In any construction project, the owner is exposed to a host of risk that are substantially different, and possibly more severe, than those contemplated for normal business operations. Liability exposures arise from the nature of work, the manner in which it is performed, the quality of project supervision, or acts or omissions of independent contractors working on the project. A successful construction project depends on how well project participants manage project risks. Risks are best managed through sound business and construction practices and through careful preparation and review of the project contract documents. Ideally, the project documents will allocate responsibility for certain risks to the party best situated to bear them, thereby minimizing the likelihood and the cost of each risk. Unfortunately, deploying such an "ideal" solution is not always possible or practical.
On average, the University has more than 350 capital projects scheduled or underway at any given time. A large percentage of these consist mainly of routine repairs to exterior components, non-structural alterations to interior layouts, or upgrades to mechanical, electrical or plumbing (MEP) systems. Occasionally, the University undertakes larger and more expansive projects that involve the ground-up construction of a new building or major renovation to an existing facility. Absent of an alternate arrangement being specifically instituted, standard commercial insurance typically provides only a nominal degree of protection to project owners for risks arising during the course of construction. The unique nature of capital project risk generally calls for a special set of risk management solutions, including commercial insurance policies, capable of accommodating the different interests and exposures that accompany construction activities.
Allocate risk to the party best situated to control the risk. At the outset of each project, the owner and contractor should anticipate and evaluate potential risks to project success and, where applicable, assign responsibility for those risks to the party or parties best situated to control them.
Allocate risk through indemnity provisions. Contract indemnity provisions generally require one party to pay for losses incurred by the other party as a result of claims made by third parties. A construction contract indemnity provision typically requires the contractor to indemnify the owner against claims for bodily injury or property damage arising out of the negligent performance of work by the contractor or its subcontractors
Include waivers of subrogation in key construction contracts. Where applicable, contracts should include waivers of subrogation to ensure that project risks are transferred in the manner intended by the project participants. Subrogation allows an insurer to stand in the position of its insured to recover amounts paid on behalf of the insured for damages for which another party may be liable. Project participants intentionally shift risk through a variety of contract provisions. Allowing an insurer to recover amounts paid on behalf of a contract participant to whom that risk was shifted through indemnification or other means may undermine the parties’ intentions. A waiver of subrogation precludes the insurer from seeking reimbursement for amounts paid on claims, and thus prevents an insurer from passing assigned risk back to the other project participants. In other words, a waiver of subrogation ensures that transferred project risk stays with the insurers as contemplated by the project participants.
Use insurance to support indemnity provisions. Contract provisions requiring insurance coverage provide assurance that each party can satisfy its indemnity obligations. Drafting effective insurance coverage requirements in contracts first requires properly identifying the risk obligations assumed by each project participant, and then ensuring each party has the right insurance to cover those obligations. Builders risk insurance is a form of property insurance specifically designed to address the perils inherent in sites undergoing new development, facilities undergoing substantial improvements, and buildings receiving minor renovations and should be considered a mandatory requirement inside every construction agreement or significant building maintenance work order.