Build Smart: Insurance secrets before the first beam

Transcript:

Jessica: Welcome back to Insured Success. I'm Jessica Gopiao and I'm here with Chris Kuleba and Chris Mosley today to tackle something that can make or break a construction project long before anyone pours the foundation, insurance. It's 2026, construction is booming, costs are climbing, and from what we've seen, disputes are very common. But the decisions you make about your insurance program before that first theme goes up, those are the decisions that determine whether you're protected or exposed when something goes sideways. Yet, for whatever reason, insurance is exactly the part of the process that gets rushed, misunderstood, or treated as an afterthought. In this episode, we're going to get into OSIPs versus CSIPs, why your rap manual might be the most important document on the job site, what surety bonds actually do for you, and what smart claims handling looks like when defects surface and fingers start pointing. We'll also dig into some of the harder questions like how damage gets allocated across policy periods, what trigger theories mean for your coverage, and why the way you frame your damages can be the difference between a covered claim and a denied one. Whether you're an owner, a contractor, or outside counsel advising on a major build, this conversation should give you the practical knowledge you need to build smarter from day one. Before we begin, I'll let the Chrises introduce themselves. Chris Kuleba.

Chris: Hey everybody, this is Chris Kuleba. I am based out of Reed Smith's Miami office, though my practice is nationwide and consists primarily of insurance coverage and construction defect litigation. Glad to be here.

Jessica: Chris Mosley.

Christopher: Thanks, Jess. I'm Chris Mosley. I'm a partner in Reed Smith's Denver office. Like Chris Kuleba, my practice is national with a heavy emphasis on representing developers and general contractors in construction related matters, whether it's assisting in risk management at the beginning of a project or handling claims on the back end. And I have been involved in some of the major legislation here in Colorado addressing construction defect and construction defect insurance and I'm glad to be here.

Jessica: And I am Jessica Gopiao. I'm counsel at Reed Smith and I'm also a proud member of the firm's insurance recovery group. In addition to advocating for policyholders, I do have some experience representing project owners, developers, contractors, and subcontractors with their construction disputes. Okay, let's get into it. Chris Mosley, let's start with the big picture. What does the construction insurance landscape look like right now? And what's changed in the last few years that people in this space need to be paying attention to?

Christopher: So the market has seen some changes throughout the country and some of the effects are more poignant in certain areas of the country than others. But as a general proposition, The market itself is no longer uniformly part. It's a little uneven, but you can see things such as builders' risk and property capacity are improving on the one hand, but general liability and umbrella limits are being pressured by large verdicts and some of the litigation trends, although in my view, those are trends that have been fairly consistent over the years. Second, insurers are beginning to shift more risk back to contractors and owners, seeing higher deductibles, some tighter exclusions, some lower attachment points, and excess towers, things of that nature. Things that we'll talk about later are important to get right at the front end. And then the overall project risk management is getting more complex. You've got climate exposure, supply chain labor shortages, cyber risks, these types of things that are important to project that important to an insurer. What I will say as well is the multifamily market as a whole kind of follows these trends and so I think the big picture for those in the construction industry is the market is out there, it's somewhat stabilized, but they're still planning to take a look for as you're planning your project.

Jessica: And Chris Mosley, you say that you've seen projects where the insurance program was essentially an afterthought? And if so, what kind of problems does that create downstream?

Christopher: Yeah, unfortunately I've seen it too often and it's largely a function I think of developers and general contractors not really understanding what the purpose of insurance is. What the less sophisticated ones or less experienced construction professionals understand about insurance is you've got to have it on a project and it's expensive and there's deductibles. and you hear horror stories about claims. And so in that realm, it has nothing to do with building, which is your sweet spot. And a lot of times what owners and developers and general contractors may do is just simply go to your broker without any idea whether the broker is sophisticated in construction insurance or not, and then buy the cheapest product that's out there. These create some pretty significant problems because insurance like so many other things you get what you pay for or less if a developer is faced with two different insurance quotes and one's 30 percent lower than the other you really ought to think twice as to why it's so much less there's a really good chance that the policy isn't going to cover your major risks what's really important i think for construction professionals to understand is the purpose of insurance and the purpose of insurance is seeing And that is to protect the profits on your project from certain risks. So your builders risk type of policy is intended to protect the profits on your project from things such as fire or other sort of wind storms or other sort of acts of gods that may come around. On the construction defect side, your general liability policy is intended to protect your project from the litigation risk. A lot of folks get scared about litigation. I see this a lot, particularly in the large-scale multi-family residential context and construction professionals can line out in their performance all sorts of different risks labor risks right now labor costs are going up supply chain issues commodities risk construction professionals are used to that what they're not understanding how to handle is the litigation risk when the plaintiff's lawyer beats on the door and i can tell you from my experience in doing this for 30 years that Most sophisticated plaintiff's lawyers that do these large-scale construction defect claims understand insurance and they understand that their best path to recovery is through the policy. If the construction professional understands that dynamic, then the construction professional understands that you've got to get a policy that is designed to cover these construction defects. And at that point in time, you can then put into your performa a litigation risk line that would consist of your policy premium when you're deductible and you're good to go. That will, as Chris and I will talk about later, will substantially enhance your protection if and when you do get that construction defect claim and that's why it's so essential that construction professionals think of their insurance program upfront as a key component of their project and not just as an afterthought.

Chris: And this is Chris Kuleba Just to add to what Chris said, think something for developers to keep in mind at the outset beyond making sure that you have the appropriate liability insurance in place for you is to think about insurance in the context of the construction contract between you as a developer and the general contractor. There are many things that will affect recovery under both a liability policy, a general liability policy, and a surety bond, depending on how that language is crafted in the construction contract. for insurance to be an afterthought is a huge risk management mistake, and it should be considered at the very inception of a project.

Jessica: Thank you both. So when talking about procuring the right insurance, something that comes up pretty typically is this concept of OCIP versus CCIP. Chris Mosley, do you want to talk about the practical differences of those two and what factors should drive that choice?

Christopher: So the OCIP, which is an acronym for owner controlled insurance program, CCIP is an acronym for contractor controlled insurance program, are also known colloquially in the industry as a RAP policy or a RAP policy. And the reason why it's called a RAP policy, which is the term I happen to like, is because it is a policy that is dedicated to the particular project at issue and wraps into the policy as an insurer all of the construction professionals that are in the project. So your owner is an insured under the policy. Your general contractor is an insured under the policy. And all of the subcontractors who enroll into the program are also insured. So it's one nice neat tight bundle of insurance for a particular project. And it has a number of different benefits. But to answer your question, Jess, the difference between an OCIP and a CCIP really is pretty simple. And that is who buys and controls the policy on an OCIP, that is, owner control insurance program, the policy is owned by the developer. In the CCIP it is purchased by and owned by the general contractor. And the technical, the coverage differences in the policy really don't exist. The policy still covers the same thing. However, there is a very, very important distinction. And that is if under an OCIP, if for some reason during the project, the general contractor leaves the project voluntarily, gets dismissed, goes into bankruptcy, whatever the case may be, the owner can still select another general contractor and the OCIP will remain in place without change because the OCIP is owned by the owner. The CCIP on the other hand owned by the general contractor, if the general contractor leaves the project, the CCIP goes with the general contractor and suddenly the project is left without a significant insurance program. Now, in that circumstance, it is certainly possible to get a new general contractor with the new CCIP. It's possible for the developer to get a new general contractor and purchase an OCIP. There are some sophisticated insurance brokers out there who know how to do this, but it's challenging. That would lead to sort of the quick question of well shouldn't I always get an OCIP? You know, what I tell my clients is, if I represent an owner or a developer, I want an OCIP. If I want to represent a general contractor, I want a CCIP. And the, what's really the thread that runs through that piece of advice is I want my client heavily involved in the negotiation of the policy so they know what they have. So I'm actually okay with representing a general contractor owner in OCIP as long as we get to partner with the developer in developing the OCIP. But that's effectively the difference between the two.

Jessica: Thanks, Chris. Yeah, so we talked about how these are called RAP policies. What about RAP manuals? Those are critical too. But what should a good RAP manual contain and what goes wrong when it's poorly drafted or ignored?

Christopher: This actually is a question that drafts upon what Chris Kuleba was saying a little bit earlier about making sure that there is consistency between the insurance provisions of the general contract and the various subcontracts along with the policy. RAP manuals simply are a manual that is prepared in connection with an OCIP or a CCIP. There's usually what we call a RAP administrator, which is often a third-party company. Sometimes it's a broker. sometimes it's a company that specializes in this area. And recognizing that these insurance programs could be pretty complicated, the RAP manual is just that. It's a manual that allows the parties who are going to be enrolled in the RAP program, whether that's the general contractor or in particular subcontractors, it gives them some general and basic information about the policy, what the coverages are, how to make claims, what the enrollment process is, things of that nature. It is, in my experience, the document that can create significant issues and is almost always the most overlooked document. because most RAP administrators have a RAP manual off the shelf. This is not a criticism of the process, but it's off the shelf and simply there's a plug and play in terms of who the owner is, who the general contractor is, what the policy limits are, what the insurance company is, things of that nature. However, the RAP manual will indicate how much coverage exists and often will, provide information of the types of risks that are covered and the types of risks that aren't covered. That's fine. That is great information, particularly for the subcontractors on the project. Unless the coverage explanations in the RAP manual are inconsistent with what's actually in the policy. And I have seen on multiple occasions, Jess, you and I are both working on a claim right now where we're seeing a situation where the coverage as explained in the RAP manual is inconsistent with what the coverage is that's actually being applied in the policy. And it has caused a significant issue. And in another case that I've had, it actually became the center point of a major litigation between a subcontractor and a general developer and the insurer simply because of the inconsistency. So it becomes that's an unforced error and I'll tell you that's an unforced error that can cause a company hundreds of thousands of dollars in legal fees and untold amounts in indemnity payments because now you become the insurer. if you misrepresent what's in your policy. And by the way, when I say you, I mean the owner if it's an OCIP or the general contractor if it's a CCIP. So it becomes critical at the outset to make sure that the coverages as described in the RAT manual are consistent with the actual coverages that are in the policy. And that takes some review and it's not a difficult thing to do, but it's the classic for those of my vintage, it's the classic FRAM filter. situation you can pay me a little now or you can pay me a lot later.

Jessica: Exactly right, thanks Chris. it's something that we have seen quite a bit and you're right that it is an entirely avoidable mistake just if you look at it sooner rather than later and before anything starts. Let's turn to Surety Bonds. Chris Kuleba can you explain what role they play in a construction project and how they interact with the broader insurance program?

Chris: So I'll start with this because not many people appreciate the distinction between a surety bond and a typical insurance policy. I think part of that is because a lot of times surety bonds are issued by companies like Travelers who also issue insurance policies. And the mechanism is very similar, but there are some important distinctions. At bottom, a surety bond is a credit-backed performance guarantee of the work and payment obligations of the general contractor. Typically in a construction contract, an owner developer is going to insist that the general contractor seek out and purchase a surety bond. Many times the developer will not have a say in the bond that's purchased, but other times they will. Just as a practice pointer, we recommend that any developer does in fact have a say in the surety bond that's purchased and we can get into the reasons for that in a little bit. There's two main types of surety bonds that are in play once the general contractor is actually selected and contracted on the job. One is a payment bond, which guarantees that the general contractor is going to make all payments it agreed to make to vendors and subcontractors. So in the event There's a general contractor default and certain vendors or subcontractors have not been paid. While they may in some states have direct recourse against the owner or developer, those claims should be handled by the surety under the payment bond. The second is a performance bond, which guarantees that the contractor is going to both complete the project timely and correctly. And this is extremely important and there is an interplay between GL coverage, which has certain limitations that are at play when the work is still in progress. Where a surety bond will typically kick in if a contractor who is building a project is either delayed significantly or the work that is being performed is defective and it's causing issues on the project. So that's a general overview of surety bonds. I think we're going to get into a little bit more detail on what are some issues to look out for under those bonds in just a little bit.

Jessica: Yeah, so let's present kind of a light hypothetical with a construction defect claim is filed. What does best practice look like from the insurance perspective in those first critical days and weeks? And Kuleba I'll give it back to you.

Chris: Okay, so first under most surety bonds, and by the way, these can be bespoke, but many times they're issued on an AIA form, which is the American Institute of Architects. There are certain requirements, obligations that the developer has to comply with prior to terminating a contract from a project, and also which are necessary to perfect the claim under a performance bond. So one of those requirements, of course, is notice. As soon as the developer reviews the general contractor to be in default, it needs to put the contractor and the surety on notice, and that the owner is considering a default. The bonds typically also require that the owner say whether they're requesting a conference between the surety and the general contractor. Typically, these are just informal meetings to... really give the surety and idea of what is going on in the project, why the developer, the owner developer has concerns and what the contractor sort of has to say in response of what the plan is to fix any perceived issues. Once the certain time periods elapse and that sort of informal mediation process runs its course, the owner can declare a contractor default, terminate the contract and notify the insured, the surety who more times than not will have the right to select the form of their completion. So under the AIA bond, I'm looking at a surety who has a claim submitted to it, has a few options under section five. And that is to arrange for the contractor with the owner's consent, of course, to perform and complete the contract. In my experience, this rarely happens because by the time... The surety gets involved, the relationship between a general contractor and the owner is at a point where the owner does not want to move forward with particular contractor. But the surety has the right to select that option, but again, it's sort of governed by the owner's consent. Two, the surety can undertake to perform and complete the contract itself through its own agents and independent contractors. I want to come back to this one in second. Third is obtain bids or... from subcontractors to actually bid out the work to complete the project and then the surety in that case will pay the owner the amount of the bond in excess of the contract balance, the remaining contract balance. Finally, the surety can just waive its right to perform a arrange for completion and obtain a new contractor and tender the limits to the owner developer. I want to go back to 5.2, which is where the surety undertakes to actually complete the project itself. There are a few issues to take into account here. One of the issues that I see come up all the time when I represent a developer against connection with a claim under a surety bond is arguments that the surety is going to make to try to get out of... fulfilling its obligations under the bond. And those have to do with things that the owner did and did not do with respect to the general contractor during the life of the project before it got so bad that the owner had to terminate. For example, if let's say in February of a particular year, the owner starts to see delays on the project, the owner talks to the GC, the GC says they're gonna make it right, they're gonna make up for the time, and they continue to work. While they're continuing to work, the owner is continuing to issue their payments under the construction contract so that the work can in fact continue. As that work continues, there are some defects identified in the work, some additional delays, yet the contractor and the owner are trying to work it out. The contractor promises to make it right, but the project continues and it devolves to the point where termination becomes necessary. I have seen many times, sureties take the position that because the owner continued to pay the general contractor when the owner knew or should have known that there were issues in the project and essentially the writing was on the wall, the surety is either one, completely relieved of its obligations under the surety bond, or two, its obligations under the surety bond are offset by the amount that the owner allegedly overpaid to the contractor during that period in question. So these are things to consider as a developer. If you see issues on a project with a general contractor, more times than not, a reasonable owner is going to continue to pay the general contractor for a period of time because the general contractor needs the funds to continue, needs the funds to continue to pay subcontractors. But a developer should keep in mind that if that payment, if that grace period, if you will, goes on for too long, the surety may have something to say about it. It's also not a bad idea to loop your surety in earlier. than the point of termination and sort of get its blessing for how best to proceed with the general contractor. Because it's in the surety's interest for the owner and the contractor to work it out because at that point the surety bond will never be called and the surety will have to perform. So it's better to sort of involve the surety early on in that process in my experience to avoid any excuses to paint it on the road.

Christopher: me just pipe in briefly here. Obviously, Chris is the surety guru and that was an excellent explanation. Let me just pick up the baton there on the CGL side. Pretty simple process. The most important thing is you've got to notify the insurer right away and you've got to do that typically through your broker. But the other thing that's super important to do right at the beginning is to determine if you're not in an OCIP. If you're in an OCIP everything gets covered by the tender to the OCIP carrier. But if you're under a standard practice program where each party brings its own insurance to the project, then it becomes important for the general contractor who's getting sued to take a close look at all the various subcontracts of the subcontractors whose work may be implicated to find out what additional insurer rights you may have and to make tenders to the insurance companies of those subcontractor insurers. And that becomes very important to do it quickly. And the last thing I'll add is often I have seen general contractors and developers want to resolve the case very, very quickly, notwithstanding the claim and just come up with an agreed upon fix, which is a great idea in the business world. However, if the general contractor wants to make sure that the general contractor preserves its rights to recover the cost of those repairs from the insurance company, then the general contractor has to get the consent of the insurer before settling. There's a lot of nuance to that. It's something that I can help with, that Chris Kuleba can help with, that you and others in our construction insurance group can help with, but it becomes very important thing in order to preserve your right. There's a dance to be had, but if you follow that dance, then your chances of coverage are going to be much higher.

Jessica: Great, thanks Chris. Yeah, you know, another potential maybe song in that dance is the CGL so-called business risk exclusions. Do you wanna talk about how those potentially operate in a construction defect space for general contractors?

Chris: Thanks, Jess. And then you mentioned earlier, you posed the question, why the way you frame your damages can be the difference between a covered claim and a denied one. I think these exclusions strike at the heart of that issue. As Chris and I were sort of discussing offline, very clear to us that construction defects are covered in the first instance under a CGL policy which pays for damages because of property damage that's caused by an occurrence. Currents being an accident, typically defined as an accident, including continuous or repeated exposure to the same general harmful conditions. What these exclusions attempt to do is exclude coverage for damages because of construction defects that occurred during the building of a project. So J5 excludes that part of the property that the general contractor or its subcontractors are working on. To give you an example of how that might work, you have the general contractor or one of its subs working on a roof. They're called 75 % done with the roof and part of the roof caves in, damaging the wood floor beneath it. Carriers tell you that under J5, the damage to the roof itself is excluded in its entirety, though there may be arguments for coverage for the ensuing loss or consequential loss to the wood floor beneath it. One of the key issues here is what it means to be working on that particular part of the real property and policyholders who are dealing with this exclusion raised by the carrier should endeavor to narrowly define what that particular part of the property means. Courts around the country have been receptive to a narrow interpretation of that issue. The argument is if it's as broad as the insurance company says it is, then it would basically disarray all coverage for these losses, which these exclusions are not intended to do. Exclusion J6 similarly works to apply to that particular part of any real property that must be restored, repaired, or replaced because, quote, your work was incorrectly performed on it. Your work typically includes the work of the general contractor and anybody working on the general contractor's behalf, including subcontractors. The key distinction with J6, however, is that it does not apply to property damage included in the quote, products completed operations hazard. What that means is once the project is completed by the contractor or the contractor abandons the project, the project is then shifted into the product's completed operation hazard and exclusion J6 does not work. I think the question also asked about the your work exclusion, which is typically exclusion L in the CGL policy, which applies to property damage to quote your work, again, meaning work of the GC or anyone on its behalf arising out of it or any part of it and included in the product's completed operation hazard. The carve out from your work exclusion, however, is work performed for the general contractor by its subcontractors. So where you have a project that has been completed or abandoned and the construction defects were performed on the general contractor's behalf by subcontractors or if by a subcontractor and the work was done by a sub subcontractor, then your work exclusion does not apply to the damages.

Christopher: if I could just add just one small piece to that. Those exclusions J5 and J6, which apply to events that occurred during the course of construction. and then the York exclusion which applies to defect claims that come after the construction is completed. Those were added to the main body of the general liability policy in 1986. Prior to that they were part of something that was called the broad foreign property endorsement. The reason I bring this up is because carriers who are wanting to avoid providing coverage for construction defect claims will frequently say that CGL policies do not provide coverage for construction and deepak claims because of these business risk exclusions saying that faulty workmanship is a business risk. And some courts have bought into that. Fortunately, not the majority of courts. Because when you go back and you take a look at the history of the 1986 forum, when I say go back to the history, I mean, through what's called the insurance services organization circular that explained what the purpose was of adding these exclusions few others to the CGO policy. The insurance industry itself, through that document, specifically said that the purpose of the structure of these exclusions is to provide construction defect coverage to developers and general contractors for construction defect claims that occur after construction is complete. And I just, I want to raise that and emphasize it because to the extent that there's a developer or a general contract out there, or even an insurance broker, who's new to this process, don't believe the hype when you hear a carrier say that. It's just simply not true. the majority of the courts across the country recognize that.

Jessica: Great, thank you. So in this final moment, I'm just gonna ask each of you to give one key takeaway you want every listener to walk away with, and then we'll wrap up.

Chris: Thanks again, Jess. Look, if there's one issue I would say everyone should take away from this. And I think we've run out of time so much we wanted to talk about. It would be anticipate issues ahead of time. And in this context, at the inception of construction project. And again, that involves making sure the construction contract is negotiated with an eye towards risk management through the general liability coverage, through shorty bonds. Make sure that if in the event a bond is acquired by the general contractor that the developer has a say in what that says and particularly what is and is not within the limits of that bond. And that's a topic for another day. But that issue comes up quite a bit when a surety takes over a project using its own people. Chris Mosley, anything from you?

Christopher: You bet. I would simply say this. There are many in the construction industry who despise insurance and a lot of that view of insurance comes from just simply not understanding the insurance and just hearing some of the horror stories behind bad claims, uncovered claims, bad policies and the like. Look, take this away. Construction insurance is not scary if you know two things. One, if you understand the purpose of all of the insurance on your project, your builder's risk, your surety bond, your CGL coverage, whether it's standalone or an OCIP, is designed to protect the profits of your project so that even if these bad things happen, you walk away with a very successful project. This is critical particularly for developers who get financed by third parties who may express concerns about handling litigation risk. It gives those parties the opportunity to go to that funding and say, I know how to do this. Even if we get sued, we're still going to do quite well on the project. The key here is to make sure that you understand it upfront, at least the basics, that you make sure that you get the right coverage in place so that you can maximize your coverage to protect your product the best you can. That comes through largely making sure that you've got an insurance broker that specializes in construction, as well as getting a policyholder lawyer that routinely works with brokers and construction professionals to make sure that the insurance policy is right, that the insurance provisions and the contracts are right, if you have an OCIP, that the RAP manual is right, and if you do all those things together you can move on to what you do best which is build things feeling comfortable that if something goes boom in the night it may not be fun but it's not going to affect your bottom line and you're still going to be highly, highly successful in what you do.

Jessica: Perfect. Thank you both so much for your insights. That wraps up today's discussion. We really appreciate you tuning in. Until next time, take care and keep building smarter.

Outro: Insured Success is a Reed Smith production. Our producer is Shannon Ryan. To learn more about Reed Smith's Insurance Recovery Group, please contact [email protected]. You can find our podcast on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved. 

Transcript is auto-generated.