily Enjoins Majority of Department of Labor “Fair Pay and Safe Workplaces” Final Rule

On October 24, 2016, the U.S. District Court, Eastern District of Texas preliminarily enjoined the majority of the Department of Labor’s Final Rule implementing President Barack Obama’s Executive Order 13673 that imposed reporting requirements of specified labor law violations on federal government contractors and subcontractors.

The Executive Order provided that contractors and subcontractors for federal contracts with an estimated value exceeding $500,000 must report any labor law violations during the preceding three years of fourteen federal labor law statutes, executive orders or equivalent state laws. On August 25, 2016, the Department of Labor issued its Final Rule implementing the Executive Order.

The challengers to the Final Rule alleged that the Final Rule, among other things, exceeded the Department of Labor’s Authority, was preempted by other federal labor laws, violated the First Amendment, violated contractors’ due process rights, and was arbitrary and capricious. The District Court agreed that the plaintiffs were likely to succeed on the merits and issued a preliminary nationwide injunction regarding the Final Rule’s reporting requirements. However, the District Court upheld the Final Rule’s paycheck transparency requirement.

While a temporary reprieve for federal contractors, we will continue to monitor future legal developments due to the preliminary nature of the injunction.

Connecticut Finally Adopts New Building Code Effective October 1, 2016

After a public comment period ending this past August, the Connecticut Codes and Standards Committee voted to accept the proposed 2016 State Building Code and 2016 State Fire Safety Code. The new code replaces the 2005 State Building Code, and its amendments, and will apply to all permit applications made on or after October 1, 2016. The 2016 Code incorporates several national model codes, along with Connecticut-specific amendments, including:

  • 2012 International Building Code
  • 2009 ICC/ANSI A117.1 Accessible and Usable Buildings and Facilities Code
  • 2012 International Existing Building Code
  • 2012 International Plumbing Code
  • 2012 International Mechanical Code
  • 2012 International Energy Conservation Code
  • 2014 NFPA 70 National Electric Code
  • 2012 International Residential Code

Connecticut’s amendments to the various model codes, as published by the Office of the State Building Inspector, can be found here.

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Harsh Consequences for Contractor’s False Payment Certifications in Massachusetts

On most construction projects, a project owner will require the contractor to certify that it has fully paid each of its subcontractors as a condition to the owner making  payment to the contractor.  The purpose of these certifications is to ensure timely payment to all subcontractors and to protect the owner from claims or liens by unpaid subcontractors. A recent Massachusetts decision highlights the importance of these certifications and the harsh consequences the contractor may expect if the contractor intentionally submits false payment certifications to the owner.

In G4S Tech., LLC v. Mass. Technology Park Corp., 2016 Mass. Super. LEXIS 36, 33 Mass. L. Rep. 301 (Mass. Super. March 30, 2016), the Contractor sought millions of dollars for alleged extra work and its contract balance for work performed on a state and federally funded project to design and construct a fiber optic network in western Massachusetts. The Owner disputed the extra work and contract balance claims because the Contractor intentionally breached the contract by submitting false payment certifications. The Contractor did not deny that it submitted false payment certifications but stated that because it eventually paid the subcontractors, and the late payments did not cause a delay on the completion of the project, any harm that arose was “de minimis”. Therefore, the Contractor argued that its submission of false payment certifications should not prevent it from collecting its contract balance and pursuing its multi-million dollar claim.  In addition, the contractor argued that it should be entitled to recover the cost of the work performed under the equitable theory of quantum meruit, which entitles one who performed work to recover the cost of that work in the absence of a contract or agreement.

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