So much attention is focused on risks that manifest during the construction phase of a project that we often lose sight of the risk issues that can  manifest post substantial completion. With the connection between design-build and operations inching closer then ever in some of the new delivery models, more attention is being paid to risks that arise due to improper practices in the design-build stage of the project. Integrity of the asset over its life is what all owners and financiers are looking for and that is the reason more and more deals seem to be delivered using lifecycle (or asset management) project delivery models. If the asset oper­ates as expected post substantial completion their the equity and debt make their returns and everyone is happy.

So, from an insurance standpoint, what are the policies that come into play post substantial completion and how do they interact to give the project necessary indemnification to keep the financial model of the asset in tact? Well, several of the policies procured prior to construction beginning have tail coverage and what each policy intends to cover should be well known to all proj­ect participants. Let’s look at the key policies that might come into play in the event of a post substantial completion loss:

I. General Liability (contractor’s practice policy and/or project specific wrap-up general liability) —General liabil­ity insurance, whether practice or project specific provides potential coverage for liabilities arising from bodily injury or property damage suffered by third parties for projects that the contractor has completed. ‘The wrap-up general liability coverage in the post completion phase is called Completed Operations (Comp Ops) coverage. This coverage is often for 24 inonths after project completion but can be purchased for periods beyond five years. Of note, it is not intended to provide coverage for the specific faulty workmanship of the contractor and the specific faulty design issues that may have caused the third party claims.

2. Professional Liability (design firm’s practice policy and project specific professional liability)—Coverage for design defects causing third party damage can be found under the professional liability coverage available to the project. Under the project specific professional liability policy the coverage afforded after project completion is known as the Extended Reporting Period (ERP). This coverage is often for a period of 24 months from project completion but can be purchased for periods that are much longer. Once again it is not intended to cover faulty workmanship, nor is it intended to cover risks oth­erwise covered under the general liability coverage associated with the project (resultant damage).

3. Surety Bonds—Both the prime contractor and subcontractors may provide performance bonds that guarantee the underlying contract they have entered into. If the contract has a warranty period and the contractor not warrantying the work has a term of default, then the surety bond should provide coverage for such events. Remember, the traditional surety bond is triggered by a default occurring and the surety acknowledging a default has occurred. Often the default in post completion phase is as­sociated with faulty workmanship and thus the performance bond may provide the owner or lenders coverage for faulty workmanship, whereas the above referenced policies specifi­cally exclude such coverage.

4. Subcontractor Default Insurance—Much like a surety bond, this policy provides coverage for warranty work guaranteed through the subcontract, provided the subcontract is properly enrolled. Once again, default is the trigger of the policy, how­ever, the default under subcontractor default insurance does not have to be acknowledged by the insurer to respond (thus carrying a degree of certainty of response that may be of interest to owners and lenders).

5. Inherent Defect insurance—this coverage incepts at project completion and will cover virtually all defects associated in the operations phase. A key underwriting requirement of this policy requires a third-party monitor the contract execution to ensure the build is being done in compliance with the design. It the insurer feels the build has not been done in  compliance with design they have the right not to incept the coverage at project completion. If they do incept coverage, however, it can provide owners and lenders a greater degree of certainty around the assets operations. “This coverage can be purchased for periods of 10 years and in some cases longer.

The above policies are typically the focal risk transfer solutions that are used to manage risk in the operations phase of a project. Knowing how each policy works, how each policy is claimed upon, and the duration of each policy’s coverage, are vital pieces of information any owner, lender or contractor should be aware of once the project has been completed. The more you know, the quicker an unforeseen event can be rectified, sparing the project unexpected deviations from its original financial model.  Written by: David Bowcott

A nifty video that Zurich Insurance just released.

http://www.zurich.com/main/landingpages/gc/ipz/en-ca/index.htm

What is a Fiduciary?

A Fiduciary is a person, bank or trust company appointed under the jurisdiction and supervision of a court, or an extension of the court to administer the property of another.

What are the Duties of a Fiduciary?

Fiduciary has very clear cut duties that are outlined in the Estate Act and Will, if one exists.

What is the Purpose of the Surety Bond?

The surety bond protects anyone who has a beneficial interest in the estate e.g. estate creditors, heirs of the estate and in the case of Guardianship, the incapacitated  person from any loss sustained by reason of the fiduciary’s failure to fulfill his/her duties.

When are estate bonds required? (not limited to)

 Surety bonds are required when:

-Deceased died intestate (without a will)

-The executor appointed in the will resides outside the Province or Country of where the deceased’s assets

-When the executor in the Will renounces or pre-deceased the deceased

-Provisions for a Continuing Power of Attorney are not made

-Minor Beneficiaries

Is there more than one type of estate bond?  If so why.

-Administration Bond (required when there is no Will)

-Administration Bond with Will Annexed (required when the executor named in the will does not wish to serve as executor)

-Foreign Executor Bond (required when the named executor(s) resides outside the Province of where the deceased’s assets lie)

-Guardian Bond under the Substitution & Decision Act (required when there is no Continuing Power of Attorney)      

Who determines the need for the bond?

The courts and the Public Guardian determines the need for the bond

How is the bond limit determined?

Typically the bond limit is reflective of the value of the estate and most courts will accept a bond for the value of the assets. However there are rare instances, depending on the jurisdiction, wherein some courts may ask the bond limit to be 2X the value of the estate.

What is the process in applying to become Executor of an estate?

Lawyer will make application to the court on behalf of the applicant who wishes to be recognized as estate executor.  Renunciation of estate heirs may be required.

What is the process in applying to become Guardian of an estate under the Substitution & Decisions Act?

Application must be made to the Public Guardian’s office.  Application can also be made to the court. The Public Guardian will advise the applicant of their requirements which will include:  Management Plan for the estate; incapacity certificate of the individual in question and surety bond.

What is the cost of the bond?

The cost of the bond is based on the value of the estate and is dependant of the financial institution that provides the bond.  Premium on the bond must be paid until such time the court or the Public Guardian releases the executor/guardian and the surety bond.

Who is responsible for payment of the premium?

The executor(s)/guardian(s) is personally liable for payment of the premium.

How do I cancel the surety bond?

In the case of an estate bond, once the assets of the estate have been disbursed and creditors have been satisfied, application is made to the court to discharge the executor(s) and the surety bond.

A Guardian Bond can only be cancelled when released by the Public Guardian or the Court – in most cases when the incapable person is deceased.

What is the difference between insurance and a surety bond?

Insurance is a 2 party agreement and in the event of a loss the insurance company does not ask the insured to reimburse them for any loses they may sustain on the applicant’s behalf.  Surety is a 3 party agreement, in this case the surety, applicant, known as the principal and the court or Public Guardian known as the obligee.  The Applicant will be asked to sign a legal & binding agreement (known as an Indemnity Agreement) making the applicant responsible for any losses the surety may sustain on their behalf.   

What is an Indemnity Agreement

A legal and binding contract between the applicant (principal) and the Surety Company.  The applicant and indemnitor(s) guarantees to reimburse the Surety Company in the event of a loss, which includes the surety bond premium.

What is the process in applying for an estate bond?

-A bond applicant is required

-A Surety Bond Application

-Copy of Will, if one exists

-Copy of Renunciation paper, if applicable

-Copy of Court Application

-Personal Net Worth Statement depending on size of the estate

-Depending on the assets of the estate other information may be required

What is the process in applying for a Guardian Bond under the Substitution & Decisions Act?

-Surety Bond Application

-Copy of the Public Guardian’s application;

-Copy of the approved Management Plan

-Copy of Will, if one exists

-Copy of medical Assessment Report/Certificate of Incapacity – if available

-Court Order, if applicable

How is a surety bond underwritten?

The surety company will look at the applicant’s financial position, character and capacity as well as the particulars of the estate. The surety must satisfy itself that the applicant(s) in question will be able to perform the obligations being imposed on them as executor(s)/guardian(s).

What are some of the factors that sureties see as high risk when assessing an estate?

Each surety company will have their own underwriting guidelines.  Generally estates with business interests, minors, life interests and trusts are considered high risk. Based on industry experience, the longer the estate remains open, the greater the chances are for mismanaging estate funds. A business asset also adds to the complexity of an estate e.g. who will manage the business? What happens if bad business decisions are made that affect the value of the estate? Lawsuits, nature of business, etc.

Here are the results of the main surety writers in Canada for the period 2005 to 2009.

This report is designed to provide insight on the sureties operating on a direct basis and is based on publicly available data for writers licensed in Canada.

Note: This report does not capture cessions to unregistered reinsurers.

Premium and Concentration

Canadian industry premium continues to grow steadily. Over the past 5 years, Direct Written Premium (DWP) has seen a 50% growth. Over the past ten years, DWP has more than tripled (+240%). For 2009, despite slowdowns in BC and Alberta, a 5% DWP growth has been achieved in Canada ($448.5 million vs $470.5 million).

The largest dollar growth is seen in Ontario, which grew by $34.7 million while Atlantic Canada saw the largest percentage change in premium growing by 53%. British Columbia and Alberta have experienced a decrease of their DWP of 18.6% and 17% respectively. DWP variation by region is illustrated below:

 DWP (in millions)

Ontario

2008: $146.4        2009: $181.1        Increase: $34.7 or +23.7%

Quebec

2008: $92.2          2009: $101.8        Increase:$9.6 or +10.4%

British Columbia

2008: $89.0          2009: $72.4          Decrease  ($16.6) or -18.6%

Alberta

2008: $69.1          2009: $57.3          Decrease: ($11.8) or -17.0%

Manitoba & Saskatchewan

2008: $24.7 2009: $26.9                   Increase: $2.2 or +8.8%

Atlantic Provinces

2008: $17.6          2009: $27.0          Increase: $9.4 or +53.0%

Ontario generates 38% of 2009 Canadian DWP, followed by Quebec with 22%, and by BC and Alberta with 15% and 12% respectively.

Top 5 primary writers hold 62.5% of DWP. Top 10 hold 85.5% of DWP.

The composition of the top 10 primary writers is relatively stable. While there has been some movement over the past few years in the lower half of the top 10, the top 4 positions have been held for many years by the same 4 companies.

Results

Positive trend continues in Canada with an industry five-year loss ratio of 19.56%. 2009 results for primary carriers average 17.51% loss ratio without distinction as to ranking.

A Tale of two Provinces No Longer – Source: Canadian Underwriter: November 2010 Edition

What a great article forecasting a change to the contractor’s CGL policy, as we know it!

The Supreme Court of Canada formulates a national approach for construction deficiency claims under the CGL policy.

Provinces frequently- vary in their approaches to legal issues. But it is rare in the world of Canadian insurance law for two Canadian provinces to express diametrically opposed views over the interpretation of identical provisions of a widely used liability insurance policy such as the commercial general liability (CGL) policy. However, until the Supreme Court of Canada released its decision in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada on Sept. 23, 2010, this very situation existed in Canada concerning the coverage available for contractors under the CGL, policy for construction deficiency- claims. The appellate courts of British Columbia and Ontario held polar opposite views over the entitlement of contractors to coverage for defects in their work, particularly in circumstances in which subcontractors performed portions of such work on of the contactor.

B.C., ONTARIO AND THE CGL

In British Columbia, perhaps due to the prevalence of leaky condo litigation in the province, Judges had enforced the perceived “intention” of, the CGL policy to exclude coverage for the defective work of the insured. It was assumed as common ground that a CGL policy was not intended to provide a warantee for a contractor’s shoddy construction.This approach was highlighted in the Supreme Court’s decision in Swagger Construction Ltd. v ING Insurance Co. of Canada. In Swagger, the Court found ING owed no duty to defend a contractor against numerous allegations of construcstion deficiencies by the University of British Columbia in a building constructed by Swagger. Although the court relied on other grounds as well, it found against coverage primarily- on the basis that faulty constriction does not qualify as an “occurrences,” as it is not accidental.

Ontario courts have taken the polar opposite approach, finding in favour of coverage. This was highlighted in the Ontario Court of   Appeal’s decision in Bridgwood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada (2006). A housing developer, Bridgewood, supplied homes with defective concrete supplied by a subcontractor. Both levels of Ontario courts found Lombard owed a duty to defend, since the defeats in the foundations constituted “property damage” and such damage was caused by an “occurrence.” Furthermore, the courts found, the CGL policy’s “work performed” exclusion as it applied to completed operations was inapplicable: the exclusion specifically excepted work a subcontractor performed on the insureds behalf.

To understand the basic coverage issues at play, one must start with the basic principle that CGL policies are triggered by the damage resulting from a negligent act, and not the negligent act itself. In order to fall within coverage, there must be “property damage” alleged. Such damage must be caused by an “occurrence,” defined in the policy as an accident. If these conditions are met, the damage would fall within the policy’s insuring agreement. The question then becomes the applicability of the CGL policy’s various “work performed” exclusions. Since most damage in the construction context occurs after the contractors have left the site, coverage is provided or excluded, depending on how one looks at it by the”completed-operations hazard.” The coverage provides as follows, based on the following advisory wording in IBC Form 2100: “This insurance does not apply to: ‘property damage’ to ‘your work’ arising out of it or any part of it and included in the products completed operations hazard.”‘

This exclusion does not apply if the damaged work, or the work out of which the damage arises, was performed on your behalf’ by a subcontractor.

PROGRESSIVE HOMES: BACKGROUND

In Progressive Homes, B.C. Housing sued Progressive as a result of defects in a housing complex Progressive constructed, seeking a defence and indemnity from its CGL carrier, Lombard. Lombard denied coverage. The matter tended up before the B.C. Supreme Court and, subsequently, the B.C. Court of Appeal. The Swagger approach was already part of the fabric of B.C. law, and so the court in each case simply followed suit in deciding Progressive Homes. Both the B.C. Supreme Court and the B.C. Court of Appeal supported Lombard’s denial, holding that damage resulting from faulty workmanship cannot be considered fortuitous or accidental and therefore does not qualify as an occurrence.” The court agreed the subcontractor exception in the “works performed” exclusion might have some application if the work was performed for the insured by a subcontractor, but the court felt that coverages would exist only if a distinct item was installer by a subcontractor such as a loss caused by an exploding boiler, for example.

THE SUPREME COURT’S DECISION The Supreme Court rejected Lombard’s position that the phrase “property damage necessarily excludes damage to the insured’s own defective construction. Nothing in the policy drew a distinction between damage to the insured’s work and resulting damage to third party property, the court found. In fact, such an interpretation, if accepted, would render the “your work” exclusion meaningless, since the insured’s own work would never fall within the insuring agreement in the first place and therefore need not be excluded.

Next, the Supreme Court held faulty workmanship can constitute an “occurrence,” depending on the factual circumstances. An “occurrence” only requires the result be unexpected or unintended from the standpoint of the insured. Since no one made any allegations that Progressive’s construction defects were intentional or expected, the allegations qualified as an “occurrence.”

Finally, the Supreme Court addressed the potential application of the policy’s “work performed” exclusion. Various forms of the exclusion appeared in the numerous Lombard policy forms at issue, given the multiple years of exposure. But the court unanimously held none of the various versions of the exclusion applied when the subcontractor performed the impugned work on behalf of the insured or when the damage was solely to work performed by a subcontractor. In the end, the court held Lombard owed Progressive a duty to defend.

Beyond B.C.’s borders, the Supreme Court’s finding that defective construction qualifies as “property damage” will be significant. The court did note, however, that such defects are required to be physical in nature and may have to he visible or apparent. It is also safe to say a duty to defend will likely be owed to a contractor in circumstances in which the subcontractor performed any of the impugned work.

Of greater concern should he the Supreme Court’s acceptance of the notion that an insured’s “work” can be divided into component parts when the language in the “works performed” ex-clusion uses the phrase “that particular parts art11 of the insured’s work. The court hinted there might well be coverage for the non-defective components of the insured’s own work when such language is used.

For example, assume a general con-tractor builds a home. The house is sound, but the windows were installed poorly and leak. If the “work performed” exclusion excludes only “that particular part” of the insureds works that is defective, the CGL carrier might well be on the hook to repair all of the damage to the home except the defectives windows. I would suggest few Canadian courts could have founds coverage in such a scenario prior to Progressive Homes.

The insurance industry is now left to ponder the future and musts consider its options. In doing so, it must share some blame. Historically, it has been idely accepted the CGL is far fro the ideal policy form for contractor related liabilities. Nevertheless, there Weems to have been no general momentums to sway from its ongoing use.

Discussion of many policy revvisions wills no doubt take time. But the immediate concern for insurers with open construction matters in B.C. B.C. where a defence had been denied is the likelihood that many insureds will now seeke recovery- for the amounts spent defending such action. The insured can generally seek recovery of defence right tip to the date of settlements or judgment and, depending on limitation issues, for r some period off Chile thereafter.

Moving forwards, and to the extent insurers are unprepared to accept the often dramatic cost of defending large-scale construction defect cases, the only option would seem to he a change in the policy language or the use of a more appropriate contractor’s lability, policy. Insurers wills also leave to prepare tor the application of the Progressive Homers in non-construction related contexts, as the principles fro the decision_ are not limited to construction.

Two new employees have joined the Western Surety team to continue building our service capacity. We want you to meet them.

Mackenzie Osatiuk

Mackenzie graduated from the University of Regina’s Paul J. Hill School of Business with a Bachelor of Business Administration majoring in finance. She also holds an arts degree from the University of Calgary.

In her spare time you are likely to find Mackenzie golfing and traveling.

Jerrod Briere

Jerrod is also making his first venture into the surety business. He earned a Bachelor of Business Administration degree from the University of Regina’s Paul J. Hill School of Business majoring in finance. He also has a certificate in economics.

Jerrod’s after work time is filled with sports, music and travelling.

From the Desk of: Doug Hinkle, Chief Underwriting Officer, CNA Surety

Successful contractors have been implementing

business plans that were put into place

before actually experiencing the current weak

construction economy. One key point in those

plans include budgeting expected volumes of work realistically.

These firms have not slipped into that downward cycle of trying to do

more and more work at less-than-adequate margins. With a realistic

revenue projection, they have reduced and/or structured overhead

accordingly. These companies know who their best people are—the

objective is to optimize with lower overhead without sacrificing

quality of work—and they know in advance the type and size of work

that has been historically the most profitable. This is good information

in the analysis of the likely type and size of work that will be available