"Covering the Fine Details Now to Avoid Future Problems."

Name: Gregory G. Brown
Firm: BROWN & CHARBONNEAU, Irvine Original Builder and Developer Article (Adobe Acrobat Required)

Recognizing the Complexities of Construction Risk Management

The concept of risk management seems simple; perhaps that is why it is often overlooked. The unfortunate results of insufficient risk management are serious losses in dollars and management time. Risk management, crucial to all businesses, can be extremely complex for construction companies.

In today's litigious environment, contractors must understand and address issues that can lead to business as well as personal liability. Often risk can be limited or transferred through insurance, contract or proper documentation. The key is to track all contingencies and implement a comprehensive plan to monitor them. Missing one component could result in a catastrophic loss and make all other efforts futile.

Injury & Business Claims:

Insurance is crucial to protecting a company against inevitable claims related to site injuries, auto accidents, and other construction activities. Workers compensation insurance covers your employees, but not third parties, independent contractors or employees of others. Maintenance on work equipment, comprehensive safety procedures and rules can limit such accidents. Implementing investigation and documentation procedures minimizes exposure and assists with OSHA compliance. Warnings and safety rules should be posted and included in employee handbooks. If procedures are implemented, they must be followed and enforced.

Business claims are expensive and, in most cases, a negotiated resolution is preferable to litigation. Keep well documented job files with contracts, plans, specifications, change orders, non-performance contractors, scope of work, and project notices. Contract, environmental, intentional torts and intellectual property claims may not be covered by insurance. Clear documentation of all agreements can help avoid confusion and limit future disputes.

Business Structure & Corporate Maintenance:

A construction company should generally operate as an entity (Corporation, Limited Liability Company (LLC), Limited Liability Partnership, Limited Partnership) for asset protection of both the company and its owners. Many legal and tax benefits also exist. Selecting the proper entity and maintaining it are essential. Corporations must be properly maintained to shield their shareholders. Establish separate corporate bank accounts, keep minutes, prepare State filings, and authorize transactions in minutes. If corporate form is not followed, the "corporate veil" could be pierced. The rules vary for LLC's and other entities.

Other potential business structure problems exist such as mixing LLC's and corporations, unwittingly exposing a parent company to the financial troubles of a project subsidiary, dissolution issues and securities law issues.

Insurance:

Carefully analyze your insurance policies so you are aware of the scope to which you are insured. Are the limits of liability and deductibles appropriate for your business? Does you CGL policy exclude coverage for your "work product" or for damages that first manifested prior to inception? Are there contractually assumed liability exclusions? Be careful when renewing policies as new riders or exclusions may enter the contract.

Construction contracts often require Additional Insured Endorsements. If receiving an AIE, assess the limitations of coverage provided thereunder. Time spent regularly reviewing all of your insurance policies is essential.

Contracts & Administration:

Construction contracts generally contain a promise by one party to defend and indemnify the other against claims of third parties. The extent of the indemnity obligation depends on the specific contract language. How the provisions are drafted is critical. Many indemnity agreements are too broad and, therefore, void and unenforceable. If shifting risk contractually, then the provisions must be specific.

Many contract provisions have a great impact if there is a dispute. Care in negotiating or drafting indemnity, warranty, attorney fee, and damage limitation provisions is essential. Courts routinely reject "boilerplate" provisions. All contracts should be kept available and reviewed. Dates or milestones in contracts should be calendared.

Employment Issues:

As an employer, you have obligations to your employees that can lead to liability if those obligations are not met. The establishment of clear and fair written company policies can be an invaluable tool in avoiding employee confusion and complaints. However, one of the worst mistakes an employer can make is to establish a policy and not follow it consistently. An employer can actually create liability for itself by establishing a policy and not abiding by it.

Appropriate investigation of employee complaints and adequate disciplinary action can shield an employer from liability even if a complaint is valid. Formal training and regular refresher courses for all "management" employees regarding their responsibilities to identify and resolve potentially inappropriate behavior are necessary. Again, consistent and thorough documentation is invaluable

State and Federal regulations require employers to confirm citizenship and work eligibility for employees and submit I-9 forms to the appropriate agencies. Failure to comply can result in penalties as well as potentially forfeiting valid defenses to termination claims.

Typical employment-related lawsuits are generally not covered by a company's CGL policy. Because of the growing number of lawsuits, many insurance companies offer Employment Practices Liability coverage tailored to cover claims for wrongful termination, discrimination, and harassment.

Succession & Estate Planning:

Succession planning is the transfer of business interests upon retirement, death or sale. All businesses need to ensure that ownership interests are transferred effectively, with minimal taxation. There are many planning tools available, such as buy-sell agreements, family limited partnerships, living trusts, life insurance, annuities and disability policies to fund a business upon sale or transfer. Failure to plan for orderly business succession can result in monetary loss. Estate taxes alone range from18 to 55%, frequently resulting in liquidation or additional debt.

All business has risk. Understanding the extent of risk, planning around it and minimizing it will ensure a smooth running business and help avoid catastrophic losses.

Gregory G. Brown, Esq. manages the business, corporate, and information technology department of the regional law firm of BROWN & CHARBONNEAU, LLP, which has offices in Irvine, San Diego, Ontario and Las Vegas. BROWN & CHARBONNEAU attorneys represent clients in the following practice areas: business & corporate, insurance, labor & employment, construction defect litigation, private & public construction law, estate planning and family law. For more information or to contact a BROWN & CHARBONNEAU attorney, call (949) 261-7895 in Irvine or (909) 941-3050 in Ontario, or visit www.bc-llp.com