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New Technology, New Challenges: Managing Risk in an Evolving Industry

Faster, cheaper, greener–these are the often-conflicting demands from customers that contractors face today when they bid on projects. Fortunately, new materials and building techniques are emerging to help them meet those demands. However, these same innovations can expose unwary contractors and lead to unintended consequences and allegations of negligence.

For example, a new product may not live up to the design criteria expected, an industry trade association may issue revised public safety standards, or a contractor may be required to use a new method or technique that is relatively untested or not fully addressed in building codes. Any one of these can trip up a contractor that may not have the time to stay abreast of every development in construction technology.

The solution is to adopt risk management protocols that reduce exposure and provide a defensible record if a claim is filed. To create a customized risk management plan, contractors should work with a knowledgeable agent and an insurance carrier that specializes in construction. In the meantime, there are a number of broad-based strategies they can adopt to manage risk.

Step 1: Understand the Pitfalls

In simpler times, a contractor’s best defense may have been to stick to whatever local building codes required. Today that may not be good enough. For example, the National Fire Protection Association (NFPA) recently updated safety recommendations based on research into fires that involved the failure of residential sprinkler systems. The recommendations not only revised standards for both new and existing homes, but also addressed the proper mix of water and anti-freeze for sprinkler systems. A contractor who installs a system without following these new standards could be open to a claim of negligence despite adhering to existing building codes.

In another case, an agency that sets structural design values for different materials revised the standards for southern pine lumber. The new values reflect the fact that “new growth” timber, which is more prevalent today in construction than “old growth” wood, has less inherent strength. Noting that building codes can become outdated even while still in force, the agency said it was making the change to avoid liability issues arising from the previously established values, which if used may lead to the failure of framing members.

A third example involves securing solar panel systems to a roof using ballast. A 2006 International Building Code revision addresses standards for calculating design wind loads based on wind tunnel testing. However, in many areas building codes have not been updated to capture these requirements. An installer can be exposed to negligence claims if the solar panel system fails because of insufficient wind load standards as interpreted by a design engineer or the panel manufacturer.

In each of these cases, contractors need to be aware of evolving standards so they can make the best choices for their projects for the sake of their customers and to limit liability.

Step 2: Adopt Risk Management Strategies

Effective risk management begins with a thorough understanding of the scope of work. Contractors should carefully review contractual obligations to make sure they match the contractor’s understanding of the job to be done. Claims may arise many years after the job is complete. A contract that outlines in detail the exact scope of job duties, backed up by detailed documentation retained by the contractor through the state’s statute of repose, is essential.

In addition to a detailed contract, document every decision that is made to help establish a record of quality control. For example, all change orders should include written approvals and authorizations from the owner and the architect/engineer. Maintain minutes from all project meetings, including having attendees sign in to confirm their presence. Document owner assurances that facility personnel know how to maintain and operate innovative systems.

A comprehensive record can go a long way toward establishing a contractor’s case for good decision making. In addition, the following strategies are critical.

  • Know the standards. As discussed above, new standards and regulations can catch a contractor unaware. One solution is to maintain an active membership in a trade association. These organizations are often the best resource for new information, as well as providing the added benefit of networking with those facing similar challenges.
  • Know the products. Review product warranties for experimental or innovative systems. Focus on common failure points, such as contact with soil or absorption of water or potential maintenance issues. Understand that there will be unknowns about products that have had only limited testing, and pay attention to manufacturer warnings and directions. When installing a new product or technology, try to arrange for a manufacturer’s representative to be on site and ask them to sign off on compliance whenever possible.
  • Know the subcontractors. Maintain a rigorous subcontractor pre-qualification program to make sure those hired have the proper experience to work with new techniques, products and materials.
  • Know risk transfer opportunities. Have legal counsel review the company’s contractual risk transfer program on an annual basis to make sure it complies with existing laws. Make certain subcontractors have adequate liability limits and that the company is listed as an additional insured in the event the subcontractor is at fault in a claim made against your company. If you are a distributor of a manufacturer’s product, request coverage on the manufacturer’s liability policy. In addition, understand the project owner’s requirements regarding risk transfer and seek to eliminate unreasonable clauses that expand liability for the actions of others, such as the project engineer or architect. To the extent possible, limit obligations to those operations that are controlled by you.
  • Know your insurer. Use the resources available from the company’s insurance carrier. Those that specialize in construction are likely to have technical staff devoted to keeping abreast of evolving industry standards and will share that knowledge with customers. The best carriers offer a variety of support, including educational materials, timely technical bulletins and construction-specific training. They should also have an experienced forensics lab that can assist in the investigation and testing of construction materials. This can play an important role in a successful defense strategy if a defect claim is made.

Staying up to date on changing methods, technologies, and standards can be challenging for contractors. When new techniques emerge faster than codes can be updated, or when new products are introduced without the benefit of a lengthy testing period, the challenges become more daunting.

However, by identifying issues and adopting proactive strategies, contractors can be well positioned to defend their work even when something goes wrong. With the assistance of trade associations and knowledgeable insurance agents, contractors can be confident they have a solid foundation for an effective risk management program.