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Contractor Risk Management Program Post-COVID-19

15 Oct 2020

Construction projects have typically been prone to risk. JLK Rosenberger works as a team with attorneys and insurance agents to help contractors assess risks. COVID-19 has brought new risks, including those described below.

From supplies and equipment to scheduling subcontractors and securing necessary approvals, there is no shortage of delay opportunities. Unfortunately, these unexpected events end up costing contractors a significant amount of time and lost opportunity. Delays in one area can easily affect another aspect of the project causing costly schedule changes. A new dimension was added when COVID-19 arrived, forcing businesses to deal with new risk concerns, which had an adverse financial effect. Many coped by reviewing existing force majeure clauses and negotiating new project terms. However, several months into the pandemic, public health crisis may be considered a known event that insurers may exclude from coverage. The change means contractors will need to pay careful attention to the force majeure clauses moving forward. These changes underscore the importance of new ways to mitigate risks in the future. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key considerations below.

What is Force Majeure?

There are two general force majeure structures: “non-exclusive” and “exclusive.” General force majeure clauses do not specify certain events or triggers; rather, they set forth non-specific qualifying events such as “floods, hurricanes, earthquakes, wars,” and so on. If triggering events fell within one of these general categories, the contractor was protected against damages and penalties.

“Exclusive” force majeure clauses specifically name qualifying events and acts and are now likely to become more common. Expect to see more language, including “epidemics, pandemics, government orders,” and so on. Further, these force majeure clauses add a stipulation that such triggering events could not have been prevented or avoided through normal due diligence. It’s expected that new language will be added to cover pandemics and epidemics and workforce availability issues added to contracts.

At the same time, it is essential to avoid including too much specificity in these clauses. Some examples where such stipulations should not be added include:

  • Economic hardship
  • Changes in market conditions
  • Late delivery of equipment, materials, or supplies
  • Equipment failure
  • Labor strikes
  • Unavailability of workers, including subcontractors
  • Climate conditions, such as rain or snow (not including catastrophic weather conditions such as hurricanes or floods)

Also, note that most force majeure clauses do not address compensation for project delays. Even if force majeure is invoked and project delays are granted, the contractor is still out the money used to purchase materials, supplies, or pay employees.

Other Risk Management Provisions

Beyond force majeure, there are other ways contractors can look ahead to potential risks and protect themselves.

  • Builders Risk Insurance – This insurance is essential to protecting materials, supplies, and on-site equipment from damage. Contractors may be surprised to learn that even if named as an additional insured on the owner’s policy, coverage may not extend to them. A recent Massachusetts District Court case found that such policies do not have ‘absolute reach’; in other words, do not assume anything. Specific policies need to be reviewed to determine whether these types of policies extend to the contractor, and according to the case, context matters.
  • Environmental Insurance – Environmental insurance policies that cover indoor air quality (IAC), bacteria, and viruses have grown in number. The way traditional policies work is they provide coverage for cleanup and disinfecting costs for insured property belonging to the first-named insured, up to a point required. There are always exclusions, and every policy is different. Most do not explicitly exclude a pandemic like COVID-19, so for existing environment insurance policyholders, they may be able to recoup some of the funds lost in disinfecting job sites. In the future, policies like this may become more mainstream.
  • Property and Business Interruption Insurance – Most business interruption (BI) insurance policies may be limited in the protection provided if operations shut down or supply chains become disrupted due to COVID-19. However, as with most contracts, the wording matters. Plus, at least five states have already drafted legislation seeking to include COVID-19 in business interruption insurance claims. Whether a result of a pandemic or other sudden and unexpected physical loss, contractors should still pursue business interruption insurance as a method of risk mitigation. Contingent Business Interruption (CBI) insurance should absolutely be a part of contractors’ future risk management programs. CBI is an extension of traditional BI policies and, unlike the basic policies, does extend to third parties. This is especially helpful for contractors to protect against risk in the supply chain.
  • Workers’ Compensation Policies – In a usual scenario, when an employee contracts an illness at work, a workers’ compensation claim can be triggered to pay out benefits. There are typical exclusions for communicable diseases like the common cold or the flu, but payouts could be examined on a case-by-case basis. Specific guidance on COVID-19 remains unclear, but it is worth exploring with insurance carriers to understand the full extent of coverage details.
Contact Us

Finding new ways to manage and limit risk exposure is essential for construction contractors. Traditional methods will not be sufficient when assessed in light of COVID-19. For this reason, it’s important to review your risk management approach and make the necessary changes. If you have questions about the information outlined above or need assistance with a construction tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9893 or click here to contact us. We look forward to speaking with you soon.

The post Contractor Risk Management Program Post-COVID-19 first appeared on JLK Rosenberger.



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