It’s no secret that the residential sector has been one of the driving forces behind New England’s recent construction boom. The continuous urbanization movement making cities like Boston more habitable have given rise to countless apartment and condominium projects. Although all projects regardless of size and scope warrant careful risk management considerations, residential work can be particularly challenging. The insurance marketplace generally views residential risk as unfavorable driven primarily by a history of construction defect claims that arise after project completion. Due to the potential for class-action lawsuits, in many cases, the cost of examining and defending these allegations can exceed the damages themselves.
Many CMs/GCs and owners address the liability risk of residential construction through the use of a controlled insurance program (aka a wrap-up program) which covers all contractors under a single set of insurance policies. This strategy has become popular, and often times necessary, as residential coverage has become increasingly scarce in the subcontractor insurance market. However, it’s not always the most feasible option. If the project isn’t being enrolled into some sort of wrap-up program, there are a number of tactics that can be used to help manage the risks associated with residential construction:
1. Choose the right owner/developer. If the owner/developer cares as much about their name and reputation as the CM/GC, it enables the team to cohesively work through issues as they arise.
2. Add language to the subcontract agreements indicating that coverage under each required policy must apply to the scope of work being performed and that Residential Exclusions or Limitations will not be accepted.
3. Make sure that the indemnity provisions within your contract and your insurance requirements apply not only during the construction phase, but through the applicable statute of repose. As stated above, the majority of the costly residential claims occur after the project has been completed. Many of the newer additional insured endorsements limit coverage to the timeframe required in the contract. In Massachusetts, requiring coverage for 6 years after completion ensures that you are covered regardless of when the damage occurs.
4. Require a copy of general liability and umbrella endorsement schedule and all required endorsements in addition to the insurance certificate itself. In most cases, a trained insurance eye can detect the presence of a coverage limitation simply by reviewing the schedule of endorsements. If one of the endorsements doesn’t look right, ask for a full copy of the policy for review. And if your firm doesn’t have the necessary in-house resources to analyze coverage, consider asking your agent, broker, or risk advisor for training and/or support.
5. Include a condition within the subcontract that the subcontractor shall provide complete copies of any required policy upon written request by the CM/GC or Owner. In the event you want to review the full insurance policy per item #4, a contract condition will support your request. This is typically required by most Owner contracts, so it’s a good practice to pass through to subs as well.
6. Invest in quality control and/or hire a reputable 3rd party to inspect your subcontractors’ work with a particular focus on water intrusion and mold prevention. Often times, if a mistake is made once, that means there may be poor quality of work throughout the complex. Be proactive in assessing the quality early and often and don’t hesitate to hire a 3rd party quality inspection company to support your efforts.
7. Invest in new technology to find and correct issues before they become a greater problem. Drones are becoming increasingly popular in monitoring safety hazards and quality during the course of construction. Additionally, Virtual and Augmented Reality are becoming widely used on large-scale residential projects to help identify risks in the design and preconstruction phase. Infrared scanning to track moisture intrusion has been incredibly valuable for mitigating ongoing water damage. Many CMs/GCs around the country have found that these minor investments greatly outweigh the potentially catastrophic quality issues.
8. Maintain records for key areas known for potential litigation including site draining, window testing, caulking and waterproofing, roofing, and concrete testing. During construction, keep progress photos and videotapes to document and timestamp the quality of your work. After completion, videotape and photograph all major working components of the project including generators, pumps, mechanical equipment.
9. Conduct and document post-completion inspections starting at 6 months after project completion. Time your one-year inspection 30 days early and notify subcontractors of warranty issues prior to the expiration of the initial warranty period. Plan for subsequent 6-month inspections thereafter.
10. Remain educated on legal issues and continuously craft your contracts and insurance programs to stay current with legislative changes. Make sure you consult with your counsel/insurance brokers and adapt to the legal environment so that risk is transferred appropriately.
The above risk management techniques provide a solid foundation to successfully deliver a quality product. While the front-end investment typically involves a combination of time, discipline, and money, these principles have proven to be the recipe for long term success and stability in the residential construction sector.
About the Author
Tyler Oakes, CPCU, CRIS is a Senior Account Executive
with Construction Risk Partners (CRP).
CRP is an insurance/surety brokerage specializing solely in the construction space advising contractors along with owners and developers. They support clients across the country by crafting innovative solutions and providing risk management advisory to some of the industry’s most challenging projects. For more information visit www.constructionriskpartners.com.