Authors: John F. Simonis Christopher R. Mosley Paul Sovik-Siemens

In this Insured Success episode focusing on data centers, real estate partner John Simonis and insurance recovery partner Chris Mosley join Paul Sovik-Siemens, senior VP and managing director for project risk at Lockton, to explore critical insurance considerations, challenges, and best practices for data center development and construction projects. The panel discusses the nuances of builder’s risk and liability insurance, the importance of wrap-up policies, and strategies for structuring insurance programs to protect large-scale data center investments.
Transcript:
Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.
John: Hello, everyone, and welcome to Insured Success, a segment of our Reed Smith Data Center series. Today, we will be discussing insurance-related considerations and best practices for data center construction projects. My name is John Simonis. I'm a real estate attorney and co-chair of Reed Smith's Global Data Center subgroup. I specialized in data center transactions development for many years, including a negotiation of numerous design and construction contracts. Today, I'm joined by my partner, Chris Mosley, and by Paul Sovic-Siemens, who is a senior vice president and manager of project risk at Lockton Companies. Lockton is one of the top insurance brokerage firms for substantial construction projects in the U.S. Both Chris and Paul have extensive experience structuring and negotiating insurance programs for data center and other substantial construction projects. Chris, can you share a bit more overview on your background?
Chris: Thanks, John. So I'm Chris Mosley. I'm a partner in Reed Smith Insurance Recovery Group. I have been representing businesses in insurance-related matters for more than 30 years. I have a particular specialty in representing owners and contractors in construction-related matters, and that work includes the assistance in negotiating insurance policies and the appropriate insurance provisions in general contracts and subcontracts on the front end, as well as handling claims that may arise after the fact, which most people see when we sue insurance companies. But the bottom line is that for the entirety of my career as well as my team, we've been helping businesses that are involved in the construction of large-scale projects from the beginning through the end of the project and then through claims that may occur thereafter as well.
Paul: My name is Paul Sovik-Siemens. I run our project risk department in the west for Lockton. My career has spanned over 20 years in construction-related insurance. I spent the first several years on the carrier side, most recently joined Lockton, and in the last five years, I've worked in our group that focuses primarily on setting up construction-related insurance for projects. A lot of our projects recently have been focused on data center clients, and so we've had a lot of experience lately structuring deals and negotiating with the contractors and figuring out the best way to cover these data center assets.
John: Thanks for the background, gentlemen. So data center construction projects are large, complex, expensive projects, often costing hundreds of millions of dollars or even billions of dollars. And the insurance costs can be several million dollars as well. So from an insurance coverage standpoint, they're obviously very complex. But maybe we can start with a little bit of an overview on the coverages that would typically be negotiated in an insurance program from a data center project. Chris, maybe you can start by giving a little overview on the differences between the builder's risk aspects of the project versus the liability insurance.
Chris: Sure. So when insuring a project like a data center, there's really, as a general overview, two basic types of coverage. What we call in the insurance trade first-party coverage or third-party coverage, first-party coverage being things like builder's risk, third-party coverage being things like liability insurance. But what are those policies and what do they do? Well, the simplest way to understand it is to think about having two data centers next to one another. Say, John, you own one data center and Paul owns the other. And there's a tower on John's property, call it a cell tower or whatever the case may be, and it falls. If that tower falls on your own data center, say John's data center, then John's going to call his first-party property carrier and say, this tower fell upon my building. There was a significant amount of damage to my building. I need you, the insurance company, under your first-party policy to pay for that. And first-party policies can look like builder's risk during the course of construction or a commercial property policy after construction is complete. Now let's take the other situation where the tower on John's property falls onto Paul's data center and damages that data center. Now, Paul has sustained a significant amount of loss because of the damage to the data center and perhaps some other damages that flow from that, and Paul sues John. One thing to understand about a liability policy, and this is true with any liability policy, it is a lawsuit policy. So anytime you hear liability policy, it's a lawsuit policy designed to protect you against lawsuits filed by third parties. So when Paul sues John, John contacts John's liability carrier and says, I've been sued because my tower fell on Paul's data center. Please protect me and provide me the two benefits under the liability policy is, which are paying for my defense, that is giving me a lawyer and paying for it, and then paying for any judgment or settlement that may occur thereafter. Those are the two basic types of policies that are intended to cover a project like a data center, both before and after the project completes.
John: So with that background, Paul, maybe we can jump to the liability insurance and in particular, maybe one part of the liability insurance that I have often found to be misunderstood, the completed operations coverage.
Paul: Happy to hit on that. So if we were talking about liability related to a construction project or construction operations, think of it in two different buckets. The first bucket are the premises or operations of that construction site. An example of a scenario where that would be triggered is if I'm walking by Chris's job site and Chris drops a hammer and it hits me, that's a liability during their premises and operations. So I would turn around and sue Chris and his job site. As Chris mentioned, it's a legal policy to where we're going to recover damage through the premises operations. The second bucket of a construction policy is called the Products Completed Operations and Construction Defect Coverage. Now, that coverage starts after the project has been put to its intended use, is finished, certificate of occupancy. Any of those triggers can set it into the post-construction completed operations phase. Now, what does that give you? That gives you construction defect claims for problems that arise sometime between post-completion and generally the statute of repose. So an example like that would be that you build your building, you've got no problems, it's operating no problem the first two years, and then all of a sudden, year three, you're figuring out that there seems to be some water penetrating and perhaps creating some damage. Water damage is a huge component and a driving loss in the construction defect phase. And this general liability policy is there to cover resulting damage from that construction defect water loss.
Chris: And John, the only thing I would add, I think Paul described it perfectly. As an oversimplification, your premises and ongoing operations occurs until you get to the CO point, and thereafter, you're in the completed operations coverage, which hits the construction defect coverage Paul was talking about.
John: And I guess similarly, your builder's risk policy, which would be your property coverage during construction. At some point transitions to your traditional property insurance on an operating facility, correct?
Paul: That's correct. And that policy operates differently than the liability policy. As Chris mentioned, it's a first-party policy just during the course of construction. And when you're talking about building a construction project and when you want to get that coverage in place and the builder's risk, you really got to focus on the construction schedule. You want to start it when there's something there to insure, meaning if you've gone out and you've done some grading or you've brought materials on site. Anything that can sustain property damage, you'll want to have your builder's risk policy in place at that point. Fast forward towards the end of the project, builders risk carriers are not interested in covering your operations. So as you approach the completed phase of your construction project, you've got to make sure that you're coordinating with your permanent property carrier to transition that policy off so that there is no lapse in coverage on the builder’s risk.
John: Paul, you touched on one thing I think is worth some emphasis, and that is that supplies, materials, equipment that's delivered on site and stored before it is incorporated into the improvement itself. I think that's becoming a bigger issue. Recently did a podcast on tariffs in data center construction. And one of the things that was emphasized during that discussion was that to avoid tariff uncertainty and tariff increases, a lot of developers are focusing on potentially doing early procurement. But if you do that early procurement, you really have to focus on making sure that whatever you, the delivered materials, delivered equipment is appropriately covered in the interim until it's incorporated into the improvement.
Paul: That's correct. And that's a focus you'll need to have when you put together a builder's risk policy, because within that policy, there are a lot of different sublimits that will extend to different materials that are stored onsite, stored offsite. They're not always clear on where that coverage falls. So when you are. Setting up your builder's risk program, it's important to know that equipment purchase, when it's arriving, where it's being installed, and making sure you have adequate coverage for it.
John: And who typically carries the builder's risk insurance? I've seen it both ways. Sometimes the contractor, sometimes the owner. What is most typical?
Paul: In our experience, we see the owner bringing it a lot. But the reason for that is that there are sometimes coverages that are more important to the owner, such as loss of income coverage or loss of rents. Usually the owner has a better grasp on that, and they will want to customize the insurance to match their risk tolerance.
Chris: John, I'd like to add one point to what Paul was saying in terms of the transition from the builder's risk to the standard property policy. that transition can't be under-emphasized. I've certainly been in multiple lawsuits which would involve my client, typically the owner, the builder's risk carrier, and the property carrier. And the big fight is when did the damage occur and is there a gap between the builder's risk and the commercial property? One of the biggest things that I've seen, some of the biggest problems I've seen for owners who have builder's risk coverage is they like to set it and forget it and just let it go until things get to the end. But if it becomes pretty apparent that the project is going to be delayed and needs to be extended, it's something that someone like Paul can go and talk to the insurance companies about, but you really need to get way ahead of that, like several months, five, six months in advance to give the builder's risk carrier a time to get comfortable with the reasons for the delay and the extension. But you really don't want to get caught with some sort of lapse between your builder's risk carrier coverage and your commercial property coverage.
John: And one other thing that might be worth noting on the builder's risk coverage, I think, is who is actually insured by that. And I know I see a lot of that get heavily negotiated in the construction documents because the builder has an interest in the builder's risk coverage as it relates to the having to reconstruct improvements that have been damaged. And the owner obviously has an interest as well because it's its facility. So usually both insured, but I guess where I see more debate is who gets to negotiate and settle the client, right?
Paul: That's a fair statement, John. The contractors that will go on to a project and perform construction operations will have access to that builder's risk policy just as the owner has named insured status. But the difference is first named insured status, they're the ones that will be able to drive the claim outcome and the ones that will receive the funds from the carriers in the event of a claim.
John: Great. Now, let's jump to professional liability. Those doing the transactional side of these deals have typically seen requirements for professional liability insurance in their contracts. The professional liability, the underlying professional liability insurance that is maintained by the architects, the engineers, by contractors when they are doing professional services, engineering work, build-a-suit work, and subcontractors that do that. We always put requirements in for those parties to carry your builders' risk insurance, but one misunderstanding, I think, from people who are not in the risk management side of things is that that insurance does not run to the owner. That insurance, the typical insurance that's carried by those parties, it runs on a claims-made basis. So it's not when it occurs, it's when the claim is made. So you need to negotiate a tail period where that coverage will remain in effect. And it also goes to the party. So it goes to the architect, to the engineer, to the contractor, not to the owner. The reason the owner cares is that there's somebody standing behind the indemnity obligations and the potential liability under the construction contract. Those policies are typically umbrella policies. So they run across the contractors, the architects, many projects. So, you know, we want to have covenants in that they renew that. But the coverages that are provided, at least in my experience, and I'd ask you both if you see similarly is $2 to $5 million, occasionally $10 million for a very big player. But the smaller players don't like to carry large amounts because they think it invites litigation. And they usually marry up the coverage under the professional liability to the limitations of liability to negotiate the contract. So with that said, I know a lot of owners on these substantial data center projects looked at a separate owner's policy covering potential professional liability that runs in favor of the owner called an Owner's Protective Professional Indemnity Policy, OPP. Paul, you want to give a little more background on that?
Paul: Absolutely. The OPPI, is a policy in the name of the owner. And what that policy does is it adds a layer of protection exclusively for the owner in the event that those underlying architects, engineers, subconsultants don't have enough insurance. Those policies that you mentioned earlier, John, that they bring $2 to $5 million in coverage, those policies are in the name of the subconsultant or the architect or the engineer. When they get a claim, those limits go away quickly. And when you're talking about a scale of a data center, there's a chance that you're going to run out of limits from all of those designers fairly quickly. So what this OPPI policy does is it sits above all of them and provides excess coverage only for the owner for design-related claims.
John: And I guess the last type of coverage to touch on, which is workers' compensation and employers' liability, which we all see as a requirement of these contracts. I'm not sure that there's a lot of nuance to that, but anything that you guys see that is subject to significant negotiation in that space?
Paul: When we're looking at data center projects, we generally see the contractors controlling the workers' comp. And so we haven't had a ton of experience, at least from the owner's side, on the workers' comp employer liability.
John: So let's jump to how the program is structured. I think in a traditional setting, in a traditional construction setting, you'd see a contractor carry its own insurance, subcontractors carry their own, the architect and consultants carry their own. But on this scale of a project, we often see what's called wrap policies or wrap-up policies. Paul, can you give a little overview on that and the differences between a wrap policy and traditional insurance?
Paul: Traditional insurance, let's start with that. Traditional insurance is a method where Chris is the owner. He goes out and he hires a general contractor, John, who then goes out and hires subcontractors, myself. In that scenario, John says, okay, I'm going to go get all these subs to actually do the work. All of those subs are going to bring their own insurance, and I'm going to bring my insurance too. And Chris says, okay, as the owner, I understand that. Something goes wrong. Look, John, I'm going to look to you. You're the general contractor. It's your item to deal with. If there's a loss, you've got to chase down the subs. If you get into litigation with your subs, it doesn't matter to me. I'm expecting you to do that. You told me that everybody would bring insurance. That's a typical way of typical setup within the traditional method. One thing to note on that approach is that all of those insurance policies, the general contractors, the subcontractors, all of those policies include projects outside of Chris's. So they're doing work for different owners, different general contractors, and they're bringing those same limits to each of those construction projects. How does that compare, contrast to what an OCIP is or a CCIP is? For this part of the conversation, I'll just call it a CIP, which is a controlled insurance program. The CIP is the liability that covers that specific project with dedicated limits and covers every contractor that enrolls into that project. So what does that mean? That means John is a named insured as the general contractor. That means I'm a named insured as an enrolled subcontractor. And we all have access to that one insurance policy with dedicated limits for that specific data center project.
Chris: And John, I would add, colloquially, we call it a wrap because the policy essentially wraps in everybody on the project into the policy. And so frequently you'll hear an owner-controlled insurance program or contractor-controlled insurance program referred to as a wrap, and that's the reason for it.
John: And on large-scale complex projects like this with many participants, I see wraps almost invariably on them. And so, Chris, maybe you can touch on the benefits of using a wrap on a large complex project like this.
Chris: Sure, happy to do so. In my experience, and Paul can chime in on this. The wrap market or the CIP market is really a mature market. It's something that has developed over the last 20-odd years or so and is commonly used by the insurance industry to insure these types of projects and commonly used by owners and contractors on these types of projects. There are a number of what I would consider to be pros for OCIPs and CCIPs. Paul touched on one of them, and that is the dedicated limits to the project. And something that we'll touch on briefly later, the purpose of the wrap program, the purpose of the insurance program is to protect the bottom line profits for the owner developer and for the contractor and everybody else involved in the project. And so the best way to make that happen from a limits perspective is to make sure you know how much of insurance is available on this project. As Paul mentioned, in a traditional program, the general contractor may have myriad projects all covered under the program, and there's no way to tell which projects may run into problems in the future, which may suck off some of the limits on the contractor's policy. You're fighting with 50 other projects for those policy limits. So that's one of the major advantages to an OCIP. The other is to understand that the OCIP really comes into play when there's a claim, when, as Paul indicated, water starts getting into the building and causing all sorts of problems. Under the traditional program, I, as the project donor, would go to John and say, John, we have a problem. Notify your insurer. And so John would notify his insurer as the general contractor to get involved. And then John would contact Paul and the 19 other subcontractors that were involved in this. And each of those parties would contact their own insurers. And this is truly what used to happen on a regular basis. Every insurer that was involved would point to every other insurer and point to every other party involved as the party at fault. And, Each one would hire its own lawyers to represent the subcontractor, the general contractor, and sometimes you'd get two or three lawyers representing the same party, and the thing becomes a big web and a big mess, and then you need to hire the, each side has to hire a coverage lawyer to try to figure out how all the pieces fit together. It's a huge, complex mess. Under the OCIP and the CCIP, all of that goes away because you have a single policy under which all of the parties that are part of the construction are insured. Every wrap policy I've ever seen has what we call an insured versus insured exclusion, which precludes parties from suing one another with limited exceptions for the whole purpose of having a single unified defense. Frankly, one of the reasons why the insurance industry wanted to have the wraps was to save the cost on all these defense lawyers. So it significantly simplifies the claim process. And so those are some of the reasons why I think that they're very important. The third one that's particularly important for the owner slash developer is the fact that the owner doesn't have to worry about being an insured or an additional insured under someone else's policy. Every general contract under a traditional program is going to say, general contractor, you're going to make me the owner and additional insured under your policy, and you're going to require all the subcontractors to do the same. And then that's what's going to show up in the subcontracts. All of that is fine and dandy until you actually get to the claim. And I think what's really important to understand is the general contract and the subcontract do not define the terms of the policy. All they do is define what the general contractor and subcontractors are supposed to get. If the general contractor or subcontractor gets the right AI coverage, great, the owner is covered. If the general contractor or subcontractor does not get the right AI endorsement, additional insured endorsement, then the owner is not an insured under that party's policy. You may have rights against the general, you may have rights against the sub, but you don't have any rights under the policy. And the additional insured issue is one that is being hotly contested across the country and construction projects. All of that goes away in an OCIP. And that's another one of the major advantages of having a wrap program, be it an OCIP or a CCIP.
Paul: I want to expand on Chris's second point, where the coverage web comes into play of attorneys representing subs and general contractors. Two things to note. One, not all of the subcontractors have the same coverage. My coverage might be good one year and it might change the next year at the time of a claim you as the owner are not going to be confident in my insurance and then it's actually going to respond to your project so that the OCIP eliminates that by having uniform coverage applying to all of the subcontractors that go on to that project the second component that's connected to that is that if I as the sub go bankrupt in five years and John has no idea how to track me down to figure out how this claim is going to be covered, kind of out of luck. Then John's policy is going to be responding and then there's going to be a lot of back and forth about this because he didn't really do the work and now he's trying to pay a claim that somebody else is out of business on and OCIP eliminates all of those outstanding exposures or risks that may not appear at the beginning of a project.
Chris: And let me add one last point, because this is one of the objections, the most common objection I get from owners with respect to wrap policies. I am a huge wrap proponent, and for a variety of reasons, but the objection I hear is it's expensive. Maybe. What's expensive to one person is not expensive to another. But I do think the wrap market is sufficiently mature these days that at a macro level, it accurately prices out the risk, the liability risk, construction defect liability risk for these types of projects. So folks need to kind of understand, again, the purpose of the policy and the like, but that's another advantage to me of the wrap policy covering everything and the price is market-driven.
John: Chris, you beat me a little bit to the punch because as the deal guy, I was going to make the comment I was surprised that the cost element wasn't brought up. But under a traditional model, the owner ends up paying for the subcontractor's insurance. The owner ends up paying for the contractor's insurance and its own insurance. It's an additional insured on all those policies, but it all does get paid. And if you use just a very broad rule of thumb of somewhere in the range of 1% that the subcontractors are throwing on their contract and somewhere in the range of 1%, bigger projects, maybe a little less. But there's a multiplier that's going on for the contractor's insurance. When you start taking the cost of a wrap policy that covers all of that into account, I think there's a good argument that when you compare apples to apples, you might be saving money. Paul, I imagine you have some thoughts on that.
Paul: We do run into this quite a bit. And John, I think you're right that all contractors pad in a little bit when they're submitting their insurance line item. And in your scenario, the owner at the end of the day is going to be paying for that one way or another. The contractor will put that within their GMP, pass it on to the owner. And so the owner is paying that premium and likely a markup on top of that.
John: Let's shift to one other item. You both have referenced OCIP and CCIP in this discussion, and I don't think we've really given a background on that, but OCIP being the owner's controlled insurance program and the CCIP being a contractor controlled insurance program where the contractor manages the program for the benefit of the owner and the contractor. So, Chris, maybe you can talk a little bit about the pros and cons of those two approaches.
Chris: Sure. So the question I get asked frequently by my clients is, what's better, an OCIP that's run by the owner or a CCIP that's run by the contractor? Now, recognize when I'm representing my clients, I'm out to look specifically and exclusively for my client's best interests. So I will say it depends on who my client is. If my client is an owner, I want an OCIP. If my client is a contractor, I generally want a CCIP, but if we're going to go with an OCIP, I want to be heavily involved in the negotiation preparation of that policy. Now, if I take that, if I telescope out just a little bit and give a broader picture of what I think is the better approach, as a general proposition, I think OCIPs are better than CCIPs, and here's why. A contractor is generally expected and generally does complete a project, but from time to time, a contractor cannot complete the project. The contractor chooses to leave, the owner forces the contractor to leave, and the like. When an OCIP is in place, it's the owner's policy easy enough to bring in a new contractor and slide that contractor into the OCIP. But with a CCIP, a contractor-controlled insurance program, that policy goes with the contractor. So if the contractor goes, the policy goes, and the owner has to find a new coverage program midstream, which is difficult to do. And it's one of the things that Paul and his crew and folks like him can go and do, but it's a very hard thing to do. So if I were looking at this from a straight objective perspective, I think an OCIP is always the better way to do it. And if I were a contractor, I would just tell my owner, I want to be involved in it because I want to know what I'm getting. and if I think there's something I need and that I want to have the ability to participate in the negotiation of that policy.
John: And I think often the arguments made by the contractors for using a CCIP is they take the management burden away from the owner. But I think the market is very well developed with folks like Lockton where the large brokerage firms will act as administrator of the program for the owner. So it's not the owner's risk management department that has to manage the profit. Right, Paul?
Paul: In our experience, administering an OCIP does not require any client to hire somebody to actually work on it and implement an OCIP. A good broker will be able to have the resources to support that client to make sure that that OCIP is done correctly and executed and negotiated with the contractor, any sort of lenders that are involved, partnering with Chris, anyone that comes to the table, the broker really should be able to advocate on behalf of the owner.
John: So you touched on timing, Paul. And in my experience, getting out ahead of this early in a project is super important, not only to make sure that we get the requirements and commitments of the contractor and all of the subcontractors and enrolled parties into the construction documents, but also to get the terms of the coverage, the amounts of the coverage out in front of everyone at the bid stage while they're still leveraging the negotiations. I think one of the benefits of an owner-controlled insurance program is the control portion for the owner. And if there's going to be any debates about coverage amounts, if there's going to be any debates about how claims are settled, I think you want to be out ahead of that. And from the standpoint of being a person who often is drafting the construction contracts, I think getting the commitments and requirements of not only the contract, but all the other project participants into the construction documents is critical. So what do you usually see in terms of how that's managed in terms of getting the teams together? I think probably on data center projects, because of the sophistication of the parties building them, I think it's better coordinated. And they all usually have risk management departments and all of the participants on the insurance side become their own work group. Is that what you usually see as a best practice?
Paul: From our perspective, the projects that go the smoothest are the ones that start this conversation early and often. And I'll let Chris chime in as he related to the contract details and how critical those are. But from just a partnership perspective, partnership perspective between the owner and the general contractor, the earlier, the better that you set out the roles and responsibilities and who's going to be procuring the insurance, the smoother the process. Because you can work through coverage changes, deficiencies, requirements. All those things are better sorted out at the beginning because they all spill into the actual contract. And Chris, maybe you can talk a little bit about how important that contract language is.
Chris: Yeah, I think it becomes critically important. And I agree with Paul that the team, and we'll talk a little bit later about what that team looks like, should start the process as soon as possible. I have certainly been involved in projects where I get a call where someone says, can you take a look at the insurance program that were proposed for this? And I said, sure. When are you guys expecting to go into the ground? And they said, like, Monday. And that becomes very difficult to try to negotiate things that we may want to improve the policy on if you don't have such a short time. I think it's also critically important to get the policy before finalizing the terms of the general contract and any subcontract, and in particular, the insurance terms. Because I have seen situations where the insurance terms in a contract have been agreed to and a contract finalized before the owner or whoever's going to get the policy gets the policy, and suddenly the market doesn't provide the coverage that is promised in the contract. And at that point, whoever was supposed to get in contract is in breach of the agreement. Usually when there's a dispute between an owner and general contractor, the insurance isn't going to be the central piece, but lawyers are going to get involved and they're going to find everything that's out there. And that's a problem. And I have certainly seen the failure to get the right insurance to be a significant problem. All that, and it becomes a six-figure lawyer fee to try to figure that out. All of that gets wiped out. If you go and get the policy first, get the best policy that you can, and then you draft the insurance provisions in the contract, the general and the subcontract, consistent with the policy, and then you're in very good shape.
John: Well, I think there's a big advantage to laying out the program when you're getting bids. So you're comparing apples to apples, so you eliminate hidden profit centers with your contractors. But sometimes it does come after, particularly it sometimes comes after you have subcontractor bids. Paul, in that instance, how do you manage negotiating the appropriate deducts if you're providing a wrap policy that provides the insurance for the subcontractor?
Paul: It's a good question and one that comes up a lot because it ties into the cost. And if we're looking at this from an ownership perspective, and we've got an OCIP quote that has X amount of premium attached to it, what the common question is, is how much am I going to get back in deducts? And before we answer that, we always like to say, look, there are two different ways you can have the contractors bid this. One is called gross, which is tell your general contractor to include insurance in there, have them line item it, and have us tell them, have that contractor explain what's included in their insurance so that we can create an apples to apples comparison. The other way of the bid method is called a net bid, which is essentially, I trust my general contractor, I trust my subcontractors, I'm going to tell them we're doing an OCIP, leave out your insurance costs in your bid. And so that bid comes in net of insurance, meaning there's nothing included in that bid package for insurance. How does this get managed? How do you how do we figure out what the if it offsets? The only way to do that is to do a gross bid to where you tell all the contractors include your insurance in there, tell me how much it's gonna you're gonna charge me for the insurance, and then what at least Lockton does, is our administration team will go in and verify that that amount through a review of the contractor's insurance pages. We'll go in and calculate what they should have charged for insurance. And then we'll turn around and hand that back to the owner and say, hey, this is what they need to deduct from their bid. Go ahead and change order this reduction because they're removing their insurance from their bid. And then when you add all of those, that's how you truly measure the deducts and if they've offset the premium that you paid separately for your OCIP.
John: So obviously cleaner to do a net bid and have the bid be excluding the insurance being provided by the wrap policy. But if you have to go do that process, is there usually much pushback or is it you able to negotiate changes?
Paul: If it's a gross bid, it's fairly straightforward and scientific to where the sub submits their rate pages and says, here's how much I'm paying for insurance we go in and do a calculation to show what they would have paid had they used their program and we say this is what your deduct is and we don't get a ton of pushback at that point because the numbers are the numbers. Where we do run into some interferences from subs is if. They say they can't net it out because they're running into minimum premiums on their program or they've, They've already maxed out their bid, and they can't take away the insurance costs from it because it's covering all the other coverages that wouldn't be included. Those are some of the pushbacks that we get from the subs.
John: But generally, a better rule to maintain all parties, all project participants should be enrolled parties unless approved by the owner?
Paul: I strongly encourage anyone that's working on that construction project to be enrolled. I think Chris would agree with me in that sense, because if you don't enroll some folks, then you're setting up a claim problem somewhere down the road.
Chris: Big claim problems because your sub's not, the OCIP carrier is then going to want to drag the sub and the sub's carrier, and you start down the road of the old spiderweb problem of the traditional program, and it just makes life way more complicated to resolve the claim.
John: Well, gentlemen, it's been a pleasure hosting the conversation with you. I realized this with a 10,000-foot overview of these very complicated and complex insurance programs. Before we sign off, any final thoughts or key takeaways for our listeners?
Paul: From the insurance side, I'd encourage everybody to communicate often with your broker and with your attorney because these assets are large in value and the insurance programs that become available to protect your data centers are critical. You're investing a lot. There's a high dollar amount associated with these data centers, and you can eliminate a lot of your future exposures if you set up your program correctly at the beginning.
Chris: And I would echo that. The purpose of an OCIP is to protect the project profits in the event of a catastrophic event. So it's very, very important to get the right protection for your profits, just as you would set up protection for any other measure on your project. And the best way to do that is to get the right team together. That's going to be the appropriate risk management people with the client. It's going to be the construction attorney, real estate attorney like John. It's going to be the broker like Paul. It's going to be the coverage lawyer like me, because we all bring something specific to the table to help put that policy together. The OCIPs aren't perfect off the shelf. You want to make them as good as they can. But if you get ahead of it up front and you put in the requisite work, then you've got the best chance to protect your project and its corresponding profits from any sort of catastrophic event that may occur down the road. So it's like anything else, put in the work up front and you're going to get a much better protective project on the back end.
John: Great insight, gentlemen. I want to thank you both for joining me today. This has been our Bytes and Rights Data Center Series podcast on key insurance related considerations, issues, and best practices for data center development and construction projects. Please visit the Reed Smith website at reedsmith.com for additional information regarding our speakers and to access a broad range of podcasts and articles in our Global Data Center series that provide thought leadership from around the world on topics and issues impacting the data center industry. Thank you all for listening, and goodbye.
Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com.
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.
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