All in Agreement
Proceed with Caution the Next 10 Years
If you have been a successful subcontractor, you have most likely saved a little money. You may have invested it in the stock market, or if the conservative type, you may have invested in Certificates of Deposits or CDs. In either case, you have done well. However, have you considered that jobs you have done in the past could be a liability in the future?
CDs or construction defect actions on completed projects are rising at an astounding rate while seriously threatening the insurance and construction industry. The construction defect business is now considered a growth industry.
What do the CDs and construction defect claims have to do with each other? Each are both money in the bank to those in the construction defect claim business and they want your deposit.
If you're a subcontractor and have provided a general contractor with a "primary additional insured" endorsement for a project with a construction defect claim, your insurance policy will pay. However it won't pay for the work you performed in most cases. That's where your CDs come in. Nothing will drain your savings quicker than a defect claim not covered by insurance.
Sherlock in the houseAs we speak, general contractors are being advised to perform risk assessments on past projects to determine the potential for a defect claim. The reason is simply that early detection of a defect allows the GC to make claim against the subcontractor before the subcontractor goes out of business and also allows the GC to stay in control of the claim.
You might say, Sherlock Holmes is in the building, checking out the building envelope, reviewing "as built" drawings and performing tenant interviews for the GC. "It's elementary, my dear Watson," says Sherlock. "If you look hard and long enough you will find something wrong and in most cases it's obvious."
Once Sherlock and his team of investigators find a problem the report is given to the GC who in turn has to make the haunting decision whether or not to open up this can of worms.
The GC is going to contact the original subcontractors and advise them of how important it is to make the required corrections to avoid a costly claim from the owner.
Now both the GC and the subcontractor are in a damage control mode trying to determine the most cost-effective way of correcting the problem.
In either case, the subcontractor is faced with a serious dilemma. The subcontractor has the option of getting involved by fixing the problem out-of-pocket or letting his insurer handle the problem. If the subcontractor chooses to fix the problem out-of-pocket, he may find the owner filing a lawsuit at a later date even though the subcontractor made the corrections directed by the GC. If the owner files a lawsuit the subcontractor and his insurer will be named.
Why? More than likely the subcontractor did not get a release from future liability from the owner and or GC on the negotiated repairs. If you're going to make corrections for free at least negotiate a release from future liability in exchange!
If a subcontractor is forced to correct alleged defects for free due to fear of litigation threats or other coercive tactics used by others, you first should get advice from an attorney who understands the defect claims business. If it is decided that you will do the work for free, negotiate a release from future liability!
It's a complicated mess when you consider the fact that the GC will most likely ask you for another certificate of insurance for the new repair work. If a problem develops with the repair work, you're still on the hook.
Negotiating a complete and total release from future liability for the original work and the repair work is key and will require the expertise of an attorney.
Avoiding suspicious projectsBecause defect claims are costly and create damaging litigation, it is important that you consider the kind of work you currently have under contract to determine the likelihood of a claim in advance. How can you tell if a job is a prime claim candidate?
Avoid projects that would cause you to become a designer. The warning lights should flash and horns should honk if the project is marginally financed, has budget problems, has a marginal owner or GC, and if it appears the project is not feasible overall.
Mr. Adair, sales manager at Mutual of Enumclaw Insurance Co., a Northwest insurance firm that provides insurance coverage to many subcontractors, says most claims are related to multifamily and single family projects. He says that of the $20 million in subcontractor revenues his company received, the company is currently dealing with $17 million worth of claims.
"Some of the contractors do not have high enough limits to cover the cost of the claim," says Adair. "Contractors can expect as much as a 300 percent increase in insurance premiums due to the severe financial impact of claims settlements."
I have to agree that buildings in which people live are the most likely candidates for defect claims. If a building is or will be controlled by an association or property manager, the likelihood of a claim increases. These people understand the claim process and I believe in many cases they knowingly develop marginally financed or unfeasible projects.
Subcontractors must select the right owner and GC, as well as select a project with the right design. Working for a GC whose management style is to hide in the job trailer while letting the subcontractors slug it out in the field is a recipe for disaster.
We must be able to give our insurance company the tools it needs in order for them to defend us. A simple "I didn't do it" statement will not work! Daily logs, correspondence, pictures, inspection reports and a quality control program are all tools that will help your insurer defend you. In addition, it is important to keep these records indefinitely. A claim could arise 10 years after you completed the work!
If you are a subcontractor involved in the construction of a building envelope you may want to include a deduction in your quote for the owner to hire an independent inspector. Your proposal should include language promoting the use of third-party inspectors.
We have developed our own quality control program that is similar to a safety plan and review daily at our safety meetings. We submit our quotes requiring our QC "deficiency notice" be made part of the subcontract.
Our QC plan, which includes a job site meeting agenda, has topics, as does a safety plan. Each day the foreman fills out an agenda form and discusses topics related to the job. The meeting creates a daily level of awareness, which all workers are involved. The topic of the day may be "windows." After the foreman describes that we are concerned about proper installation of the windows as well as seal and compatibility with the cladding, a discussion ensues among the workers. Although another trade is installing the windows, everyone is made aware that we may become involved in a claim as a result of the window installation.
During these meetings, if our workers report unsuitable or unacceptable window installation or product, it is noted on the meeting form and then inspected by the foreman. If the foreman has grounds for concern, he then reports the information to his supervisor and a deficiency notice is generated and sent to the GC.
Do subcontractors have high enough insurance limits? Adair mentioned that many contractors don't. We may see mold and mildew claims easily exceed our limits because the health and welfare of people are at stake. It may be time to reconsider our current limits and consider raising them. Insurance companies are paying out huge sums of money for water intrusion, mold and mildew issues. They pay it out in the form of legal fees for defense and settlement costs.
Let's not deceive ourselves into thinking that our insurance will always cover us because the insurance industry is changing. Besides increased premiums, we will soon see exclusions and new limitation in our policies. If we want full coverage we will have to pay dearly for it in the near future.
Remember: Teamwork begins with a fair contract!