Source: http://roughnotes.com, July 5, 2017
By: Joseph S. Harrington, CPCU

Judging from the rhetoric of the 2016 U.S. political campaign, one might have expected to see cranes and other heavy equipment popping up like weeds throughout the American landscape.

At times, it seemed that there was only one thing most Americans and the major political parties could agree on: Substantial public building projects, financed with low interest rates and innovative private-public partnerships, would address chronic shortcomings in the nation’s infrastructure while creating hundreds of thousands of good-paying jobs.
So far, it hasn’t worked out that way. To date, President Donald Trump’s idea for $1 trillion in infrastructure work appears to be on the back burner, as Washington is consumed with investigations and congressional Republicans focus on other policy priorities, particularly healthcare and tax policy.
More than $300 billion in highway funding is available over five years under the federal “FAST” Act of 2015 (Fixing America’s Surface Transportation), and some states have gone ahead with public projects, but there’s little in the works to match the expansive expectations of 2016.
“So far, infrastructure work is tracking with the overall construction market,” says Jeff Slivka, president of New Day Underwriting Managers, an intermediary to agents and brokers in construction-related professional liability, environmental insurance, and risk management.
“Funding is still a question on both the state and federal level,” he continues. In particular, “the amount of investment the [Trump] administration will be able to release for infrastructure is still to be determined.”
Even without the scale of expenditure President Trump may have anticipated, he can still boost infrastructure investment by reducing regulations, according to Mark Kleabir, senior vice president, general casualty for Allied World Insurance.
“We’ve seen a steady rise over the past few years in new bridge and tunnel construction,” Kleabir says. “We do expect the infrastructure push to continue and we’ll be watching for regulatory changes.”
He adds that “despite any changes in oversight, we’ll be advising our clients to self-regulate and maintain the highest levels of safety and compliance.”
Working through challenges
If public sponsorship of construction has not taken off as anticipated, perhaps that’s for the better, as construction firms and the insurers that protect them have to work through a number of major challenges before being subjected to a sharp surge in demand.
Among the principal challenges facing construction firms is a lingering shortage of skilled labor, a hangover from the housing crash of the mid- to late 2000s. In October 2015, the U.S. Census Bureau reported that 60% of the construction workers displaced by the housing bust had found work in other sectors or left the workforce entirely between 2006 and 2013.
“We are seeing a shortage and it is particularly prevalent in certain states, such as Texas, California, and Florida,” says Kleabir.
“The major challenge is the shortage of specialty trade contractors,” he says. “In the absence of specialists, labor contractors are taking on those jobs, and the risk is that these contractors do not have proper training to take on highly specialized work.”
“It’s a challenge that has always plagued the construction industry,” says Slivka. “Simply put, less qualified or less experienced people on complex projects can lead to catastrophe.”
According to Slivka, the two principal causes of professional liability claims in construction are technical errors and gaps in communication, both functions of poor preparation or a lack of experience among workers.

“Depending on the structure of the contract and an entity’s involvement in a project, a [public-private partnership] can present expanded professional liabilityrisk for the design and construction team.” —Jeff Slivka President New Day Underwriting Managers

Technology
The shortage of skilled workers in construction becomes more problematic as technology rapidly transforms how projects are carried out.
“One of the biggest risks comes from one of the greatest advancements: the use of drones,” says Kleabir. “Drones have dramatically improved efficiency and safety of workers,” he says. “However, new risks do exist and must be managed. The risks vary from a drone damaging property to causing injury or raising privacy issues.”
Aerial drones often are connected to another rapidly growing type of construction technology: autonomous or remote-controlled construction equipment, including bulldozers, excavators, and other heavy equipment.
“Two of the major benefits of this technology are [enhanced] safety and [addressing] the skilled labor shortage,” reports ConstructConnect.com, in an article titled “Five Commercial Construction Trends to Watch in 2017.” The article adds that “with these machines, you can put a less skilled worker in the cab and the equipment will do almost all of the work.”
Among the most exotic technological advances in construction is the implementation of virtual and augmented reality applications that allow designers, contractors, and workers to visualize each phase of a project before construction. This aids immensely in identifying design errors and avoiding worker injuries, but it creates new risk for errors in designing and utilizing the systems.
Given the growing use of network technology in construction, it’s no surprise that cyber security has become a big concern for the construction industry, as it has for other sectors.
“Hackers are looking for valuable information, and construction companies do have access to critical engineering plans, as well as personal information of employees,” Kleabir says.
“Many major data breaches are caused by a third-party provider, such as a contractor,” he adds. “Many were shocked to learn that the entry point for the well-known Target breach came through Target’s HVAC contractor.
“Hackers will look for any way in, and if a contractor has weak cyber defenses and access to its clients’ information, that is a recipe for a perfect crime,” he says. As a result, “more and more companies are asking contractors about their cyber defense as part of the vetting process for selection.”
While the actual work of construction entails new loss exposures, new approaches to organizing and executing projects require careful identification and allocation of liability.
For example, public-private partnerships (“P3s”) are increasingly used as a means to finance infrastructure, while avoiding or limiting public expenditure and indebtedness. Under some P3s, contractors might execute a project in exchange for a share of subsequent revenue from the project (e.g., bridge tolls).

“The major challenge is the shortage of specialty trade contractors. In the absence of specialists, labor contractors are taking on those jobs, and the risk is that these contractors do not have proper training to take on highly specialized work.” —Mark Kleabir Senior Vice President, General Casualty Allied World Insurance

“Depending on the structure of the contract and an entity’s involvement in a project, a P3 can present expanded professional liability risk for the design and construction team,” says Slivka. “Is the designer or contractor a part of the concessionaire holding equity in the project? Does either have equity in a ‘special purpose vehicle’ (SPV) created for the project?”
If so, he says, “When the design and/or construction team hold equity interest in the SPV or as a concessionaire, there is an elevated professional liability risk for participating as an owner of the project.”
Apart from being exposed to fiduciary liability along with other members of the concessionaire, Slivka says that “claims made against the design-construction team may not be covered under its professional liability policy, as these claims may fall under exclusions for claims made by related entities.”
According to Slivka, the scope and scale of contractors’ professional liability has expanded greatly in recent years. In contrast to the traditionally segmented sequence of design-bid-build, large projects now routinely require collaboration between designers and builders throughout the project life cycle. As a result, he says, contractors are assuming more responsibilities that are professional in nature.
Last year was a “banner year” for design-build projects, according to the Design-Build Institute of America (DBIA). In a year when 22 states relaxed restrictions on the use of design-build approaches to public projects, the DBIA claims to have issued a record number of certifications in design-build project management, and anticipates a “breakout year” for design-build projects in 2017.
Citing information from First Research, the accounting and advisory firm Sikich reports: “The technological sophistication of many projects and the increasing use of design-build contracts encourage the integration of engineering and construction companies.
“Some companies have experienced higher revenue growth from design and engineering work than from construction,” Sikich adds. “While large companies like Bechtel and Fluor have long combined engineering and construction expertise, the combination of skills is becoming more important for small and mid-sized companies.”
Exposures and cautions
In the current environment, Slivka has identified several types of operational exposures that could lead to professional liability claims against construction contractors:

• Errors and omissions in design work assumed by the contractor or its subcontractors, regardless of the delivery method;
• Errors in entering or interpreting data used in “building information modeling” (BIM), which has been shown to reduce errors but creates a new form of risk for contractors;
• Liability for establishing, evaluating, reviewing, and/or assessing documents throughout the entire pre-, during, and post-construction phases;
• Liability for scheduling, sequencing, and coordinating subcontractors;
• Liability for “construction means and methods” (CMM), such as the design of scaffolding or temporary support structures; and
• Liability for failing to meet “green building” standards that an owner seeks to meet.

The list is not exhaustive, according to Slivka, but it highlights the need for every contractor, particularly those working on large projects, to work with its insurance professionals to develop a professional liability risk profile that identifies its exposures and the coverages needed to address them.
Slivka warns against assuming that additional insured status on an owner’s or subcontractor’s commercial general liability policy is the contractor’s best option. “When it comes to professional liability claims, coverage under any CGL policy can be extremely limited,” he says.
A contractor’s professional liability (CPrL) policy may be needed to provide coverage beyond the limitations of a CGL policy. A CPrL has its own limitations, particularly the common provision that defense costs deplete the policy limits.
An insurance producer seeking to stand out to construction clients must be prepared to distinguish between general and professional liability exposures, and to help clients make sure they have adequate limits and defense cost coverage for their level of risk.
For more information:
Allied World Insurance
www.alliedworldinsurance.com
New Day Underwriting Managers
www.newdayunderwriting.com