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by Rick Stryker, P.E.
You might be wondering what the world's most famous fictional
spy has in common with site and facilities issues
at camp. On the surface, only the "bond" part of the name
may ring a bell. But, once we've examined the topic in more detail,
you'll see where
the namesake can work for you like a great network
of secret operatives can safeguard the country.
You may not be aware that there is a significant
amount of legal and liability no-man's-land
with construction at camp. And, without a doubt,
the very worst time to learn about how you could
have protected your organization and your guests is after there's
been an "unfortunate
incident." So
this month, we're going to look at several different kinds of
special insurance policies, including general liability
and bonds, as well as how to ensure that if you're in the "to
be sued" line,
at least you're at the end and not the front.
Easy Does It and
First Things First . . . .
Before we talk about
bonds, let's look
at two pieces of the puzzle that almost every organization
is familiar with already: workers compensation
insurance and the general liability policy. Although
this is a topic that's better covered
in detail by the insurance industry, there are
a couple of aspects that relate to construction
work on camp which may surprise you. You know to
ask if the contractor has worker's compensation
insurance (they all say yes), but do you know that you need to ask for
a certificate of insurance? And, when you get it, do you know what to
look for?
Did you know that as soon as you sign a construction contract,
you open the door to liability? For example, if
the work crews are in a horrific vehicle crash en route to your project
site, your organization may be named in the lawsuits which
follow. Unbelievable, but true! What can you do
about that?
Probably the first thing would have been to require that
your organization be named as an additional insured
on the contractor's automotive /vehicle policy. Did you even think
to ask for a certificate of insurance or to take
the document to your insurer for review, let alone
to require an "additional insured?" That
process would have accomplished two separate things.
First, by having your insurance professional check
the limits of coverage, you're
bringing your own expert into the decision process
earlier than you might ever have before. "After
all," goes the thinking, "Why call the insurance
guy until I have something to insure…?" Because as long as you have
something to lose, insurance should be working
to help you keep it!
There are a number of things
that he might be able to do to lessen your exposure
or cost, but only if you provide the opportunity
to do that before there's a problem. Otherwise, it's like
calling AAA for a towing policy while you're sitting
in your car in the snowy ditch. So, while your agent is helping
you decide whether the contractor has enough coverage
to get the ball rolling, you're
likely to hear about being named "additional insured"
on the contractor's
policy. What's that mean, you ask? Well, it establishes
a pecking order where a claim is brought. In most cases,
if problems arise, the first policy to step up
to the plate is his. Otherwise, the camp could
be named at the same time, and you're
effectively side-byside instead of single file
over something that was completely out of your
control! Yes, your insurance may eventually be
involved in the claim but not until after the contractor's
policy has been exhausted. And in cases like that,
even a small cushion can be very, very helpful.
Moreover, he's likely
to check the construction agreement for requirements
for indemnification and hold-harmless agreements.
If they're not
in there, he can probably provide you what you
need to include.
One final "extra" type
of coverage that you might consider requiring is
"builder's risk" insurance. Have you ever wondered
who would be responsible to replace a partially complete project? Builder's risk seeks
to establish the conditions and situations under
which a third-party will reimburse for losses before
the project is complete. These losses could be as catastrophic as a
fire or collapse. But at the same time, they could be less dramatic
but just as expensive as thefts of material or equipment from the job
site. Imagine the cost of losing all of the commercial kitchen appliances
that are stored in a trailer on the job site for your new dining hall.
Someone's
already paid for them (probably you!), but they're gone! Who's
responsible for the loss, and who's financially on the hook to
replace them? Again, this is another case where
asking the question, before the loss happens, will serve your organization
well. You may be interested in hearing about one more gem that I heard
about recently. If you hire sole proprietor contractors, they may tell
you that they don't have to carry worker's
compensation because they are sole proprietors.
And while that may be true, the insurance is available
to cover just them. But did you know that your
insurance may back charge you to cover them working on your property?
In one case, a worker's
compensation insurer dumped a $60,000 bill on the
owner! So, if you do work with sole proprietors, make sure that they
either get worker's
compensation for themselves, or you coordinate
with your worker's
compensation insurer so that you can account for
that cost from the start. (Wouldn't you just hate that surprise…?)
What About Those Bonds?
But what about these bond things we were talking
about? Bonds are specialized, project-specific
policies that are purchased to cover very specific
conditions and situations associated with your construction projects.
There are four very common bonds with large or expensive improvements:
Bid, performance, payment, and maintenance. Let's look at these in order
. . . .
Bid Bonds
Imagine bidding out a large,
complex project with a number of different construction
specialties. You've identified the bidder you want to work with, and
you spend some weeks getting things lined up before the contract is
ready to sign. All of a sudden, the contractor calls to say that he's
made a math mistake in totaling the bid and that he can't
do the work for what it was bid. Either concede
to a contract value change (before it's even signed),
or he'll walk away since he's not under contract
yet. In the meantime, you've lost
several weeks of precious construction time messing
around with it. He walks away without looking back,
but you're stuck with other, higher bids and a
bunch of lost time. A bid security, usually either
a bond or a cashier's check for 10 percent of the
value of the job, is a mechanism that helps to ensure that everyone
putting a bid on the table is both serious and capable of following
through with the project. In our example, a properly arranged bid would
have the bidder walking away, but without the 10 percent. Either it
will come out of his pocket directly, or it will be extracted as a healthy
pound of flesh from the surety. In the relatively "small world" of
construction bonding, his reputation is seriously
damaged, and getting a bond for the next project will be much more difficult
and expensive. Moreover, this sort of requirement has the added benefit
of separating the proverbial "wheat" from the "chaff," because
a poorly run and financed company won't be able to obtain the
bond in the first place, walk away from that much cash money, or afford
a damaged business reputation. A great incentive? You bet!
Performance
Bonds
Then, there are performance bonds. These
documents guarantee that the contractor will build the project according
to the construction documents and complete it on time. For example,
one common giant mistake involves establishing the building's floor
elevations (or "setting grade"). If the basement elevation is too low,
the drains or sewage plumbing might be too low to discharge without
pumps, and that could add a significant cost both in construction, operation,
and maintenance. A performance bond would provide funds to make the
situation right or at least minimize the effect of the error.
Payment
Bonds
Next, let's look at "payment" bonds. This
is yet another transfer of risk whose function is to ensure that workers,
subcontractors, and suppliers working directly or indirectly for the
project are paid. Did you know that if the general contractor doesn't pay the people involved
in the project, they can file a lien against the property to recover
their costs? Plumbing fixtures, appliances, lumber — the contractor's
probably not pulling this stuff out of his own warehouse but is buying
it from local or regional vendors. If he gets behind on payments to
the suppliers, do you really want to field the angry telephone calls,
particularly if you've been paying the general contractor right
on time? Not only do you have to worry about paying the suppliers, but
you're now wondering where all the money you've paid the
contractor has been going. Two, yes, two worries for the price of only
one!
A payment bond helps in two ways. First, if you find yourself in
that boat and the contractor doesn't quickly make
things right with the aggrieved suppliers, you simply pick up the phone
and begin to work with the bond issuer to get those folks paid. After
the creditors are taken care of, they work on the nonpaying contractor.
How nice is that! The payment bond comes in to play at the end of the
job as well when the contractor is required to complete an affidavit
that everyone involved has been paid. This document, called a "release
of lien," attests that there is no outstanding debt on the completed
project. It effectively extends the payment bond's coverage in case
someone comes back months later to file a claim saying that they weren't
paid for this or that. In a small way, it keeps your foot in the door
with the bonding company.
Maintenance Bonds
And finally, sometimes the
work simply doesn't last as long as it should.
(Remember that the industry warranty is one year!) When it comes to
camp projects, a maintenance bond is the money behind the standard,
one-year warranty against defects in workmanship. It's important to note that although this generally
does not cover materials or equipment, (since these have their own warranties)
the maintenance bond may have provisions to ensure that the contractor
returns to make things right if those weren't installed right
in the first place.
Yes, but the cost, you say. Certainly, these bonds
aren't free, and ultimately you'll pay for them
in the price of the project. And for that reason alone, they're not
for every project. But your team of professionals, engineer/architect,
attorney and insurance broker should be able to guide you toward selecting
coverages and limits, which will serve to protect your organization
if something goes wrong. You've worked hard to install new facilities
or really renovate a key program element. Why race out on a tightrope
without a net? Follow through and protect your organization's assets
by hoping for the best but planning for the worst.
Originally published in the 2009 July/August
issue of Camping Magazine.
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